When a party suffers loss or damage due to the actions of another, and the “wrongdoer” is indemnified by insurance, section 9 of the Law Reform Act 1936 (the LRA) may become relevant. This provision may be used when, as a third party, you are considering legal action against the wrongdoer/insured, who is potentially not judgment worthy.
Section 9(1) of the LRA provides that where a person (the insured) has entered into a contract of insurance that indemnifies them against liability to pay damages or compensation, a charge arises over the insurance proceeds. This charge arises at the moment the event giving rise to the claim occurs, and not when the liability is quantified or judgment is obtained.
This is significant because it means the injured party or claimant has a legal interest in the insurance proceeds as soon as the underlying damage-causing event occurs.
How does the injured party or claimant go about enforcing this charge against the insurer?
Under Section 9(4), this charge can be enforced directly by the claimant through legal action against the insurer. However, this is subject to an important procedural requirement: if the insured was not bankrupt or insolvent at the time the event giving rise to the claim occurred, the claimant must first obtain leave of the Court to bring the claim directly against the insurer.
Fortunately for claimants, the threshold for obtaining leave is not particularly high. When considering whether to grant leave, the Court will look at three main factors:
- Is there a prima facie claim against the insured?
- Is there a prima facie claim under the insurance policy?
- Is the insured not a “perfectly good common law defendant”?
If the claimant can convince the Court that the above requirements have been met, the Court is likely to grant leave, allowing the claimant to proceed directly against the insurer.
Perhaps something for insolvency practitioners to consider when bringing proceedings on behalf of the insolvent company against directors, shareholders, or third parties for actions that have caused loss to the company. Where those individuals or entities have insurance that covers the relevant conduct, and where the insured is not “judgment-worthy”, the insolvency practitioner (on behalf of the company) may be able to apply under section 9(4) for leave to pursue the insurer directly.
The above process could increase the insolvency practitioner’s chance of recovery against the “wrongdoer”/insured, which in turn improves the likelihood of potential distributions to creditors in an insolvency where none may have been available if the insured lacked the financial means to satisfy any judgment obtained against them.
