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56 UNDER A CONTRACT OF LIABILITY INSURANCE a person (the insured) is entitled to be indemnified by another person (the insurer) for damages or compensation that, because events specified in the contract occurred, the insured has become liable to pay to a third party. Under Part III of the Law Reform Act 1936 (reproduced in appendix B) such an injured third party may be entitled to a charge over the insurance money payable from insurer to insured. The third party’s charge over the insurance money arises on the insured’s insolvency (s 9) or death where no one is granted administration of the insured’s estate (s 9A). Section 10, which repeals earlier provisions, is the third and last section of Part III.
57 After considering the origins and development of Part III, and comparable overseas provisions, this chapter addresses the questions:
We conclude with draft provisions to replace Part III (see para 112).
IN RE HARRINGTON MOTOR COMPANY LTD, EX PARTE CHAPLIN [1928] 1 CH 105
58 At first instance Eve J held that the proceeds of an insurance policy taken out by the insured company (by then in liquidation) were to be distributed among the creditors of the insured company with equal priority (pari passu). Chaplin, the injured third party in the accident that gave rise to indemnification, was therefore left to prove in the liquidation in competition with other creditors of the insured. Eve J expressed sympathy with the plight of Chaplin (110). On appeal the Court of Appeal affirmed Eve J’s initial judgment. Lord Hanworth MR added that it was
perhaps unfortunate that one should have to give a judgment which would, at first sight, appear to run counter to what I might call the common-sense view of the proceedings. Nonetheless it is necessary for us to administer the law as it stands and if any alteration is to be made in it that must be made by the proper authorities and by proper means. (111)
Atkin LJ expressed the view “that the applicant has a real grievance, and if it were possible to decide for him I should very willingly do so” (116). Lawrence LJ added his sympathy but noted that “we cannot allow that sympathy to lead us astray, or do otherwise than administer the law as it exists” (124).
HOOD’S TRUSTEES V SOUTHERN UNION GENERAL INSURANCE CO OF AUSTRALASIA LTD [1928] 1 CH 793
59 The injured third party, Caddy, fared even worse than had Chaplin, the injured third party in Harrington. Despite it having been held that the proceeds of the insurance policy passed to the trustee in bankruptcy, Caddy was refused the right to participate with equal priority with other creditors of the bankrupt/insured because he had not established his claim by a judgment obtained before the bankruptcy.8 Although Caddy pursued Hood and obtained a second order of adjudication in bankruptcy, both Tomlin J and the Court of Appeal (applying Harrington) held that the insurance moneys passed to the trustee of the first bankruptcy. This meant that the creditors of Hood’s first bankruptcy shared in the financial fruits of Caddy’s injuries to his exclusion. Tomlin J described the result (802) as “a very remarkable position”, and added that in Harrington
Atkin LJ said that he thought that the appellant had a real grievance; but the general rule of law was too strong to allow the Court to make any exception, however the Court might sympathise with the appellant. The position in law was quite clear, and it was that the appellant had no right or claim against the insurance company or against money paid by the insurance company. The assured had a direct right of recourse against the insurance company, but a third party had no such right, because there was no privity between him and the insurance company, and it was difficult to see how a special right could be said to exist against the insurance company, or any right to claim money paid over by the insurance company, merely because the assured happened to be in financial difficulties. (802–803)
SMITH V HORLOR [1930] NZLR 537
60 In this case Reed J applied the pre-existing law in Harrington and Hood’s Trustees, and held that the proceeds of an insurance policy passed to a trustee under an assignment, by the insured, of “all real and personal estate” for the benefit of his creditors before the time at which the third-party obtained judgment against the insured. Like the English judges, Reed J came to this conclusion with regret, saying that
[i]t is undeniably a hard case. So also were the two English cases, in which similar regret was expressed and in which suggestions were made that legislation should be introduced to meet a similar situation should it arise. It has been done in New Zealand by the Motor Vehicles Insurance [(Third-party Risks)] Act 1928 which, however, was not passed in time to affect this case. (544)
