The Owners Strata Plan 66601 v Majestic Constructions Pty Ltd & Ors - [2008] NSWSC 735

No judgment structure available for this case.

CITATION: The Owners Strata Plan 66601 v Majestic Constructions Pty Ltd & Ors [2008] NSWSC 735

HEARING DATE(S): 6 June 2008

JUDGMENT DATE :
18 July 2008

JUDGMENT OF: Rein J

DECISION: Applicant/Second Defendant's application refused. Applicant to pay costs of the two Respondents (plaintiff and JDT) of the motion.

CATCHWORDS: Insurer seeks to have insured join a third party (alleged by insurer to be a tortfeasor liable to insured), or alternatively, to itself cross claim - Insurer not permitted to require joinder until it has accepted liability for insured's claim - no right in insurer to cross claim against third party - Construction of subrogation clause and consideration of whether insurer had accepted insured's claim

LEGISLATION CITED: Corporations Act 2001 (Cth)
Limitation Act 1969
Law Reform (Miscellaneous Provisions) Act 1946

CATEGORY: Procedural and other rulings

CASES CITED: Patricks Operations Pty Ltd v American Home Assurance Co BC 8902506 (23 February 1989)
Santos Ltd & Ors v American Home Assurance Co & Ors (1987) 4ANZ Ins Cas 60-79
Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd & Anor (2003) 12 ANZ Ins Cas 61-553
Simpson v Thompson (1877) 3 App Cas 279
Castellan v Preston (1883) 11 QBD 380
State Government Insurance Office v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228
Boag v Standard Marine [1937] 2 KB 113
AFG Insurance Ltd v The City of Brighton (1972) 126 CLR 655
Inglis v Stock (1885) 10 App Cas 263
Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483
Arthur Barrett Ltd v National Insurance Co of New Zealand Ltd [1905] NZLR 874
Leighton Contractors Pty Ltd v C.E. Heath Underwriting & Agency Services Ltd & 8 Ors 27 March 1997, unreported, Supreme Court of NSW
Leighton Contracters Pty Ltd v C E Heath Underwriting and Agency Services Ltd and Leighton Contractors Pty Ltd v Kinhill Engineers Pty Ltd of 13 November 1992
Sydney Turf Club v Crowley [1971] 1 NSWLR 724
Distillers Co Biochemical (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1
Club Motor Insurance Agency v Swann [1954] VLR 754
Groom v Crocker [1939] 1 KB 194
Page v Scottish Insurance Corp (1929) 140 LT 571
Employers Reinsurance Corporation and Suncorp Metway Insurance Ltd v Ashmere Cove Pty Ltd & Ors 15 ANZ Ins Cas 61, 757 [2008] FCAFC 28
JN Taylor Holdings (in liq.) v Bond (1993) 59 SASR 432)
Interchase Corporation (in liq.) v FAI General Insurance Co Ltd [2000] 2 QdR 301
Gordian Runoff v Price & Ors [2004] NSWSC 535

TEXTS CITED: Meagher, Gummow & Lehane, Principles of Equity, 3rd Edn
McGillivray on Insurance Law, 10th Edn
Derrington & Ashton, The Law of Liability Insurance, 2nd Edn
Kelly & Ball, Principles of Insurance Law

PARTIES: Owners Strata Plan 66601 (Plaintiff/ Respondent on Motion)
Allianz (Second Defendant/ Applicant on Motion)
JDT Design Pty LTd (Respondent on Motion)

FILE NUMBER(S): SC 55091/2005

COUNSEL: T Lynch (Plaintiff/Respondent)
D. Weinberger (Second Defendant/ Applicant)
L. Chan (Respondent)

-

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY & CONSTRUCTION LIST

Rein J

Hearing Date: 6 June 2008
Judgment Date: 18 July 2008

55091/2005 The Owners – Strata Plan 66601 v Majestic Constructions Pty Ltd & Ors

JUDGMENT

1 His Honour: The plaintiff’s claim arises out of allegedly defective building work. The second defendant, Allianz is the insurer under a policy, variously described as a building owner’s warranty policy, a homeowner’s warranty policy or a contractor’s warranty policy, by which the plaintiff, it is agreed, is insured.

2 The plaintiff claims that the building suffers from a number of defects the rectification work for which will cost in the order of $2 million.

