Questions 4 and 5: Defence Costs and Multiple Claims
105The essence of the dispute reflected in questions 4 and 5 is whether, because the charge under s 6(1) comes into existence on the happening of an event giving rise to a liability, it must, at that time, attach to or descend on all insurance moneys that are, or may become, payable, in respect of the claim made to enforce that liability, subject to the requirement, under s 6(7), of actual notice of the charge being received by the insurer. The critical question concerns the meaning of the words in s 6(1) that the amount of the liability of the insured is to be a charge on "all insurance moneys that are or may become payable in respect of that liability".
106The word liability in the quoted phrase refers back to the liability of an insured to pay damages or compensation to a third party claimant. The Transform Claimants contend that the quoted phrase can encompass defence costs and other like costs and expenses, the payment of which erodes the limit of liability under the Policies. Accordingly, they say, any payment by the Insurers of defence costs or legal representation costs, after they have actual notice of the existence of the charge in favour of the PDS Claimants, will not be a valid discharge to the Insurers. The PDS Claimants say that several textual features of s 6 support that construction.
107The charge attaches to, or descends on, not only insurance moneys that are payable, but to all insurance moneys that may become payable. The PDS Claimants say that the words may become payable are apt to encompass insurance moneys that may be applied for several purposes. Thus, the charge is not limited to moneys that are payable for the liability of the insured to the third party claimant. Rather, the charge attaches to insurance moneys that are, or may become, payable in respect of that liability. The words in respect of convey the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer. The charge arises notwithstanding that the amount of the insured's liability may not then have been determined. That emphasises that the insurance moneys are to be subject to the charge as security for the full amount of the insured's potential liability, notwithstanding that, at the time when the charge attaches or descends, it may not be possible to assess how much is owed by the insured to the claimant.
108The PDS Claimants contend that that construction is consistent with the statutory purpose of s 6, being to enable a third party claimant to have recourse to funds paid or payable by an insurer to a wrongdoer in respect of the injury of which the third party claimant complains. It is designed to prevent the wrongdoer from either dispersing the moneys amongst its creditors or frittering it away on its own purposes. It is also designed to prevent the wrongdoer and its insurer from making a corrupt bargain (McMillan v Mannix (1993) 31 NSWLR 538 at 547). Thus, they say, insurance moneys are not to be depleted to the prejudice of the third party claimant, particularly by being consumed in defence costs.
109The charge arises on the happening of the event giving rise to the claim for damages or compensation (Bailey at 446 and 415). At that time, the charge affects all insurance moneys that are or may become payable in respect of the claim for damages or compensation against the insured. Therefore, the PDS Claimants say, all insurance moneys that respond, or may respond, to the claim for damages or compensation are subject to the charge.
110The Policies indemnify the insureds for a maximum amount of Loss (as defined) suffered by them. The Policies do not provide one limit of liability for claims made by third parties and another limit of liability for defence costs. Rather, the Policies provide that the Insurers are to pay up to a maximum amount for the Loss suffered by the insureds. That, the PDS Claimants say, is the sum that is or may become available to pay the liability for any claim first made against the insureds during the Policy Period. It is a necessary corollary, they say, that that is the sum that is the subject of the charge, at the time of the event that gives rise to the claim against the insured. They say that the maximum amount of Loss payable by an insurer for a claim for damages or compensation under the relevant contract of insurance is the amount available to pay the liability for any claim made against the insured.
111The PDS Claimants accept that the Insurers may pay moneys under the Policies until such time as they receive actual notice of a charge. Such payments would be a valid discharge of the Insurers. However, they say, by the operation of s 6(6), after the Insurers receive actual notice of the charge, no payment made by them under the Policies will be a valid discharge of their delegations (see Bailey at 450 and 415). The language of s 6(6), they say, is sufficiently wide to capture all payments made to the insured after the charge attaches or descends (Steigrad v BFSL 2007 Ltd [2011] NZHC 1037; (2011) 16 ANZ-Ins Cas 61-910 at [51]) (Steigrad).