61 The Motor Vehicles Insurance (Third-party Risks) Act 1928 (NZ) s 10 came into force on 9 October 1928. Speaking on the introduction of the Bill enacted as the 1928 Act, the Attorney-General explained to members that the Bill was meant to deal with motor vehicle accidents where victims were injured or killed. The long title to the Act described it as an Act to “require the Owners of Motor-vehicles to insure against Liability to pay Damages on account of Deaths or Bodily Injuries caused by the Use of . . . Motor-vehicles.” In the late 1920s the use of motor vehicles on New Zealand roads was increasing, although motor vehicles were relatively new to New Zealand at the time. Proceedings for damages for personal injury by accident could then still be taken – the bar on proceedings for damages for personal injury would of course not be introduced until the Accident Compensation Act 1972. The 1928 Bill was meant especially, the Attorney-General’s speech introducing it advised members, to address the dangers that the increasing use of motor vehicles caused to New Zealanders’ persons:
it appears to be the function of the State primarily to protect the lives and ensure the safety of the people, but so far as property is concerned, that is a function which individuals can look after themselves. In dealing with this matter we have in this Bill dealt only with the questions of accidents and injuries to persons. ((1928) 219 NZPD 589, 590)
62 The Attorney-General referred to the growing death toll on the roads, and to an increase in numbers of convictions for dangerous driving (from 4259 in 1926 to 5171 in 1927).9 Responding to these trends, the 1928 Act introduced a compulsory insurance regime. Added to that regime were provisions to avoid the consequences of Harrington and Hood’s Trustees.
63 To ensure that the injured third party did not have to share the insurance money with other creditors of the insured, the 1928 New Zealand Act used a “charge” no doubt because since 1900 there had been a comparable provision in the workers’ compensation legislation.10
64 Section 10 of the 1928 Act allowed an injured third party to stand outside the insolvency regime. It applied “after the happening of an accident giving rise to a claim for damages” where the owner of the car was indemnified for liability to the third party under a contract of insurance taken out under the 1928 Act and the insured
In such cases the Act gave the third party a charge over the insurance money payable whether the insured was bankrupt at the time of the accident or later became bankrupt, and whether or not the insured’s liability to the third party was determinate: s 10(1).
65 Because s 10 could apply to charge the same insurance money with more than one liability to a third party, it also provided for the relative priority of multiple charges. If insufficient money was available to pay two or more claims by third parties, claims would be met in the same order as accidents had occurred (but by reference only to dates, and not times within the same date): s 10(2).
66 Third parties could enforce a charge under the Act by an action against the insurer. Section 10(3) provided that a third party may bring such proceedings “in the same way as if brought by the insured” – presumably to avoid any privity argument based on a third party not being a party to the contract of insurance (eg, see para 59: Hood’s Trustees [1928] 1 Ch 793, 802–803, per Tomlin J). An action to enforce the charge could be brought even though proceedings had already been issued (and a judgment obtained and enforced) against the insured: s 10(4).
67 Section 10 was intended to apply only to insolvent entities, so if a company went into liquidation voluntarily (for the purposes of reconstruction, or to amalgamate with another body corporate) then the charge would not attach: s 10(5).
68 Finally, s 10 included two provisions protecting an insurer. First, any payment made by an insurer without actual notice of the existence of the statutory charge continued to be an effective discharge of the insurer’s contractual (and, over-riding statutory) duties, despite the insurer having actually paid the insurance money to the wrong person: s 10(6). Secondly, where an insured’s rights were enforceable as a charge by a third party, s 10(7) provided clearly that the insurer would not be liable beyond the limits of the contract of insurance. The purpose of s 10(7) seems to have been to ensure that in an action a third party brought to enforce the charge an insurer had the same defences as it would have had if the insured had been the defendant. But this consequence was not provided for explicitly.
69 Considering s 10(1) of the 1928 Act in Jorgensen v Findlater [1931] GLR 403, Myers CJ held that because the insured’s liability to pay damages ended with his death in the accident, the insurance company could not be held liable to the third party because it was not liable to the insured.11 The Chief Justice said that the purpose of s 10(1) was
to create a charge in respect of any existing liability that there may be and to prevent the injustice that was shown to exist in such cases as In re Harrington Motor Company Ltd, ex parte Chaplin, and not (as I think) to create a new liability on the part of either the owner of a motor vehicle or the insurance company except of course to the extent of covering the extended liability under s 3(1). (407)
The “extended liability under s 3(1)” refers to the Act applying to insurance cover for liability arising from a person other than an owner driving a motor vehicle.