3 The plaintiff made a claim on the insurance policy. Allianz has disputed that all of the alleged defects are defects within the policy and disputed that the rectification costs are of the order claimed. The claim was made in late 2003. Proceedings were commenced by the plaintiff against Majestic Constructions Pty Ltd (“Majestic”), Allianz, and Blueprint Property Developments Pty Ltd (“Blueprint”), in 2005 in the Consumer Trade and Tenancy Tribunal but the proceedings were later transferred to this Court. Majestic, the builder, and Blueprint, the developer, have both been placed in liquidation.

4 By letter of 31 March 2008 Allianz wrote to the plaintiffs through their solicitor enclosing a cheque for $50,000. The letter said:

“We are instructed to admit liability under the policy to the value of $50,000.00. The admission is made without prejudice to our client’s rights under the policy and without prejudice to the Response filed in the proceedings and relied upon by our client. The sum of $50,000.00 is not tied to any specific alleged defect or defects”.

5 Before they went into liquidation Majestic and Blueprint joined JDT Design Pty Ltd (“JDT”) by way of cross claim. JDT are engineers who designed and/or advised on aspects of the building. Majestic and Blueprint alleged that JDT had breached a duty of care owed to the plaintiff in their work. Proceedings on the cross claims have been stayed by virtue of the liquidation of Majestic and Blueprint and s471B of the Corporations Act.

6 Allianz is concerned that any claim that the plaintiff might have against JDT will be lost by virtue of the operation of the Limitations Act. It has requested the plaintiff to commence proceedings against JDT and offered to indemnify the plaintiff against any costs orders which might be made against the plaintiff, should Allianz (in the plaintiff’s name) fail in its claim against JDT. Allianz has, by letter of 31 March 2008 indicated it would “file and serve the evidence it considers appropriate in support of the plaintiff’s claim against JDT” but added: “our client will, at its discretion, be at liberty to compromise or settle the claim the plaintiffs bring against JDT on terms that it considers appropriate”: see Exhibit MHM8 to the affidavit of Mr Matthew Maling of 29 May 2008. The plaintiff has refused to join JDT.

7 Allianz seeks an order, pursuant to Part 6.24 of the Uniform Civil Procedure Rules (“UCPR”) that the plaintiff join JDT. Part 6.24 relevantly provides:

8 Alternatively, by its Amended Notice of Motion, Allianz seeks leave to issue a cross summons/cross claim against JDT seeking a declaration that JDT is liable to compensate the plaintiff in damages.

9 Mr Weinberger of counsel, who appears for Allianz, foreshadowed a third possible course, which was to seek leave to issue a separate summons in the name of the plaintiff, which could then be stayed pending the outcome of the current proceedings. He indicated that this was not a desirable course since whilst it solved the problem of the Limitations Act, it did not solve the problem of multiplicity of proceedings.

10 Mr Lynch of counsel appeared for the plaintiff, and submitted that:

11 Ms Chan of counsel, who appeared for JDT, joined in opposition to the proposed joinder against her client either by way of amended statement of claim or by way of cross claim.

12 Mr Weinberger referred me to a decision of Rogers CJ of the Commercial List in Patricks Operations Pty Ltd v American Home Assurance Co BC 8902506 (23 February 1989) and Ms Chan referred me to Santos Ltd & Ors v American Home Assurance Co & Ors (1987) 4ANZ Ins Cas 60-79 and Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd & Anor (2003) 12 ANZ Ins Cas 61-553. I shall say more about these cases later, but I drew the attention of counsel to a decision of Cole J in Leighton v C E Heath (infra) and Rolfe J in Leighton v C E Heath (infra), which decisions, it occurred to me, might be relevant to the present application.

13 I granted leave to all counsel to provide submissions on the Leighton cases and any subsequent consideration of them, and for those to be provided to me by 3 July 2008. The further submissions were not provided to my Associate until 10 July. The insurer’s further submissions were wider in scope than were the subject of leave but subject to one matter to which I will refer, were not the subject of objection.

14 Subrogation is a principle having much wider application than in the field of insurance law (see Meagher, Gummow & Lehane, Principles of Equity, 3rd Edn, para 90 (et seq.)). For insurance purposes, the right of subrogation is the right of the insurer to ‘stand in the shoes’ of the insured to pursue any benefit that the insured has against a third party. In McGillivray on Insurance Law, 10th Edn, para 22-24, the learned authors note that an insurer is entitled to exercise its rights of subrogation if:

(c) his rights of subrogation are not excluded by a term of the parties’ contract”.

