Section 9 of the Law Reform Act 1936 (the Act) provides a statutory charge over insurance proceeds, allowing claimants to recover insurance moneys directly from insurers when the insured faces a liability. This charge is triggered when an event gives rise to the liability, even before the exact amount is determined. It ensures that insurance proceeds are used to cover the insured’s liability, and the charge takes precedence over other claims. Claimants can pursue the insurer directly in court, treating the insurer as if it were the insured party.
Section 9 is particularly useful for liquidators, who can access insurance funds when a director or insured person is unable to pay due to insolvency or an inability to cover any judgment due to limited funds. For instance, if a liquidator brings a claim against a director for breaches of directors’ duties under the Companies Act 1993, and these breaches are covered by Directors and Officers liability insurance, the liquidator can add the insurer as a party to the proceeding under section 9. The liquidator may also choose to bring the claim solely against the insurer. This section enhances the prospects of recovery for creditors, especially when directors of liquidated companies have little personal funds available.
Extraterritorial limitations of section 9
A significant limitation of section 9 is its lack of extraterritorial application. New Zealand Courts’ jurisdiction is limited to cases where the insurance proceeds are located in New Zealand or where the court can assert jurisdiction over the involved parties. This issue was highlighted in Ludgater Holdings Ltd v Gerling Australia Insurance Co Pty Ltd [2010] NZSC 49, where the Supreme Court held that:
- Section 9 does not have extraterritorial application;
- Section 9 will only apply if the New Zealand Courts have subject matter jurisdiction over any debt payable by the underwriters under a policy; and
- Subject matter jurisdiction will not be conferred if the debt is situated or located outside New Zealand (called the situs or situation of the debt).
The case underscored that the insurance proceeds, situated outside of New Zealand, were beyond reach of New Zealand’s legal system.
Contracts of Insurance Act 2024
The Contracts of Insurance Act 2024 (the CI Act), coming into force on 15 November 2027, addresses the extraterritorial limitations of section 9, particularly concerning overseas insurers. Under the new provisions (Subpart 6 of the CI Act), a liquidator will be able to pursue an overseas insurer more easily, provided the claim is valid under the insurance contract. The key change is that the insurer’s location will no longer be a barrier, and the New Zealand Court will focus on whether the insured’s insolvency event has taken place in New Zealand, rather than the location of the insurance proceeds. The Court however retains a discretion to refuse leave if it considers that New Zealand is not the appropriate forum for the proceeding. This shift simplifies the process for liquidators and claimants, allowing them to recover insurance proceeds even if the insurer is based outside of New Zealand.
Conclusion
While section 9 has been an invaluable tool for claimants and liquidators, especially in cases of insolvency, its extraterritorial limitations have hindered its effectiveness in dealing with foreign insurers. The CI Act addresses these issues by allowing claimants to pursue overseas insurers more easily, making it simpler to access insurance proceeds in cross-border situations. This change represents a significant development in ensuring that claimants can recover the funds they are entitled to, regardless of the insurer’s location.