70 The Law Reform Act 1936 kept the 1928 Act technique of the charge, but departed from the 1928 Act in:
Part III simply consolidates some existing provisions, which provide that where there is wrong perpetrated by a person who is insured the injured person can have a lien on the insurance-moneys. That already exists in the law in respect of the Workers’ Compensation Act, and also there are provisions in the Motor-vehicles Insurance (Third-party Risks) Act in relation to the matter. There was a provision of that sort in regard to the Deaths by Accidents Compensation Act, and instead of making a third provision the Law Draftsman thought it better to consolidate them all and make a general rule, which he has done in Part III to cover all cases of that description. ((1936) 247 NZPD 237, emphasis added)
The words in italic suggest that s 9 in Part III extended inadvertently the 1928 Act provisions.
71 Neither s 10 of the 1928 Act nor s 9 of the 1936 Act included a provision to give an injured third party someone to claim against where the insured died solvent and no one had sought a grant of administration of his or her estate. Only from 24 October 1957, when the Law Reform Amendment Act 1957 was given the Royal Assent and came into force, was an injured third party guaranteed someone to claim against. Attorney-General the Hon Mr Marshall described to members the purpose of the 1957 Amendment Act provisions as being
to avoid a procedural difficulty that arises where a person desires to claim damages or compensation the liability for which is covered by insurance, but the person who would be primarily liable is deceased and there is no person willing to take out administration in his estate. In those circumstances there is no one whom the claimant can sue so he has a right without a remedy, and it is a principle of the law that no person who has a right should be without a remedy. The clause [enacted as s 9A of the 1936 Act] provides that a person so placed may pursue his claim by this procedure, in that he may give notice to the insurer requiring the insurer to nominate a defendant, that is a person against whom a claim may be taken and if the insurer fails within fourteen days to nominate a person the claimant can apply to the Court to appoint the Public Trustee to act in that capacity. ((1957) 314 NZPD 3047; committal of Statutes Amendment Bill 15 October 1957)
72 The Third Parties (Rights Against Insurers) Act 1930 (UK) came into force on 10 July 1930. The long title to the Act describes it as an “Act to confer on third parties rights against insurers of third-party risks in the event of the insured becoming insolvent, and in certain other events.” It differed from New Zealand’s 1928 Act by applying to policies of insurance covering injuries to property as well as to persons,12 and by using the technique of assignment rather than attachment of a charge. The assignment gives the third party the insured’s rights against the insurer under the contract of insurance outside any insolvency regime to which the insured is subject.
73 Section 1(1) assigns to an injured third party an insured’s cause of action against an insurer (so that the third party stands outside the insolvency regime) if before or after the event giving rise to the right of indemnity the insured
74 The cause of action is also assigned where a person’s estate is sequestrated in Scotland: s 1(2). There is no right to contract out of the Act: s 1(3). The insurer’s liability to the third party will never be greater than it would have been to the insured: s 1(4)(a). Where there is a shortfall to a third party, the third party retains the right to sue the insured or to prove with other creditors for that shortfall: s 1(4)(b). Third parties are also given rights to receive all information necessary to bring claims directly: s 2. Finally, agreements between insurer and insured to settle a claim are not valid if made after the commencement of the insolvency regime: s 3.
75 The UK Act concerns only insolvency. Claims against an insured who has died solvent were purposely excluded because under the then law the death extinguished the third party’s claim. Introducing the Bill enacting the 1930 Act, Sir William Jowitt reminded the Commons that the Bill had nothing “to do with the effect of death on the [insurance] contract because hon. Members will know that as a rule personal actions come to an end by the death of either of the parties concerned”: (1929–1930) 231 HC 128. The quotation also suggests that the application of the 1930 Act to insurance for all forms of liability to third parties may have been unintended. Certainly the case of Harrington was mentioned in convincing members of the need for the Bill (128–130).
76 So the 1930 UK Act does not apply if an insured dies solvent. A third party in such a case must pursue a personal representative of the insured who, representing the insured’s estate, will be entitled to be paid the insurance money by the insurer. The 1930 UK Act is currently under joint review by the Law Commission (England and Wales) and the Scottish Law Commission – a joint consultation paper defining certain issues was published in 1998: Third Parties (Rights Against Insurers) Act 1930: A joint consultation paper.