15 The policy here is, it was implicitly agreed, indemnity insurance. I shall set out the provisions of the Allianz policy which were said to be the relevant terms (found in Annexure “A” to the affidavit of Mr Maling of 5 June 2008):

“(2) Upon the insurer accepting liability in respect of a claim under this policy the insurer is subrogated to any rights of the Building Owner against any party, including but not limited to the contractor, whether or not the Building Owner will or has been fully or partly indemnified or whether or not any payment has been made by the insurer” (emphasis added), which I shall refer to as “the subrogation” clause.

(6) in relation to a defect due to a faulty design provided by the Building Owner, or a previous owner”.

16 Other provisions had been relied on by Allianz, and there was some dispute as to which policy precisely the plaintiff is insured under, but by letter of 14 July 2008, these issues were not pressed and I proceed on the basis that I need not concern myself with subclauses (3)(a) or (b) under Part B Claims Procedure to which reference had been made, nor any argument based on those clauses.

17 The common law principle in relation to subrogation is that the right of subrogation cannot be exercised until the insurer has made payment under the policy: McGillivray at 22-27, citing inter alia Simpson v Thompson (1877) 3 App Cas 279, 284; Castellan v Preston (1883) 11 QBD 380, 389 and see also State Government Insurance Office v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228, 240-241 per Barwick CJ.

18 Until the insured has been compensated for all his loss caused by the third party the insured is entitled to remain dominus litus (i.e. to have conduct of the litigation against a third party). McGillivray argues that, contrary to some opinions expressed, the insurer who has paid the full amount of the claim payable under the policy, does, at common law, have rights of subrogation even if the insured has not been indemnified in full for his loss: see 22-30, but adds that “the manner in which those rights are exercisable will depend on whether the insurer or the assured is dominius litus”.

19 The common law right of subrogation can be modified by contract as has already been noted. Allianz argued that this subclause did alter the common law because it gave a right of subrogation to Allianz even if the insured was only partly indemnified and whether or not any payment has been made.

20 At the hearing of the motion Mr Weinberger accepted that Allianz’s position reflected in the Amended Response filed by Allianz appeared to be inconsistent with the assertion that Allianz had agreed to indemnify the plaintiff. He sought leave to further amend the Response and I granted Allianz leave to do so by 13 June 2008 which leave was availed of.

21 By its proposed Second Amended Response, Allianz does not admit that it insured the plaintiff for any loss or damage for which the developer was liable to the plaintiff under ss 18B and 18C Home Building Act 1989, (see paragraph 5 of the Second Amended Response), admits that it is liable to indemnify the plaintiff in respect of loss and damage suffered by the plaintiff in respect of residential building work arising from a breach of statutory warranty but qualifies this by reference to the terms and conditions of the policy and in particular exclusion clause 6 (see paragraph 12 of the Second Amended Response) and says it has quantified its liability as $25,880 and hence does not admit liability to indemnify in respect of loss and damage exceeding $25,880 (although it has paid an amount of $50,000).

22 Both the plaintiff and the insurer claim to have found support for their respective positions in Patricks. In Patricks the plaintiff sued its insurer under a fidelity policy as a result of losses suffered by Patricks due to allegedly fraudulent conduct carried out by employees of Patricks and another company, Beaurepaire. Rogers CJ Comm. Div. considered an application by the insurer for an order that Patricks issue proceedings against Beaurepaire. He noted that:

“the Courts have been steadfast in adhering to the view, that, generally speaking, a plaintiff will not be forced to join as a defendant a party against whom the plaintiff does not desire to claim any relief”.

23 His Honour refused to make the order sought by the insurer and Patricks’ ratio offers no support for Allianz’s argument here. However, reliance is placed by Allianz on some comments that his Honour made, particularly his Honour’s statement at p.6:

“there is high authority to support the proposition that a Court has jurisdiction to enjoin an insurer from prejudicing the right of subrogation of the insurer”

“In the circumstances, a further question which was not discussed before me, but is adverted by Derham Subrogation in Insurance Law , does not arise. The author suggests (p 131) that an insured may be under an obligation to allow its name to be used in proceedings against a third party for the purpose of preventing the limitation period from expiring before indemnity. In footnote 29, the author says: ‘Of course the insured would only be required to do this if the insurer is prepared to give an indemnity as to costs’. That must clearly be right” (p.7 BC8902506).

24 In his comment “that must clearly be right”, I take Rogers J to be expressing a view that if an insured could be compelled to issue proceedings that could only be on the basis that the insurer would give indemnity, not the more general proposition which, in any event, is expressed by Dr Derham as being that the insured “may” be under an obligation.