112Where general words are used, they should be given their ordinary meaning unless the contrary intention is shown. The PDS Claimants say that no reason has been shown for limiting the terms of s 6(6) and that, in accordance with ordinary principles of statutory construction, the words any payment in s 6(6) would include a payment made by the Insurers for defence costs. Thus, if the Insurers make any payment of defence costs after they have received actual notice of a charge, they will be at risk, upon enforcement of the charge by the GS Claimants, of being liable to restore the amount of any such payment to the pool of moneys available under the Policies to meet the claims of the GS Claimants.
113The PDS Claimants assert that the Insurers received actual notice of the charge in their favour by the letter of 17 September 2012. Accordingly, they say, any payments that the Insurers might make under the Policies after that time must be for the purpose of satisfying the liability of the insureds to the GS Claimants. Any payment made towards defence costs after that date will have been made voluntarily (Steigrad at [57]). They contend that, since s 6(6) effectively renders the Insurers volunteers in respect of defence costs after receiving actual notice of a charge, the Insurers could refuse to provide their consent to pay defence costs under the terms of the Policies.
114The PDS Claimants point to the provision of the Primary Policy whereby each insured agrees not to incur defence costs or legal representation expenses without the prior written consent of Chubb and Liberty. Further, Chubb and Liberty are not to be liable for any defence costs, legal representation expenses or other element of loss incurred, or any obligation assumed or any admission made, by any insured without their prior written consent. However, under the relevant provision of the Primary Policy, they may not unreasonably withhold or delay such consent.
115That contention rather begs the question. The question is whether the charge extends to moneys payable under the Policies in respect of defence costs. That is to say, the question is whether s 6 operates to deprive an insured of a vital benefit under the Policies to have defence costs paid as they are incurred in order to defend a claim. It could not be said that the Insurers would be acting reasonably if they withheld consent for the Executives and GSMAL to incur defence costs in defending the claims made by the GS Claimants in the Great Southern Proceedings.
116The PDS Claimants also contend that s 6(6) prevents the Insurers from making any payment under the Policies with actual notice of a charge, unless it is for the purpose of satisfying a liability that an insured has to a claimant. Such a liability, they say, only arises as and when the liability of the insured is established by settlement, arbitration or judgment. Valid payment of any such liability would be a valid discharge to the Insurers. The Transform Claimants, on the other hand, contend that the same reasoning that prevents the payment of defence costs by the Insurers would prevent payment to any of the GS Claimants after receipt of notice of the claims by such GS Claimants.
117The object of the right conferred by s 6 is to ensure that insurance moneys paid by an insurer to an insured, in respect of a liability of the insured to pay damages or compensation to a third party claimant, are available to meet that liability. That is to say, s 6 creates the charge in relation to insurance moneys that are, or may become, payable in respect of a liability to pay damages or compensation. Importantly, s 6 does not confer such a right in respect of insurance moneys that are, or may become, payable to an insured otherwise than in respect of a liability to pay damages or compensation. There is nothing in the policy of s 6 that would require a claimant to be preferred over the insured in relation to a right of the insured under its contract of insurance to be indemnified in respect of a loss or outgoing that is something other than a liability to pay damages or compensation to such a claimant.
118The source of many of the difficulties with s 6 is that it provides that the charge comes into existence at a time, and by reference to events, different from the circumstances in which the moneys to which the charge attaches or on which it descends become determinate and payable. The charge comes into existence on the happening of an event giving rise to a liability to pay damages or compensation for which a claim may be made. The charge, however, only attaches to or descends on moneys that are or may become payable in respect of that liability to pay damages or compensation. There is nothing to which the charge can attach, or on to which it can descend, unless and until a liability to pay damages or compensation has been determined. The liability is not determined, so as to give rise to an entitlement to payment by the insurer, unless and until a determination has been made, by judgment, award or settlement, that the insured is liable.
119Thus, s 6(1) looks at the position as at the time when the charge is created. It contemplates the possibility that, immediately on the happening of the relevant event, the insured becomes liable to make a payment to the claimant. However, it also contemplates the possibility, which is far more likely, that that liability will be established subsequently, in which case the charge would attach to or descend on moneys that become payable at that later time.
120The charge is concerned with moneys payable in respect of that liability, being the liability of the insured to pay damages or compensation to the claimant. The charge is not expressed to catch all moneys that might be payable under the contract of insurance (see Steigrad v BFSL 2007 Ltd [2012] NZCA 604 at [25]).
