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Join in: third parties can join insurers who deny indemnity to insolvent defendants

Ashurst share their article Joinin: third parties can join insurers who deny indemnity to insolvent defendants.

CGU Insurance Limited v Blakeley [2016] HCA 2

Key takeaways for insolvency practitioners

If you are suing an insolvent insured and their insurer has denied indemnity, you can ask the court to join the insurer to the proceeding and determine the insurer’s liability to indemnify.
This avenue of relief will enable you to conduct proceedings efficiently by obtaining judgment against both the insured and insurer in one proceeding.
In some circumstances, you may even be able to obtain a declaration as to the insurer’s liability before proceeding to trial. This will give you a strategic advantage: you will know the true value of your claim before you incur litigation costs and will be able to engage in settlement discussions from a position of strength.

What you need to do

First, obtain copies of potential defendants’ insurance policies, for example through public examinations, and carefully consider the terms.
Second, ascertain the insurer’s position on indemnity early on.
Third, if the insurer denies liability, consider whether the “joinder and declaration” strategy is available to you.

What are the critical facts in CGU v Blakeley?

The liquidators of Akron Roads Pty Ltd (Akron) caused Akron to sue the directors of Akron, alleging insolvent trading.
The director defendants made a claim under their professional indemnity policy with CGU but indemnity was denied.
The directors, being impecunious and unfunded, did not contest the insurer’s denial.
The liquidators of Akron took matters into their owns hands, and asked the Court to join the insurer and declare that the insurer was liable to indemnify the insolvent defendants under the terms of the contract.

What has the High Court decided?

The High Court has decided in favour of the liquidators of Akron (being the third party claimant). Generally, a third party has no power to do anything about a contract to which it is not a party. However, the Court has said that s 562 of the Corporations Act (and the equivalent s 117 of the Bankruptcy Act) creates an interest in an insurance contract for a third party. This is because those provisions require that any proceeds an insolvent insured receives from its insurer must be paid directly to the third party.

Two main criteria must be met:

  • the insurer denies liability for a claim; and
  • the insured is insolvent and is unwilling or unable to do anything to contest that denial.

The Court has confirmed that, if those criteria are met, it is open to you to take steps to protect your interest in the proceeds. You do this by joining the insurer to the main proceedings against the insured and seeking a declaration from the Court about whether the insurer is correct in denying indemnity.

What are the challenges with suing insolvent defendants?

To sue or not to sue? This question has long plagued insolvency practitioners who have identified a claim against an insolvent individual or company whose insurer is playing hard-ball.

The insolvency practitioner in these circumstances is faced with the unappealing prospect that, even if it obtains a substantial judgment against the defendant, this judgment will be worthless in practical terms unless it obtains a separate judgment against the insurer requiring it to indemnify the insured.

Since the insurer may not be bound by the initial decision, the insolvency practitioner may need to establish the key facts underpinning the insurer’s liability all over again. Given the likely expense and complexity involved in this two-step recovery process, it can be difficult for the insolvency practitioner to gauge whether pursuit of the claim will be in the best interests of creditors at all.

How does the High Court decision affect my recovery strategy?

The High Court decision is welcome news for insolvency practitioners. Insolvency practitioners should seriously consider this as a viable option when suing an insolvent individual or company whose insurer denies indemnity.

It confirms that you can determine both the defendant’s and its insurer’s liability in the one proceeding. There will be no need to re-litigate issues (and incur further costs) at a later stage. Better still, where the determination of the insurer’s liability does not rely on key findings of fact to be made at trial, the Court may agree to determine the question of the insurer’s liability prior to trial as a “preliminary question”.

The “joinder and declaration” strategy adds a valuable string to your bow, as it facilitates the determination of the actual maximum value of your claim before you incur the expense of a trial. Bearing in mind your duties to creditors, this strategy will provide you with certainty in assessing the actual value of a claim and gauging whether you should proceed to a full trial or seek to settle early.

How do I put the strategy into practice?

First, identify the company’s potential claims. Next, for each defendant, use the public examination process to confirm:

  • the existence of a valid insurance policy;
  • whether the policy responds to the potential claims against the insured;
  • the limit of indemnity available under the policy (including whether any previous claims have been made that reduce the amount available); and
  • if the policy is a claims made policy, that the insured has made a valid notification under the policy in order to enliven coverage under the policy.

The next step is to engage with the insurers of the insolvent defendant. Aim for early and direct engagement, as this will allow you to not only confirm the insurer’s position with respect to its liability to indemnify, but also to determine whether there is any scope for negotiation with the insurer for the early settlement of claims. In light of the decision in CGU Insurance, insurers may be more willing to engage in settlement discussions with insolvency practitioners, to avoid being joined to proceedings and becoming embroiled in costly litigation about their own liability to indemnify.

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