25 Rogers J also made reference to the expression of opinion by Barwick CJ in SGIO v Brisbane Stevedoring (supra) in which Barwick CJ found inappropriate a description of the insurer’s subrogationary rights as a “contingent” right, a description used by Lord Wright MR in Boag v Standard Marine [1937] 2 KB 113. Barwick CJ said

“… it is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject of the loss and by subrogation may enforce them. This right of subrogation is inherent in the contract of indemnity. It has been put that it exists as a contingent right from the inception of the insurance. For my part, with respect, I do not find the description ‘contingent right’ appropriate and satisfying. Yet the right of subrogation as it seems to me does not depend for its existence as a right upon the occurrence of a loss under a policy. Its exercise is of course dependent upon the payment of the loss but as a right it exists from the moment of the making of the contract of indemnity. There is therefore no reason why a breach or threatened breach of the right could not be restrained by the insurer before the loss has occurred, though an occasion for such a course will probably be rare” (emphasis added).

“It is also settled law that an insured may not release, diminish or compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation”.

26 Rogers J did then say (at p.9) however:

“Indemnity having been refused by the insurer, in my view, disqualifies it from relying upon the concept explained by the Chief Justice. I am therefore left in the situation where I cannot require the plaintiff to make a claim for relief against the defendant”.

27 If Rogers J’s reference to “indemnity having been refused” is a reference to indemnity for costs, then it would offer some support, albeit in an obiter dictum, for Allianz’s position since they have offered to indemnify the plaintiff for costs of launching proceedings against JDT. If, on the other hand, it is read as referring to indemnity under the policy, it offers no support for Allianz’s position. In the first portion of the preceeding paragraph, Rogers J noted that all counsel “proceeded on the assumption that the right of subrogation does not arise prior to indemnity from the insurer”, and I therefore read his Honour’s reference to “indemnity” as being indemnity under the policy.

28 Dr Derham’s suggestion (referred to in [23] above and found in the text after discussion of SGIO v Brisbane Stevedoring) that an insured may have an obligation to institute proceedings was in the following terms:

“…if the insurer could not adequately investigate the claim before expiration of the limitation period, the insured may be bound to institute proceedings against the third party if the insurer so requested even before indemnity” (pp131-132).

“Since the insurer does not have an enforceable right of subrogation until its insured has been indemnified, there are doubts as to whether it could compel him to apply for an injunction”

“while the insurer before indemnity has an existing right of subrogation, in the sense that it has a right which the insured is not permitted to prejudice, it does not have an enforceable right, and so it would appear to be inappropriate for it to seek an injunction itself at this stage”.

29 De Derham also said, at pp130-131, that even after indemnity has been given and an insured has two alternative courses open to him “he would not be obliged to choose the one that will benefit his insurer if coincidentally that alternative would harm his own commercial interests” citing AFG Insurance Ltd v The City of Brighton (1972) 126 CLR 655 and Inglis v Stock (1885) 10 App Cas 263 at 274 per Lord Blackburn.

30 There is no doubt that an insured, once indemnified in full, cannot prejudice the subrogationary rights of an insurer without penalty: see for example Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483; Boag v Standard Marine [1937] 2KB 113, 128; Arthur Barrett Ltd v National Insurance Co of New Zealand Ltd [1905] NZLR 874; but that is quite a different matter from requiring an insured to take positive action when it has not been indemnified. Whether there is some scope for an argument that an insured who has made a claim on the policy very close to the expiry of a limitation period has some obligation to avoid loss of rights whilst the insurer considers the claim, within an appropriate period, is an interesting one, but it does not arise in this case as the claim on the policy was made in late 2003.

31 I do not read Barwick CJ’s obiter dictum as of relevance to a situation when the insurer has refused indemnity wholly or in part. I do not think Barwick CJ was propounding a view that an insured had a positive duty to protect the interests of the insurer and when the insurer could protect its rights against third parties by agreeing to indemnify the insured.

32 Nor do I read Dr Derham as providing support for the existence of any general requirement on an insured to take action against a third party prior to full indemnity being made or agreed to be made under the policy.