121The Transform Claimants rely on the proposition that s 6 is intended to ensure that insurance moneys are not depleted to the prejudice of a claimant. However, stating the purpose in those terms glosses over an important distinction. It is unquestionably the purpose of s 6 to ensure that insurance moneys that are payable to an insured in respect of liability to a claimant are not depleted to the prejudice of the claimant. Nevetheless, there is nothing to suggest that the purpose of s 6 is to prevent insurance moneys being paid to discharge other obligations that an insurer may have to an insured under a contract of insurance.
122Importantly, if s 6 were construed as catching all moneys available at the time when the charge arises, that would alter the contractual rights between insurer and insured. In the present case, each insured under the Primary Policy has a contractual right to be advanced defence costs within 30 days of receipt of an invoice from defence counsel. That right exists even if the right to indemnity under the Primary Policy has not yet been determined. The Primary Policy contains a provision permitting the Insurer to recover amounts so advanced in the event that it is ultimately determined that the Primary Policy does not respond to the claim in question.
123Those provisions provide a valuable benefit to the insureds. They ensure that the insureds are not placed in the invidious position of having insufficient resources to defend major claims while the Insurers consider the question of indemnity. If the charge caught all moneys available under the Primary Policy at the time when the charge arose, and s 6 applied, Chubb and Liberty could not safely pay defence costs, if there were any possibility that the ultimate liability of the insured might exceed the amount available to meet that liability at that time. There would then be a real question as to what would happen.
124The insured would have a contractual right to be paid defence costs and could bring an action to enforce that right. It would be extraordinary if the effect of s 6 were to provide Chubb and Liberty with a defence to such an action, on the basis that they might, at some time in the future, be liable, by the operation of s 6(4), to pay to the GS Claimants the moneys that would otherwise have been paid in defence costs. There is nothing on the face of s 6 to suggest that it was intended to alter the contractual rights of the parties in such a radical fashion. If the New South Wales Parliament intended s 6 to have such a drastic effect on the contractual rights of an insured, it could be expected to have provided so in express terms.
125The GS Claimants suggest that it would be open to the parties to a contract of insurance to avoid such a problem by agreeing to separate limits in respect of liability to pay damages or compensation and defence costs. However, that supposed solution ignores the important relationship between legal costs and claims. Where there are separate limits, there would be the possibility that the defence of a claim might be successful but the insurer's maximum liability in respect of defence costs might be exhausted before the proceedings are resolved. It is difficult to see, as a matter of commercial logic, why the balance of the liability limit should not be available to pay defence costs. On the other hand, the proceeding might be resolved before the limit in respect of defence costs is exhausted. It is difficult to see, as a matter of commercial logic, why the balance should not be available to settle a claim.
126Under the terms of the Primary Policy, an insured is entitled to be indemnified against any loss. Where the indemnity concerns an obligation to satisfy a judgment, award or settlement, the right to the indemnity arises at the time when the liability is established by that judgment, award or settlement (see Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957 at 966; Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 28; (1974) 130 CLR 1 at 2526). At that time, the insured is entitled to sue on the indemnity and, subject to exhaustion of the maximum liability under the relevant contract of insurance, is entitled to recover the amount of the judgment, award or settlement. The fact that other claims have been, or may be brought, against the insured, or any other insured indemnified by the same contract of insurance, does not alter the first insured's right to indemnity in respect of the liability that has been determined.
127If s 6 caught all moneys available at the time when the charge arises, and s 6(1) applied to a second claim, an insurer could not safely pay the first ascertained claim if the second claim might exceed the amount of the limit that would then remain, unless it could be satisfied that that first ascertained claim has priority under s 6(3). Again, on that approach, the effect of s 6 would be, by a side wind, to alter the rights of the contracting parties. The insurer would be entitled to refuse to pay a claim that it was obliged by the terms of the contract of insurance to pay, because it would run the risk of having to pay more than the maximum amount it contracted to pay.
