Supreme Court of NSW dismisses direct claim against insurer under Third Party Claims Act

This article was co-authored by Law Graduate Julie Hwang.

This recent decision of the Supreme Court of New South Wales provides useful commentary on third party claims for insurance proceeds, as well as the circumstances which might give rise to indemnity under claims-made liability policies.

Background

The first defendant and insured, SMLXL Projects (SMLXL) had entered into a contract with the plaintiff to carry out design and construction works for a multi-storey retail and commercial development in Double Bay, New South Wales.

SMLXL commenced the work in 2020 but abandoned the site after it went into liquidation.

SMLXL did not achieve practical completion of any of the contracted works. Because of this and other alleged defects, the plaintiff alleged various breaches of contract by SMLXL.

Application for leave to proceed against Insurer3>

Because of SMLXL's liquidation, the plaintiff sought leave to commence proceedings directly against SMLXL's professional indemnity insurer (Insurer) under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Act).

The Act allows a claimant who is owed damages, compensation or costs by a party to pursue these claims directly against the party's liability insurer with leave of the court (ss 4-5).

The Court held¹ that leave requires three elements; an applicant must establish that:

1. they have an arguable case that the insured is liable to the applicant;
2. there is a reasonable possibility that the insured will be unable to satisfy in full any judgment against them; and
3. there is an arguable case that the insured would, if found liable to the applicant, be entitled to indemnity under the policy.

The first and second elements were not disputed, and the Court was asked to consider whether there was an "arguable case" that SMLXL was entitled to indemnity under its professional indemnity policy (Policy), which was issued by the Insurer.

The decision primarily concerned whether the plaintiff had made "Claim[s] for civil liability" against SMLXL, as required under the Policy. A "Claim" relevantly included a "written demand for civil compensation or civil damages or non-monetary civil relief made against the Insured".

The decision

The Court considered each of the plaintiff's categories of claims against SMLXL to determine whether there was an arguable case for indemnity:

Liquidated damages claim

• The first category concerned the plaintiff's claim for liquidated damages, due to SMLXL's failure to achieve practical completion.
• The plaintiff submitted correspondence it had sent to SMLXL which referred its contractual entitlement to these damages and rights of set-off. However, the Court rejected that this communication constituted a "written demand" as required by the Policy, as there was no express or implied request for SMLXL to pay the liquidated damages.
• Even if the plaintiff's correspondence amounted to a demand for liquidated damages, the Court observed that claims for liquidated damages (agreed in a contract to be payable as a genuine pre-estimate of damage in the event of breach) are claims for debt and not "civil compensation" nor "civil damages".
• In the alternative, the Court rejected that the plaintiff's correspondence could be categorised as a claim for "non-monetary civil relief" (of a kind that may be granted by a court or tribunal in civil proceedings) or as a "Claim for civil liability" (as it did not seek the establishment by judgment of responsibility in law).
• The Court held generally that complaints about delay and the resulting inconvenience, frustration, and cost, accompanied by a reservation of contractual rights, do not amount to a demand for relief.

Claims for non-monetary relief

• The second and third categories related to the plaintiff's claims against SMLXL in respect of the glazing and balcony.
• In respect of the glazing issues, the plaintiff relied on correspondence with SMLXL, including the provision of an acoustic testing report and various requests for SMLXL to respond to the issues identified in that report. For the balcony, it relied on an email to SMLXL which proposed design changes and requested advice on next steps.
• The Court rejected that these communications amounted to "Claim[s]" as required by the Policy, as that they did not contain an explicit or implicit demand.

Remaining claims for rectification

• The remaining categories of claims concerned the plaintiff's demands for rectification of alleged issues with the air conditioning, concrete façade and structural design.
• Unlike the other categories, the Court accepted that the plaintiff had arguably made demands by way of email correspondence. However, these did not amount to "Claims" within the meaning of the Policy.
• As with the liquidated damages claim, the Court held that the plaintiff's demands to rectify the air conditioning only required SMLXL to comply with its contractual obligations, and were not claims for civil liability or non-monetary civil relief.
• For the structural and concrete façade issues, the Court was not satisfied that there was any nexus between the plaintiff's original demands for rectification and the deficiencies that were later alleged against SMLXL.

In the absence of a "Claim" as required by the policy, the Court found no arguable case that SMLXL would be entitled to indemnity under the Policy and dismissed the plaintiff's application in its entirety.

Key takeaways

• This decision provides a useful overview of the requirements to establish a direct claim against insurers for insurance proceeds under the New South Wales Act. Namely that there must be an arguable right to indemnity under a Policy in order for the Court to give leave under the Act.
• A reminder that the Act is not meant to allow fishing expeditions into insurers' policies.
• For insurers, it provides further commentary and clarification around claims-made policy coverage, where indemnity may be triggered by claims for compensation or damages, non-monetary relief or similar circumstances.

Footnotes:

¹ Referencing the NSW Court of Appeal's earlier decisions in Avant Insurance Ltd v Burnie [2021] NSWCA 272 and Clark v Avant Insurance Ltd [2022] NSWCA 175