33 In Leighton Contractors Pty Ltd v C.E. Heath Underwriting & Agency Services Ltd & 8 Ors 27 March 1997, unreported, Supreme Court of NSW, Leightons, the insured, made a claim on its policy as a result of allegedly negligent advice from or work of consultants but was not intending to join the consultants as defendants. The limitation period for a claim by Leightons against the insurers was close to expiry and the insurers were concerned that failure to launch a claim would prejudice any right of subrogation the insurers might have. Leightons were prepared to issue a claim against the consultants, but not serve it, provided the insurers agreed to indemnify Leighton, on a solicitor/client basis, for all costs which might arise in consequences of the issue of and service of the claims on the various consultants. Cole J (as he then was) thought that Leighton’s insistence on a complete indemnity as a precondition to the commencement of proceedings was unreasonable. He thought that a decision on the issue of costs was best deferred and he stood the matter over for a period of three weeks to enable Leightons to issue the proceedings against the consultants but without requiring service. Cole J noted that it was desirable that all consultants, contractors, subcontractors and the like should be joined in the one proceedings and he felt that Leighton’s approach seemed to “put aside that approach”. He did not think that Leighton’s reasons for not wanting to join the contractors were adequate. One reason was that Leightons believed it could recover on the policy if it could show that it or the consultants were negligent, and the second was that it had continuing commercial relations with those consultants.

34 Subsequently, Rolfe J in Leighton Contracters Pty Ltd v C E Heath Underwriting and Agency Services Ltd and Leighton Contractors Pty Ltd v Kinhill Engineers Pty Ltd of 13 November 1992 said (at p.3) “On 27 March 1992 Cole J ordered that Leighton commence proceedings against the consultants for the reasons he then gave”, and later said (at p.8):

“I would add that this case is somewhat unusual in a number of respects, including the requirement of the Court that the plaintiff should join certain parties as defendants against its will…”

35 It will be seen that by the judgment of 27 March 1997, Cole J did not actually order Leightons to commence proceedings against Kinhill rather, Cole J indicated a view that the insurers did not have to agree to fully indemnify Leightons as a condition of Leightons taking that course. Whilst Rogers J seemed to think that a failure to agree to indemnify the insured was an important factor, Cole J took a different view. Rolfe J’s view that an order requiring the insured to commence proceedings was somewhat unusual was, if anything, an understatement since Counsel in this matter have found no case in which such an order has been made where the full claim under the policy had not been met. Patricks was not mentioned in Leightons, nor was any other case. Whilst it can be said that Cole J took an approach that supports Allianz here, no consideration was given by his Honour to the principles relevant to insurance law and his Honour did not actually make an order that was inconsistent with those principles. Nor is it clear from the judgment whether the claim on the policy had only recently been made and further, it is a case in which the insured agreed to issue proceedings so as to protect the insurer.

36 In Santos, the plaintiffs claimed under a consequential loss policy for production losses, alleging that flanges installed at oil terminals by various third parties (“Davy McKee”) were defective or otherwise incapable of withstanding extremely cold temperatures. Santos had not sued Davy McKee for breach of contract or negligence. The insurers denied that any damage had occurred, and that the flanges were defective and asserted that Santos had been mistaken or badly advised by Davy McKee in deciding to replace them. The insurers cross-claimed against Davy McKee but the cross claims were struck out. White J took the view that the insurers could not force Santos to commence proceedings against Davy McKee whilst no indemnity had been provided to Santos:

vis-à-vis

domini litis

37 Santos was followed in Hammer Waste at 76.512 in which Palmer J said, in rejecting an insurer’s attempt to join a third party:

“[77] First, the law is clear that the insurer’s right of subrogation inheres from the date of the insurance contract and may be protected by injunction or declaration if the insured attempts to interfere with it or defeat it. However, the law is just as clear that the right cannot be exercised so as to put the insurer into the shoes of the insured until the insurer has paid out the whole of the loss which is insured under the policy: see State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228, at 240-241 per Barwick CJ; Santos Ltd v American Home Assurance Co (1986) 4 ANZ Ins Cas 60-795 and the authorities reviewed there by White J”.

38 The approach taken by White J and Palmer J in rejecting any right in an insurer to issue a cross claim or seek to require the insured to commence proceedings against a third party, and with which I respectfully agree, is one entirely consistent with the principles outlined in McGillivray; see also CCH Australia & NZ Insurance Law Reporter 27-260, Derrington & Ashton, The Law of Liability Insurance (2nd edn.) paragraph 13-43, and Kelly & Ball, Principles of Insurance Law at 9.0090. Further, in relation to the cross claim aspect, an insurer cannot bring in its own name a claim against an alleged tortfeasor even after indemnity has been given to the insured: Sydney Turf Club v Crowley [1971] 1 NSWLR 724 per Mason JA at p 731 and 126 CLR 420.