128The GS Claimants say that an insurer faced with such a problem could interplead. Interpleader may solve the problem for an insurer, but it would not solve the problem for an insured. The insured has a contractual entitlement to indemnity. The insured may have a judgment or award against it that must be satisfied, and can only be satisfied, from the proceeds of insurance. If the judgment or award is not satisfied, the insured may face insolvency proceedings. The court hearing the interpleader proceeding could provide no solution for the insured in such circumstances.
129More importantly, s 6 says nothing about altering the contractual rights and liabilities of the parties to the relevant contract of insurance. Indeed, s 6(4) and s 6(7) demonstrate that s 6 was not intended to affect the contractual rights and liabilities of the parties to the relevant contract of insurance. If the GS Claimants' contentions are correct, that is what s 6 would do.
130It is true that, if priority is given only in respect of moneys that have become payable as a result of a judgment, award or settlement, the circumstances in which there may be competing claims to that sum of money will be rare. Generally, competing claims will only arise where a judgment is obtained in favour of a number of claimants whose claims arise out of the same or similar facts. However, s 6(3) is not rendered otiose by the interpretation advanced on behalf of the Insurers. The fact that, on that interpretation, the circumstances in which it may operate are limited is not a reason for rejecting it.
131Moreover, on the Insurers' interpretation, the creation of the charge still has consequences. A contract of insurance is to remain as it stood at the time when the charge arose (Bailey at 448). Further, by the operation of s 6(6), it would not be open to the insurer, after that time, to rely upon a payment made to the insured under the contract of insurance in respect of a liability to a claimant, unless the payment was made without actual notice of the existence of the charge in favour of the claimant. To that extent, the position of such a claimant is protected (see Bailey at 450). Thus, once the charge has arisen, upon the happening of the event that gives rise to the liability for damages or compensation, no mutual or unilateral action by either the insurer or the insured, which is taken otherwise than under the contract of insurance or the general law as it operates upon the contract, may vary, discharge or otherwise qualify or abrogate the contract of insurance so as to deny to a claimant what otherwise would be the fruits of enforcement of the charge by action taken under s 6(4) against the insurer.
132It is clearly possible that the limit under a contract of insurance might be reached as a consequence of the payment of insurance moneys in respect of defence costs. Notwithstanding such payment, if the insured is still found liable to a claimant, the insured, assuming it is solvent and is able to meet any liability that it is found to have to the claimant, will be out of pocket and will not be indemnified in respect of the liability to the claimant. Where the insured is not insolvent and is found liable, the claimant will be entitled to enforce its judgment against the insured and the insured will be required to meet and satisfy that judgment from its own funds, notwithstanding that it receives no indemnity from the insurer in respect of that liability because the limit under the contract of insurance had been reached.
133There is no reason in principle why a claimant should not be exposed to that same risk. A claimant should not be in a more favourable position than an insured is in respect of the insured's contractual right of indemnity under its contract of insurance, where the obvious intention of the parties to the contract of insurance is that the insured be indemnified for defence costs as and when they are incurred. An insured should not be required to wait until after the question of its liability to a claimant has been determined before it can be indemnified for such costs. It would be quite anomalous for an insured, who successfully defends a claim by a claimant, to be compelled to wait until after that successful defence before being reimbursed for what could be very substantial legal costs incurred in defending the claim.
134Similar observations can be made in respect of the determination of the liability of an insured following a judgment, award or settlement. The obvious intention of the parties to a contract of insurance is that the insured be indemnified in respect of its liability under such judgment, award or settlement when that liability is determined. An insured should not have to await the determination of some other claim, which might prove unsuccessful, before enforcing its contractual right to indemnity under its contract of insurance.
135It follows that question 4 should be answered in the negative and question 5 should be answered in the positive. That is to say, the charge under s 6 would not extend to moneys payable under the Policies for defence costs and the like before any judgment, award or settlement in favour of the GS Claimants. While the question has not been raised expressly, it would follow that, if an entitlement to a payment for defence costs and the like had arisen before any judgment, award or settlement, the charge under s 6 would not extend to the moneys payable under that entitlement. Further, payment by the Insurers under the Policies, by way of indemnity for an insured's liability to pay damages or compensation to any of the GS Claimants, would be a valid discharge to the Insurers if made before judgment, award or settlement in relation to claims of other GS Claimants.