CGU v Blakeley: High Court Expands Rights to Join Insurers in Insolvency Proceedings

Joel Parsons

LawyerAitken PartnersView Profile

The High Court’s landmark decision in CGU Insurance v Blakeley [2016] HCA 2 makes it easier for people like liquidators and bankruptcy trustees to claim insurance money when companies or individuals go broke.

This case explains when a third party can join an insurer in a court case and ask for payment under an insurance policy, even if they’re not part of the original contract. If you’re dealing with insolvency, this decision could help you recover more money from insurance.

Case Background

The liquidators of Akron Roads Pty Ltd commenced proceedings in the Supreme Court of Victoria against its former directors for insolvent trading. The defendants were insured by CGU Insurance Limited under a professional indemnity insurance policy, however, CGU denied indemnity, relying upon the policy’s carve outs. In response, the liquidators applied to join CGU as a defendant and obtain a declaration that it was obliged to indemnify the directors.

Legal Issue: Can Third Parties Join Insurers?

The key issue was whether there was sufficient “matter” or “justiciable controversy” for CGU to be joined and declaratory relief be granted, despite the liquidators not being party to the insurance contract.

“It is a necessary condition of federal jurisdiction, in the sense of authority to exercise the judicial power of the Commonwealth, that the matter in which the jurisdiction of the court is invoked is “capable of judicial determination” or “justiciable”.

…

The constitutional requirements for the existence of a matter were not in issue in this appeal. What was in issue was the existence of a justiciable controversy between the Akron liquidators and CGU.”

[26]-[27]

High Court Decision and Reasoning

Firstly, the Supreme Court of Victoria made orders granting the relief sought by the liquidators.

Subsequently, the Victorian Court of Appeal dismissed CGU’s appeal, also finding in favour of the liquidators.

Finally, the High Court of Australia dismissed CGU’s further appeal and held unanimously that there was a justiciable controversy and that the Supreme Court had jurisdiction to determine the matter. The Court accepted that the indemnity issue arose from the directors' alleged liability under section 588M of the Corporations Act 2001 (Cth) (Corporations Act), and therefore satisfied the federal subject matter requirement.

Section 562 of the Corporations Act provides that if a company has liability insurance and becomes liable to someone, any insurance money paid by the insurer for that liability does not form part of the general pool of assets available to creditors. Instead, the liquidator must pay that insurance money to the person who suffered the loss, to the extent needed to satisfy that liability, before paying ordinary creditors. A similar provision exists in the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) for individual persons (s 117).

Pursuant to such legislation, if the liquidators were successful in their claim for damages suffered due to the failure of the directors to prevent insolvent trading, alongside establishing liability of CGU, the proceeds of the CGU insurance policy should be provided to the liquidators.

“They [liquidators] are not claiming as a party to the insurance contract nor as persons otherwise entitled to the benefit of that contract. Their claim is based upon the legal consequence created by s 562 of the Act in the event that CGU is liable to indemnify Crewe Sharp and, more contingently, s 117 of the Bankruptcy Act in the event that CGU is liable to indemnify Mr Crewe and he becomes a bankrupt. That legal consequence would be the bringing into existence, in favour of the Akron liquidators, of a right to the proceeds of the insurance policy payable to Crewe Sharp in respect of its liability to Akron. The interest upon which the claim for declaratory relief is based and CGU’s denial of liability under the policy are sufficient to constitute a justiciable controversy between the Akron liquidators and CGU involving a question arising under a law of the Commonwealth. Because of these statutory provisions, it is the Akron liquidators who stand to benefit (to the exclusion of Crewe Sharp and Mr Crewe) from the making of the declaration sought.” – [67]

A third-party claimant is not prevented from seeking declaratory relief against an insurer merely because of a lack of contractual privity. Where the claimant has a real interest in whether insurance monies will be available to meet a judgment, a court may permit joinder and determine the insurer's indemnity obligations. It reflects a recognition of the reality that a plaintiff’s interest is not to be confined by a requirement that the plaintiff demonstrate a claim for vindication of an existing legal right against the insurer [42].

Key Takeaways: Implications for Liquidators and Insurers

The key takeaways from CGU v Blakely are as follows:

1. The statutory provisions in both the Corporations Act and the Bankruptcy Act give a claimant a sufficient economic and legal interest in insurance proceeds, bypassing traditional contract privity rules.
2. A real “matter” exists between a plaintiff and an insurer when coverage is denied, allowing state supreme courts to exercise federal jurisdiction to grant declaratory relief.
3. Liquidators can ascertain and target professional indemnity or ‘Directors & Officers’ insurance funds early in recovery actions against insolvent entities.

If you need help understanding how this High Court decision could affect your insolvency case, or want advice about joining an insurer to your legal proceedings, reach out to our experienced litigation team today. Call us on (03) 8600 6000 or (07) 3544 5659 to discuss your situation and learn how we can help you recover what you’re entitled to.