39 If Cole J in Leighton is treated as having adopted the view that the insured has an obligation to take positive action to protect a right of the insurers not yet exercisable because the insurer has not met the insured’s claim, I am, with respect, unable to accept such a proposition. If an insured does not join a party who might be successfully sued for the damage caused to the insured, the insured takes the chance that the insurer may be able to successfully resist the claim and that it, the insured, will not be able to recover from the third party. If the insurer refuses to pay the claim it runs the risk that if it is adjudged liable to pay the claim, by that time its rights of subrogation will have become worthless or at least of reduced value. In my view, an insured does not have any duty to protect an insurer from the insurer’s decision to refuse to pay the claim. If the insurer’s decision to refuse the claim is held to have been correct, then no right of subrogation will exist. If the insured is successful at the hearing against the insurer, then a fortiori the insurer’s refusal to pay was a breach of its contract.

40 In approaching the subrogation clause and bearing in mind the agreed absence of any other provisions dealing with exercise of the right, it is possible to view the clause as merely conferring a contractual right of subrogation rather than providing any guidance as to its exercise. I shall however, assume in favour of Allianz that the clause ought not be construed so narrowly. On that assumption, I think the clause, by stating that the insurer is granted a right of subrogation before payment, is altering the general law. By stating that the insurer is subrogated to any right of the insured whether or not the insured has been fully indemnified or partly indemnified the clause endeavours, I think, to preclude arguments of the kind that were identified in paragraph 22-30 of McGillivray, see [18] above. The clause would therefore permit subrogation even where the insured will not, by payment of the maximum amount payable under the policy, be fully indemnified in respect of its loss.

41 That reading of the last portion of the subrogation claim is consistent with the opening words of the subrogation clause, which I regard as of critical importance. In this regard therefore, whilst the subrogation clause would give to Allianz a right even if payment were not actually made or even if the plaintiff was not, by the payment or agreement to indemnify under the policy fully indemnified for its loss, it would not grant to Allianz the right to be subrogated or exercise that right unless it had paid or agreed to pay all of the monies payable to the plaintiff under the policy.

42 For Allianz to be entitled to exercise a right of subrogation it must establish that it has met the requirements of the subrogation clause, which therefore requires “acceptance of liability in respect of a claim” and Allianz has not accepted liability in respect of the claim made by the plaintiff. Rather, at most, it has accepted liability to pay a portion of the claim made by the plaintiff. Allianz argues that it has agreed to indemnify the plaintiff and by paying $50,000, has indemnified the plaintiff or at least indemnified it sufficiently to enliven the insurer’s right to bring proceedings by way of subrogation against JDT. If the insurer were exercising only its rights of subrogation, the maximum claim which it could bring against JDT would be $50,000. It could only claim a more substantial amount if it were advancing the plaintiff’s claims as they are presently formulated and that would be inconsistent with Allianz’s contentions and position. Further, I note that by its offer to take over the proceedings it requires agreement that it has a right to compromise the claim against JDT at its discretion, which would be inimical to the interests of the plaintiff and would not pay due regard to the legitimate interests of the plaintiff as an insured and the implied obligation imposed on an insurer “to have regard to more than its own interests when exercising its rights and powers”: see Distillers Co Biochemical (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1, per Stephen J at 31 and Club Motor Insurance Agency v Swann [1954] VLR 754 and Groom v Crocker [1939] 1 KB 194.

43 In my view, these problems only serve to underscore the contradiction in the position of Allianz in this matter. The plaintiff insured could not be compelled to hand to Allianz conduct of litigation in which Allianz has no interest beyond $50,000 and could on its proposal settle without any regard for the interests of its insured. I do not accept Mr Weinberger’s submission that Allianz can challenge the categorisation and quantum of damage and rely on the exclusion clause and yet assert that it has accepted liability for the insured’s claim. As the learned authors of Kelly & Ball, state at 9.0090:

“The insurer’s entitlement to exercise its right of subrogation does not arise if the insurer pays part of the amount due under the contract and reserves its position in relation to the balance”.

“I think the right to be subrogated to the rights of the assured does not pass to the underwriter until he has satisfied all the claims under the policy in respect of the particular subject-matter and that if you get on car, on accident, one policy, one premium, I do not think the underwriter can claim to be subrogated until he has satisfied all the claims arising under that policy and paid for by that one premium in respect of that one accident and that one car (LT at 576)”.

44 In my view, Allianz has accepted liability only for a portion of the plaintiff’s claim and what is seeks to do is contrary to authority. Nor do I think that the principles outlined in McGillivray and Page v Scottish Insurance, and reiterated in Kelly & Ball lead to the conclusion that the question is one for the discretion of the Court, as was submitted by Mr Weinberger. If I am wrong in that view, and it is a matter of discretion, I would not exercise it in favour of Allianz when it has refused to indemnify the plaintiff within a five-year period and only now seeks to require the plaintiff to launch proceedings to protect itself, and where it reserves the right to settle those proceedings in effect without regard to the plaintiff’s interests.