77 Australian provisions that – like s 9 of the 1936 New Zealand Act – attach to insurance money a charge in favour of an injured third party include:
78 Before 1 January 1986, when s 51 of the Insurance Contracts Act 1984 (Aust) came into force, in cases where the insured had died the third party usually had to bring an action against the estate of the insured. This requirement could prejudice the third party if no one had been granted administration of the insured’s estate. In such a case, to obtain a defendant, the third party had to have appointed an administrator ad litem.
79 An exception was the limited area of compulsory third party motor vehicle insurance, where state legislation (eg, Motor Vehicles Act 1959 (SA) s 113(1)) might give the third party a right to proceed directly against the insurer in cases where the insured driver was dead or could not be found. In cases where the insured could not be found insurers had been known to defeat claims by third parties by insisting that proceedings be served on or judgments enforced against insureds who would be difficult or impossible to locate.
80 To prevent such prejudice to injured third parties, the Australian Law Reform Commission recommended in Insurance Contracts (paras 338–340) that the exception become the rule. Legislation giving third parties a right to proceed directly against insurers where an insured was dead or could not be found should be extended to insurance generally. From 1 January 1986 s 51 of the Insurance Contracts Act 1984 (Aust) has given third parties the entitlement recommended.
81 Section 9 of the Law Reform Act 1936 raises two main questions:
82 Section 10 of the 1928 Act, and its successor s 9 of the 1936 Act (applying to policies indemnifying for any liability and not only liability for personal injury) were both designed to place insurance moneys outside bankruptcy and winding up legislation. In enacting these provisions the New Zealand Parliament accorded the claims of injured third parties a greater priority in the insured’s insolvency than that accorded to the claims of other creditors. In his introductory speech the Attorney-General described the effect of the provision enacted as s 9 by saying that if the insured “happened to become bankrupt the insurance moneys will necessarily go to the injured party, and not to the Official Assignee”: (1928) 219 NZPD 589, 601. Notably, over 60 years later in FAI (NZ) General Insurance Co Ltd v Blundell & Brown Ltd [1994] 1 NZLR 11, 15, 18, 26, the members of the Court of Appeal noted this priority without question.
83 Affleck argues that s 9 is inconsistent with existing insolvency legislation because on the insured’s insolvency a third party’s claim for damages or compensation for injury is satisfied before the claim of any other unsecured creditor (on preferences generally, see Heath, 1996; and Cantlie in Ziegel, 1994, 413). Affleck would accord no preference to the third party’s claim because:
84 Affleck would, however, accord an injured third party’s claim priority over that of other unsecured creditors if the liability of the insured arose after the insured became insolvent, in order to prevent the insurer receiving a windfall (441). The reason for this is because either:
85 It might also be argued that if the priority of an injured third party was removed, other unsecured creditors of the insolvent would be unjustly enriched, because they would receive insurance money meant to pay only for the cost of compensating the third party for his or her injury. The possible perversity of the law before the 1928 Act was illustrated in Harrington Motor Co [1928] 1 Ch 105 when Atkin LJ said that
it would appear as though a person who is insured against risks and who has general creditors whom he is unable to satisfy, has only to go out in the street and to find the most expensive motor car or the most wealthy man he can to run down, and he will at once be provided with assets which will enable him to pay his creditors quite a substantial dividend! (124)
86 To similar effect is the statement in the Australian Law Reform Commission General Insolvency Inquiry report that
the rationale for this priority [for the injured third party] would appear to be that an individual who would have been entitled to the proceeds of an insurance claim could be very adversely affected if insurance money which has been generated because of their claim is pooled on behalf of all creditors. (para 759)
87 Although the cost of pursuing a claim is a factor which is equally relevant in a pre- or post-insolvency setting and not unique to insurance contracts, when coupled with the widespread community expectation that a third party’s loss will be met from insurance moneys available to the insured, it becomes arguable that the de facto priority should remain.
