Claims directly against third party insurers – the application of the “leave” requirement tested

Key Points
  • The Courts continue to be presented with opportunities to consider and apply the relatively new and important Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW).
  • Murphy, McCarthy & Associates Pty Limited v Zurich Australian Insurance Limited [2018] NSWSC 627 provides an insight into the Courts views on the application of s5(4) of the Act and illustrates that the requirement for leave is imposed to insulate insurers from exposure to untenable claims.

In June 2017 the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (“the Act”) was enacted providing an alternative and simpler avenue by which a plaintiff can bring a claim directly against a prospective defendant’s insurer.

Since that time the Courts have been presented with a number of opportunities to test different aspects of the legislation, including the provisions of the “leave requirement” prescribed by s 5 of the Act.

The recent case of Murphy, McCarthy & Associates Pty Limited v Zurich Australian Insurance Limited [2018] NSWSC 627 provided the NSW Supreme Court with the opportunity to consider and apply s 5(4) of the Act, which provides that “leave must be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any Act or law”.

In this case, Murphy, McCarthy & Associates Pty Ltd (“MMA”) was a specialist civil engineer and project manager. MMA had been retained by Sydney Water to construct a well in Balmain in 2015. 

MMA sub-contracted the epoxy coating work in relation to the well to CFC Fibre Cement Pty Ltd (“CFC”). On 1 September 2015, an inspection revealed significant defects with the coating. CFC went into liquidation in September 2017.

MMA asserted a claim for damages against CFC with respect to remedial works associated with the epoxy coating.

MMA made an application to the Supreme Court for leave under s5 of the Act to proceed directly against Zurich, CFC’s insurer, for recovery of its damages.

Pursuant to s5(4) of the Act, the Court was required to consider the terms and exclusions contained in the ‘Business Insurance Policy’ held by CFC with Zurich (“the Policy”), and whether leave should be refused on the basis that it was arguable that Zurich was entitled to deny the claim under the terms of the Policy.

For this purpose the Court needed to consider a number of relevant exclusions contained in the Policy, including a ‘Product Efficacy Exclusion’ to the effect that the Policy did not respond to “property damage which arises out…the failure of any of your products to cure, alleviate, prevent, monitor, detect, eliminate or retard”.

The Court noted that in order to succeed in its application for leave to proceed directly against Zurich, MMA needed to establish that:
  1. it has an arguable case against CFC;
  2. if judgment were obtained against CFC it would not be able to meet it; and
  3. the Policy would arguably respond to any claim made on it by CFC.
The first two requirements were not in issue. Accordingly, the only issue for determination was whether the Policy, on its proper construction, would arguably respond to any claim made on it by CFC.

Zurich argued that the Policy would not respond because MMA’s claim fell under one or more of the exclusions contained in the Policy.

However, the Court considered that MMA has an arguable case that the claim was not excluded by any of the relevant exclusions. It is important to note that the Court was not required to make a finding with respect to the effect of any of the relevant exclusions, only that it is reasonably arguable that the claim would not be excluded should such an exercise be undertaken.  For example, the Court found that the ‘Product Efficacy Exclusion’ was not necessarily triggered because it is arguable that the damage to the well was not the result of the failure of the epoxy coating within the meaning of the Policy, but CFC’s defective workmanship in the application of the coating.

The Court was ultimately satisfied that leave should not be refused under s 5(4) of the Act, and that accordingly, leave should be given to MMA under the Act to proceed directly against Zurich.

This decision provides further insight into how the Courts are interpreting and applying this relatively new and important piece of legislation.

Post by Patrick Hodgetts 

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