45 Mr Weinberger, in his supplementary written submissions, has referred to the case of Employers Reinsurance Corporation and Suncorp Metway Insurance Ltd v Ashmere Cove Pty Ltd & Ors 15 ANZ Ins Cas 61, 757 [2008] FCAFC 28. In that case, investors in a management scheme who claimed to have suffered losses by reason of the actions of the entity managing the scheme (“KMF”) and the directors of KMF. The liquidator of KMF had made a claim on KMF’s insurance policy and indemnity had been denied on the basis of the exclusion clause. The liquidators had indicated that they did not have the funds to proceed against the insurer to challenge the insurer’s refusal of indemnity. The investors sought to have the insurers added as respondents and that order was made by French J. The appeal court, Heerey, Sackville and Siopis JJ, rejected the appeal.

46 In the course of the judgment, the Full Federal Court noted that French J had considered the question of whether the declaratory relief sought by the investors would be binding as between KMF and the insurers. A view had been expressed in an earlier case (JN Taylor Holdings (in liq.) v Bond (1993) 59 SASR 432) that it would, but in Interchase Corporation (in liq.) v FAI General Insurance Co Ltd [2000] 2 QdR 301 the Queensland Court of Appeal had taken a contrary view, with which contrary view French J expressed tentative agreement. Nevertheless French J thought that the joinder of an insurer in such circumstances might have the ‘practical effect’ of binding insurer and insured, and he was of the view that the Anshun principle could be called in aid.

47 The Full Federal Court in Employers Reinsurance Corporation saw it as unnecessary to determine whether the JN Taylor Holdings approach or the Interchase approach was correct as they saw the insurers as facing “formidable obstacles if they choose not to put forward all their defence in the current proceedings, or if they seek to reagitate issues that are the subject of adverse findings or holdings by the Primary Judge”. They regarded the view taken by French J, that the Anshun principle would apply, as correct: see [71]. It was, concluded the Full Court, of practical utility and not unjust, to direct the joinder of the insurers pursuant to FCR Order 6 Rule (8)(1).

48 Allianz contends that “by parity of reasoning, there could be utility” in making the order permitting Allianz to file a cross summons, and cross claim with JDT as a cross defendant, in which declaratory relief is sought. I do not accept this submission.

49 In Employers Reinsurance Corporation the plaintiff was a third party who could not bring an action against the insurers (s601G of the Corporations Act was not available because KMF had not been deregistered and there was no legislation in place in Western Australia equivalent to s6 of the Law Reform (Miscellaneous Provisions) Act 1946: see CCH Australia and New Zealand Insurance Reporter paragraph 27-510.) Since the liquidation of KMF, the insured would not take action against the insurer, the third party claimant with an interest in the proceeds of the insurance being available needed to have determined the question of whether the exclusion operated or not. That question would be determined through the claim for declaratory relief. In the present case, Allianz does not seek a determination of whether its refusal of full indemnity was correct but would by the cross claim seek declaratory relief that JDT, a third party, has breached a duty of care to the plaintiff. It is not just that declaratory relief that a party is liable in damages would appear to be an inappropriate form of relief in a claim in tort or that an insurer has no standing to join JDT in its own name, but that the type of issue which was seen as being useful and convenient to determine in Employers is not an issue which Allianz seeks to ventilate. I do not regard Employers as providing any support for Allianz in this application.

50 Both Mr Lynch and Mr Weinberger also relied on Gordian Runoff v Price & Ors [2004] NSWSC 535. In Gordian, McDougall J held that an insured who sought to be joined as a defendant to an application by an insurer to prevent solicitors who had acted for the insured and insurer in proceedings brought by a third party against the insured, ought be permitted to be so joined. Mr Weinberger drew my attention to paragraphs [9], [10], [13] and [15] of Gordian and submitted that the decision demonstrated the flexible application of rule 6.24 (and its predecessors). Mr Lynch relied on Gordian on the need for the proposed party’s joinder to be “necessary to the determination of all matters in dispute in any proceedings”. Allianz, he argued, has no current substantive right to be subrogated to, so no right of Allianz was prejudiced directly or indirectly.

51 In my view, the question of whether JDT is liable to the plaintiff is not a matter which has to be determined in litigation between the plaintiff and Allianz. Either the policy responds or it does not, and either the plaintiff’s claim as to the amount of damage it has suffered and falling within the policy will be upheld or it will not. The issues between an insured and insurer are not the same as those between an insured and a third party whose conduct is alleged to have been negligent. In my view, rule 6.24(1) cannot be relied on by Allianz.