88 Review of corporate insolvency law cannot be deferred indefinitely. Whether an injured third party’s s 9 priority should remain is a question which should be considered in a comprehensive review of corporate and personal insolvency. On 24 June 1997 the Hon John Luxton MP, Minister of Commerce, responded to a question for written answer of the Rt Hon Mike Moore MP by saying:
The primary legislation in relation to receiverships is the Receiverships Act 1993, which was enacted as part of the 1993 company law reform package, and codified the common law relating to the conduct of receiverships. The Ministry of Commerce will review the Receiverships Act as part of a comprehensive review of insolvency law. That review will be commenced with the release, by the end of 1997, of a discussion paper on the framework for insolvency law. The insolvency review will be a long term project, and is likely to take at least three years to complete. This will allow, among other things, for monitoring of the impact of the Receiverships Act 1993. No substantial legislative changes to the Act are proposed before the review is completed. (House of Representatives, Replies Supplement 97.18 (24 June 1997), 65–66, Q10245)
89 Parliament removed another form of priority when it repealed as from 1 July 1988 the Wages Protection and Contractors’ Liens Act 1939.15 Depending on the weight to be properly attributed to the factors mentioned above, a complete review of insolvency law might conclude either that s 9 is:
90 In determining whether, at this stage, to make any amendments to s 9 it is important to bear in mind:
The latter two points suggest that there is sufficient reason to justify amending s 9 at this time.
91 The current s 9 priority for the injured third party might be achieved by:
– to the third party – as in s 1 of the Third Party (Rights Against Insurers) Act 1930 (UK), or
– to the official assignee or liquidator also subjected to a personal duty to pay the injured third party – as in the Bankruptcy Act 1966 (Aust) s 117 and Corporations Act 1989 (Aust) s 562);
92 Charges would provide the necessary protection, but only with complicating property connotations. In Grimson v Aviation and General (Underwriting) Agents Pty. Ltd (1991) 25 NSWLR 422, 428, Meagher JA said of the New South Wales section attaching a charge to insurance moneys payable: “It is, on any account, a somewhat curious section because it purports to grant a charge or security but not over any property.” Using a trust would require complex and changing definitions of the property subject to the trust, the trustee, and the beneficiary. Using a charge may leave undesirable uncertainty, because such a charge may (at least theoretically, if not to date in practice) be open to attack under either the voidable preference or transaction provisions in ss 56–57 of the Insolvency Act 1967, or the voidable security/charge provisions in ss 292–293 of the Companies Act 1993. Assignments introduce the possibility of confusion given the general statutory assignment of property on bankruptcy (see Insolvency Act 1967 s 42(2)). Use of the charge, assignment, or trust also raises the question whether the insurer may raise – as a defence to the third party’s action to enforce the charge, assignment, or trust – any defence it would have had to an action by the insured to enforce the contract of insurance.17
93 Extending privity would therefore seem to be the most apt technique for protecting the injured third party. It would address most directly the original mischief. In Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] 1 Ch 793, 802–803 Tomlin J attributed the injured third party’s difficulty to his or her lack of privity of contract with the insurer (see para 59). While both the insured and the third party may expect the insurer to pay the third party’s loss, the insurer’s contractual duty to indemnify is owed only to the insured.
94 Section 4 of the Contracts (Privity) Act 1982 ameliorates “the rigours of the privity doctrine” for contracts generally.18 We recommend that s 9 be replaced by a new provision deeming the benefit of the contract of liability insurance to be one that is recoverable by the third party under s 4 of the Contracts (Privity) Act 1982.
95 We know of no reason why a provision like s 9A should not be retained. In cases where no one has been granted probate or letters of administration of the estate it supplies an essential practical benefit to the injured third party: a defendant. Indeed, we are of the view that there are two circumstances which justify its extension.
96 First, for the reasons identified by the Australian Law Reform Commission (see para 80), we recommend s 9A should be modified and extended to the like case where an insured is not dead but merely cannot reasonably be found.
97 Secondly, we recommend that a corporate insured which has been removed from the register of companies under s 317 Companies Act 1993 or has otherwise been dissolved or ceased to exist (where not a company subject to the 1993 Act), should be treated analogously to a deceased individual so that the third party may retain the benefits of the policy.
98 Pending the review of corporate insolvency law mentioned in para 88, problems Part III has shown in practice might be remedied by new provisions answering the following questions:
WHAT TIME LIMITS SHOULD APPLY TO A THIRD PARTY’S CLAIM?
