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In April 2016, the NSW Law Reform Commission released Consultation Paper 17 addressing whether s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) should be repealed or amended. Broadly speaking, s 6 creates a statutory charge over insurance moneys payable in respect of an insured's liability to a third party and allows the third party to enforce that charge directly against the insurer.

Section 6 has had a troubled history and has not been replicated throughout all Australian jurisdictions. The Commission identified a number of circumstances where the application of the provision is uncertain, including:

  • Claims made policies—The weight of authority is that s 6 cannot apply to events that occurred before the relevant insurance policy commenced, which in practice significantly restricts the operation of the provision for claims made and notified policies.
  • Directors' and officers' insurance policies—It is unclear whether the charge on "all insurance moneys that are or may become payable" affects the liability of directors and officers to access insurance money to meet ongoing defence costs. While the NSW Court of Appeal has held that s 6 does not prevent an insurer from advancing defence costs, there is authority to the contrary in New Zealand.
  • Liability for pure economic loss—In Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212, the NSWCA noted it could be difficult in cases of pure economic loss to identify the event giving rise to the claim for damages or compensation and when rights conferred by s 6 arise. 
  • Contracts for reinsurance—It is unclear whether s 6 covers situations where an insured cannot proceed against, or recover from, an insurer and instead seeks to cover from the insurer's reinsurer.

The Consultation Paper set out a number of options for reform, including:

  • Leaving the legislation as is on the basis that s 6 remains useful and has been sufficiently clarified by High Court and NSW Court of Appeal decisions.
  • Retain the thrust and structure of the section but clarify the areas of uncertainty.
  • Retain the thrust and structure of the section while reforming areas where s 6 has been criticised or is problematic, such as allowing an insurer to disclaim liability for the insured's failure to cooperate and determining priority between charges where there are multiple plaintiffs.
  • Repeal s 6 and leave the field to existing (or revised) Commonwealth provisions, existing state workers' compensation and motor accident regimes, and the common law.
  • Retain the thrust of s 6 but rewrite it in a contemporary drafting style, which clarifies uncertainties.

Thirteen submissions were provided in response to the Consultation Paper, which closed on 20 May 2016. Once all submissions have been considered, further consultation will take place before the Commission finalises its report, if required. We await the next steps and will continue to report as new developments occur.

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