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Section 6 – farewell (and good riddance!)

In December 2016 we posted on the NSW Law Reform Commission’s recommendation to replace section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).  Six months later, we can now confirm that section 6 is (finally) dead and herald the new era of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Act).  The new Act is now live (from 1 June 2017) and is a welcome clarification of the confusion and ambiguity caused by section 6.

The Act permits (at the Court’s discretion) a claimant (ie a liquidator) to sue an insurer of a proposed defendant directly, without needing to assert a statutory (section 6) charge over insurance proceeds.  Recovery under the Act is limited to the insurer’s liability (under a relevant policy) for the defendant’s liability to the claimant.  This is important, as it means defence costs are excluded from the reach of the provision (unlike the section 6 regime).  Leave can only be given if the insurer has a liability under the contract of insurance  – if an insurer can establish there is no indemnifiable claim, leave must be refused.

The Act will be popular with claimants where (an insured) proposed defendant is insolvent.  Significantly, an insurer sued under the Act will be able to “stand in the shoes” of its insured and avail itself of any defences available to the insured.  Further, any payment made by an insurer to a claimant discharges its liability to make an indemnity payment under the policy.  The important effect of this is that insurers can pay ongoing defence costs and settle claims without being hampered by priority issues (another section 6 conundrum).  This should provide clarity and transparency to both insurers and claimants (including claimant liquidators).  The practical outcome will be “first in best dressed” in terms of settlement/judgment of multiple claims where one policy exists.

It will be interesting to see how the NSW Courts exercise their discretion to allow proceedings against insurers under the Act.  We expect the Courts will consider a range of factors including whether cover is available under the policy (a threshold issue), the merits of the claim against the (insured) proposed defendant and the reasonableness/utility of joining insurers.