99 New Zealand and New South Wales judges have expressed different views on whether a third party’s proceedings to enforce a charge against an insurer must be brought
100 The wording of s 9(4) and its New South Wales equivalent affect this question. As Baragwanath J stated in UEB Packaging Ltd v QBE Insurance (International) Ltd [1996] 2 NZLR 467, 481:
Unless the statutory cause of action by the [injured third party] plaintiff against the insurer shadows the cause of action against the insured, the clear language of s 9(4) “the same rights and liabilities” is departed from.19
101 Disregarding the meanings that may reasonably be given to the words of the current provisions, what limitation period should apply? Given the purpose of granting a third party direct access to the insurer where the insured is insolvent or has disappeared or died, there seems to be no reason why if the third party has brought proceedings against the insured within time, the third party must also bring further separate proceedings against the insurer within the time the insured has to proceed against the insurer. It is likely that an insured will notify its indemnifier if a third party issues proceedings against it in time and, if it does not, the insurer may have other defences against the insured which would also prevail over the third party. No prejudice is apparent to the insurer if another set of proceedings is not issued within the limitation period as against the insured. However, much prejudice may result to the third party whose right to recompense may be lost. It also seems wrong for a third party who has prosecuted diligently a claim against an insured to be met by a limitation defence where the insured has (from the third party’s perspective) been unexpectedly placed into an insolvency regime after expiration of the limitation period as against the insurer. We therefore recommend that new provisions to replace s 9 clarify:
SHOULD CLAIMS MADE POLICIES BE INCLUDED?
102 Paragraphs 35 and 39–40 mention that the way s 9 is worded – particulary subs (1) – has led to different views about whether it applies to claims made policies (defined in paras 36–38) (see discussion in Affleck, 1996, 647–649). As Robertson J noted in FAI (NZ) General Insurance v Blundell [1994] 1 NZLR 11, 25, in 1936 the New Zealand Parliament may not have contemplated these policies. Affleck suggests that liability insurance was not commonly available in 1936 and that claims made policies may have been first discussed by textbooks only in the 1960s (Affleck, 647). The problem is most acute in cases where the claims made policy does not even exist at the critical time under s 9(1): “on the happening of the event giving rise to the claim for damages or compensation.” The s 9(1) references to a person who has “entered into a contract of insurance” and “[insurance moneys] that are or may become payable” in respect of liability under such a contract may well mean that for a charge to attach to insurance money, an insurance contract must exist when the event occurs that gives rise to a third party’s claim. For clarity we recommend that new provisions apply to all insurance policies, which includes claims made policies.
WHAT INSOLVENCY REGIMES SHOULD BE AFFECTED?
103 Ways by which an insured might be subjected to an insolvency regime include:
Any statutory list of insureds able to be subjected to insolvency regimes would be cumbersome and require careful ongoing monitoring for accuracy and completeness (for entities that can be subjected to insolvency regimes, see Laws NZ, Insolvency, para 3). However, not referring to particular regimes may impose on third parties the greater costs of seeking leave to proceed despite the form of insolvency regime to which the insured has been subjected being no different in kind from a bankruptcy or liquidation. Provisions to replace s 9 should allow a third party as of right (that is, without the leave of the court) to proceed directly against an insurer where an insured:
MUST THE THIRD PARTY GET AN EMPTY JUDGMENT OR PUT THE INSURED INTO AN INSOLVENCY?
104 Should a third party, before being able to sue an insurer directly, be required to go to the cost of seeking, obtaining, and trying in vain to enforce an empty judgment against an insured known to be insolvent? As Richardson J said succinctly in FAI (NZ) General Insurance v Blundell [1994] 1 NZLR 11:
If the insured is apparently impecunious there can be no justification for postponing recourse against the insurer and expecting the claimant to bear the cost and effort of pursuing other possible defendants. (15)
Similarly we can see no reason to force a third party to put the insured into an insolvency regime so that the third party might then exercise rights outside the insolvency regime.
IN WHAT CASES SHOULD THIRD PARTIES REQUIRE LEAVE TO SUE AN INSURER DIRECTLY?
105 We also recommend that a third party be allowed to proceed directly against an insurer if the third party proves to the satisfaction of the court that the insured:
IN WHAT CIRCUMSTANCES SHOULD LEAVE BE GRANTED?
