No leave without proper pleadings when seeking to join insurers directly to proceedings

In Sergienko v AXL Financial Pty Ltd[1], a recent win for an insurer, the NSW Supreme Court confirmed the importance of precise and well-constructed pleadings when determining whether leave will be granted pursuant to Section 4 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the ‘Act’).

Background

The principal proceeding was brought by Mr Sergienko against AXL Financial Pty Ltd, Mr Oliver Roths, Roths Holdings Australia Pty Ltd, IWC Industries Pty Ltd (IWC) and DK Excavation & Concreting Pty Ltd (DK) seeking relief consequent upon a settlement reached between the parties.

This interlocutory hearing concerned a Motion filed by IWC and DK seeking leave to file a Cross Claim against an insurer, Lawcover Pty Ltd (Lawcover), to join it directly to the proceedings in circumstances where, at the relevant time, it was the professional indemnity insurer of a deregistered legal practice, AXL Legal, who advised on the settlement.  In short, DK’s principal complaint was that AXL Legal gave negligent advice in relation to the settlement terms and arrangements which exposed DK to a breach of trust.

The Policy

The insuring clause of the professional indemnity policy provided coverage to the insured for civil liability arising from the provision of legal services on a claims-made basis.

The policy contained a number of potentially relevant exclusions (including one relating to fraud).  As at the date of the hearing of the Motion, due to the limited information known by Lawcover and the perceived inadequacies in the proposed Cross Claim (by which Lawcover was sought to be joined), policy coverage had not yet been determined.

The decision

Lawcover requested that the Court refuse leave for it to be joined to the proceeding.

There are three matters to be established to enliven the Court’s discretion to permit the joinder of an insurer directly under the Act[2]:

• There is an arguable case as to the liability of the insured;
• There is an arguable case that the policy responds to the claim against the insured;
• There is a real possibility that, if judgment is obtained, the insured would not be able to meet it.

The party seeking leave bears the evidentiary and persuasive onus of establishing those matters.[3]

Lawcover submitted that DK had not established via the proposed Cross Claim that it had an arguable case against the Insured.  Particularly, Lawcover alleged the proposed Cross Claim made no attempt to engage with the relevant matters set out in section 5B and 5D of the Civil Liability Act 2002 (NSW) and, despite requests, no particulars had been provided.

For example, the pleading needed to identify the relevant risk of harm, whether the risk was foreseeable, whether it was not insignificant and whether a reasonable person would have taken precautions, particularly to clarify whether fraud was being alleged as this may result in Lawcover denying the claim for coverage.

Chief Justice Ward emphasised that an insurer is entitled to know precisely what case the insurer would have to meet.  His Honour accepted that there were serious deficiencies in the pleading which impacted on criteria (1) and (2) (as criteria (3) was clearly established).  Without a properly pleaded case of negligence against the insured, there was no utility in exercising discretion to grant leave for the joinder of the insurer at this stage.  His Honour dismissed the Motion with costs.

Take away

This case highlights that the underlying intention of the Act is to “provide a filter against insurers being unjustifiably made parties in litigation that, apart from the grant of leave, they would be free to stay out of”.[4]  It is a timely reminder for all practitioners considering joining an insurer directly to proceedings to think carefully about the cause(s) of action and properly plead the case to ensure that discretionary leave will be granted.

[1] [2019] NSWSC 1610 - 20 November 2019
[2] Zaki v Better Buildings Constructions Pty Ltd [2017] NSWSC 1522
[3] Energize Fitness Pty Ltd v Vero Insurance Ltd [2012] NSWCA 213
[4] Wayland v Bird [2017] NSWCA 26