52 I agree that it is desirable that all matters arising out of an accident or incident are determined together if that is possible, but I do not think a right which the insurer can only exercise by accepting liability for a claim can be permitted to be advanced before it has accepted liability, which it has not done here.

Conclusion

53 It follows, in my view, that Allianz’s application to require the plaintiff to join JDT or to issue a cross claim against JDT should be refused, and that Allianz should pay the costs of the plaintiff and JDT of the motion.

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Citations

The Owners Strata Plan 66601 v Majestic Constructions Pty Ltd [2008] NSWSC 735

Cases Citing This Decision

0

Cases Cited

6

Statutory Material Cited

3

State Government Insurance Office (Queensland) v Brisbane Stevedoring Pty Ltd [1969] HCA 59

AFG Insurances Ltd v City of Brighton [1972] HCA 70

CITATION:	The Owners Strata Plan 66601 v Majestic Constructions Pty Ltd & Ors [2008] NSWSC 735
HEARING DATE(S):	6 June 2008
JUDGMENT DATE :	18 July 2008
JUDGMENT OF:	Rein J
DECISION:	Applicant/Second Defendant's application refused. Applicant to pay costs of the two Respondents (plaintiff and JDT) of the motion.
CATCHWORDS:	Insurer seeks to have insured join a third party (alleged by insurer to be a tortfeasor liable to insured), or alternatively, to itself cross claim - Insurer not permitted to require joinder until it has accepted liability for insured's claim - no right in insurer to cross claim against third party - Construction of subrogation clause and consideration of whether insurer had accepted insured's claim
LEGISLATION CITED:	Corporations Act 2001 (Cth) Limitation Act 1969 Law Reform (Miscellaneous Provisions) Act 1946
CATEGORY:	Procedural and other rulings
CASES CITED:	Patricks Operations Pty Ltd v American Home Assurance Co BC 8902506 (23 February 1989) Santos Ltd & Ors v American Home Assurance Co & Ors (1987) 4ANZ Ins Cas 60-79 Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd & Anor (2003) 12 ANZ Ins Cas 61-553 Simpson v Thompson (1877) 3 App Cas 279 Castellan v Preston (1883) 11 QBD 380 State Government Insurance Office v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 Boag v Standard Marine [1937] 2 KB 113 AFG Insurance Ltd v The City of Brighton (1972) 126 CLR 655 Inglis v Stock (1885) 10 App Cas 263 Commercial Union Assurance Co v Lister (1874) LR 9 Ch App 483 Arthur Barrett Ltd v National Insurance Co of New Zealand Ltd [1905] NZLR 874 Leighton Contractors Pty Ltd v C.E. Heath Underwriting & Agency Services Ltd & 8 Ors 27 March 1997, unreported, Supreme Court of NSW Leighton Contracters Pty Ltd v C E Heath Underwriting and Agency Services Ltd and Leighton Contractors Pty Ltd v Kinhill Engineers Pty Ltd of 13 November 1992 Sydney Turf Club v Crowley [1971] 1 NSWLR 724 Distillers Co Biochemical (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 Club Motor Insurance Agency v Swann [1954] VLR 754 Groom v Crocker [1939] 1 KB 194 Page v Scottish Insurance Corp (1929) 140 LT 571 Employers Reinsurance Corporation and Suncorp Metway Insurance Ltd v Ashmere Cove Pty Ltd & Ors 15 ANZ Ins Cas 61, 757 [2008] FCAFC 28 JN Taylor Holdings (in liq.) v Bond (1993) 59 SASR 432) Interchase Corporation (in liq.) v FAI General Insurance Co Ltd [2000] 2 QdR 301 Gordian Runoff v Price & Ors [2004] NSWSC 535
TEXTS CITED:	Meagher, Gummow & Lehane, Principles of Equity, 3rd Edn McGillivray on Insurance Law, 10th Edn Derrington & Ashton, The Law of Liability Insurance, 2nd Edn Kelly & Ball, Principles of Insurance Law
PARTIES:	Owners Strata Plan 66601 (Plaintiff/ Respondent on Motion) Allianz (Second Defendant/ Applicant on Motion) JDT Design Pty LTd (Respondent on Motion)
FILE NUMBER(S):	SC 55091/2005
COUNSEL:	T Lynch (Plaintiff/Respondent) D. Weinberger (Second Defendant/ Applicant) L. Chan (Respondent)