106 In Campbell v Mutual Life and Citizens Fire and General Insurance Company (New Zealand) Ltd [1971] NZLR 240, 243 Roper J stated that leave should be refused only where a “perfectly good common law defendant” was available to the third party. In FAI (NZ) General Insurance v Blundell [1994] 1 NZLR 11, 15, 19, 22, Richardson, Hardie Boys and Robertson JJ adopted Roper J’s test and put at a relatively low level the threshold for granting leave to the third party. The Court of Appeal accepted that an insolvent insured is not the “perfectly good common law defendant” that the test requires. It also considered that, given the purpose of s 9, the existence of other defendants was not a bar to granting leave. The Court concluded that an arguable or prima facie case against the insurer was all that was required for leave to be granted. To clarify the law we recommend that leave be granted to any third party who satisfies the preconditions and shows a prima facie case against an insurer.
WHAT INSURANCE POLICY TERMS SHOULD BE OF NO EFFECT?
107 Because they might undermine or avoid the achievement of the purpose of provisions to replace s 9, we recommend that two types of policy terms be made of no effect. First, it may be a term of a liability insurance policy that the insured’s right to be indemnified arises only if a third party obtains judgment against the insured (see, for example, Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 367, approved in Bradley v Eagle Star Insurance Co Ltd [1989] AC 957). This will not be so under the provisions we recommend which treat the contract of insurance as one for the benefit of the third party. Secondly, new provisions should also state that a term of an insurance contract is of no effect if that term
This recommendation is consistent with the duties we recommend in para 111.
MULTIPLE CLAIMS TO INSUFFICIENT INSURANCE MONEY
108 Section 9(1) charges currently rank in the order of the events that gave rise to the insured’s rights under the contract of insurance: s 9(3). But the 1936 Act introduced an exception: if the events giving rise to the insured’s rights arose on the same day, then charges arising out of those events rank equally with each other.20 We consider the approach of the exception to be more equitable than that of the rule, which makes the rights of third parties depend on the order in which events giving rise to liability chance to happen, rather than on the nature of the injury or on any diligent prosecution of action by a third party who has suffered loss. We therefore recommend that the exception displace the rule entirely: where the insurance money is insufficient to satisfy fully two or more third party claims, each claim should abate proportionately.
WHAT PAYMENTS SHOULD BE A VALID DISCHARGE OF AN INSURER’S LIABILITY?
109 Any payment that an insurer, before having received notice that the insured is insolvent, makes to an insured should be a valid discharge of the insurer’s duty to both the insured and the third party. New provisions should also provide that an insurer’s payments to an administrator of an insolvent insured’s estate or property are not a valid discharge of the insurer’s duties. In this case the insurer must know that the insured is insolvent.
110 It is desirable, however, that insurers be entitled to rely on settlements entered into before the proposed legislation comes into force. We therefore recommend that nothing in our proposed legislation affect any discharge of an insurer’s liability under a contract of insurance when the discharge was concluded before the date on which the new legislation comes into force.
SHOULD THERE BE DUTIES TO DISCLOSE INFORMATION THIRD PARTIES NEED IN ORDER TO CLAIM?
111 To help third parties exercise their rights responsibly and quickly, s 2 of the Third Parties (Rights Against Insurers) Act 1930 (UK) obliges insurers and others to supply to third parties information they need to make their claims. Provisions to replace ss 9 and 9A should provide similarly that:
Third parties should be able have these duties enforced by originating applications to the High Court or a District Court.
112 We therefore recommend that Parliament replace Part III by enacting the following provisions which we recommend be inserted in the Insurance Law Reform Act 1977 as sections 11A to 11E (see pages 59–81 for our complete draft Insurance Law Reform Amendment Act and commentary).
11A Application of sections 11B to 11E
Sections 11B to 11E apply in respect of any contract of insurance entered into before or after the commencement of those sections under which the insurer promises to indemnify the insured in respect of the insured’s liability to pay damages or compensation to another person (“the third party”), but do not affect a discharge of an insurer’s liability under a contract of insurance which discharge was concluded before the commencement of those sections.
11B Insolvency or death of insured before payment
(1) The benefit of an insurer’s promise under a contract of insurance to which sections 11B to 11E apply to indemnify the insured in respect of the insured’s liability to pay damages or compensation to a third party is deemed to be a benefit conferred on the third party which is enforceable against the insurer by the third party under section 4 of the Contracts (Privity) Act 1982 as if it were a promise by the insurer to pay such damages or compensation to the third party if, before payment is made by the insurer to indemnify the insured,
(a) the insured has become insolvent or, if the insured is deceased, the insured’s estate is being administered under Part XVII of the Insolvency Act 1967; or
(b) the insured has been deceased for not less than 60 days and no administrator of the deceased’s estate has been appointed in New Zealand; or
(c) the insured, being a corporation, has been removed from the New Zealand register under section 317 of the Companies Act 1993 (if a company), or has otherwise been dissolved or ceased to exist; or
(d) the insured cannot, after reasonable inquiry, be found.
(2) An insured is insolvent for the purposes of this Act if the insured
(a) is subject to a statutory or contractual regime under which the assets of the insured have been or are to be realised for the benefit of secured or unsecured creditors; or
(b) is unable to pay the insured’s debts that would be provable in bankruptcy or on a liquidation as they fall due and from the insured’s own money.
11C Extent of insurer’s liability in actions by third parties
(1) An insurer is not liable to a third party in an action brought under section 11B for any amount in excess of the amount of the insurer’s liability provided for under the contract of insurance.
(2) If the amounts payable in respect of claims made against an insurer by one or more actions under section 11B exceed the amount for which the insurer is liable under the contract of insurance, those claims are to abate proportionately to their amounts.
(3) A payment made under the contract of insurance by the insurer to one third party without actual notice of a possible claim by any other third party constitutes, to the extent of that payment, a valid discharge to the insurer in respect of the claim of such other third party or third parties.
(4) A payment made under the contract of insurance by the insurer to the insured without actual notice that the insured is insolvent constitutes, to the extent of that payment, a valid discharge to the insurer in respect of the insured’s liability to the third party.
(5) Nothing in this Act prevents the variation or discharge of an insurer’s obligation under a contract of insurance at any time before the insurer has actual notice that the insured is insolvent.
(6) A payment made under the contract of insurance by the insurer to an insolvency administrator who has been appointed in respect of the insured’s property or estate does not constitute a valid discharge to the insurer in respect of the insured’s liability to the third party.
11D Duty to give necessary information to third parties
(1) Every insurer and every insured and any receiver, manager, trustee, liquidator, personal representative or other person in possession of the estate or property of the insured must, at the request of the third party, give to the third party such information as the third party may reasonably require to ascertain whether any promise of the insurer to indemnify the insured is one to which section 11B applies.
(2) The duty to give information under this section includes a duty to allow all contracts of insurance, receipts for premiums, and other relevant documents in the possession or power of the person on whom the duty is imposed to be inspected and copies of them to be taken.
(3) An application to enforce a duty imposed by this section may be made by originating application either in the High Court or in a District Court.
(4) A provision of a contract of insurance is of no effect if it purports, directly or indirectly,
(a) to prohibit or prevent the giving of any information required to be given by this section; or
(b) to avoid the contract or to alter the rights of the parties under it upon the giving of any such information.
11E Actions by third parties against insurers
(1) A third party may bring an action against an insurer under section 11B although judgment has already been entered against the insured for damages or compensation in respect of the same matter.
(2) Before commencing an action against an insurer under section 11B, a third party must obtain the leave of the court in which the action is to be commenced unless
(a) the insured is subject to a statutory or contractual regime under which the assets of the insured have been or are to be realised for the benefit of secured or unsecured creditors; or
(b) the insured’s estate is being administered under Part XVII of the Insolvency Act 1967; or
(c) the insured, being a corporation, has been removed from the New Zealand register under section 317 of the Companies Act 1993 (if a company) or has otherwise been dissolved or ceased to exist.
(3) On an application by a third party for leave to bring an action against an insurer, the court must grant leave if it is satisfied that the third party has established a prima facie entitlement to bring such an action.
(4) If an action for damages or compensation is commenced by a third party against an insured within the time allowed by section 4 of the Limitation Act 1950 and subsequently the third party commences an action under section 11B of this Act against the insured in respect of the same matter, section 4 of the Limitation Act 1950 does not apply to that action against the insurer.
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URL: http://www.nzlii.org/nz/other/nzlc/report/R46/R46-5.html