What happens if a claimant is injured by an insured person, and the insured
A recent High Court decision confirms that the answer depends on where the
insurer is based. If the insurer is based overseas, the claimant is not
entitled to receive the insurance money even if that money is paid to the
insured person in New Zealand.
Section 9 of the Law Reform Act 1936
Section 9 of the Law Reform Act says that any insurance money that is payable
to the insured in respect of its liability to the claimant are charged in favour
of the claimant. This means that the claimant, and not the insolvent insured’s
creditors, gets the benefit of the insurance money. The charge is intended to
address what has been called the “obvious unfairness” of insurance money being
shared between the insured person’s creditors along with the insured’s other
assets, in circumstances where the money is only available because of the loss
suffered and claim made by the claimant.
It is clear that s 9 applies to insurance payments made by New
Zealand-based insurers. The more difficult question – which has been considered
in four cases in the last five years – is how s 9 operates when the insurer is
based offshore. The Courts have held that the section does not apply to offshore
insurers, no matter how strong the connection between the claim and New Zealand.
As a result, injured third parties can never rely on s 9 to reach overseas and
claim against insurers who were not in the jurisdiction.
The issue was considered most recently by the High Court in McCullagh v
Underwriters Severally  NZHC 1384, where the claimant argued that the
charge applies to insurance money once it is paid to the insolvent insured in
New Zealand. Does the charge created by s 9 cease to exist when the money is
paid to the insured? Did Parliament intend to address the “obvious unfairness”
by changing the insurer’s obligations, but not the insured’s?
The High Court held that the insured’s obligations are not charged. Section 9
provides that the charge applies to insurance money “upon the happening of the
event giving rise to the claim for damages” – that is, at the moment that the
insured incurs liability to the claimant. The Court held that if the charge does
not descend at that time (because the insurer was overseas) then it does not
descend at all. This sits uneasily with the Court of Appeal’s reasoning in
FAI (NZ) General Insurance Co Ltd v Blundell & Brown Ltd  1
NZLR 11, which was premised on a charge attaching to money payable under a
policy that came into effect years after the relevant event took place. The High
Court also held that the charge is only enforceable against the insurer, and not
against the insured. Once the insurance money is paid to the insured, it forms
part of the insured’s pool of assets, and is available for distribution to
general creditors in the usual way.
In practical terms, this means that:
If the overseas insurer accepts its liability and pays the insured, there is
a windfall gain for the insured’s other creditors. The insurance money will be
distributed to creditors along with all the insured’s other assets, in
accordance with the usual rules of priority. The injured claimant will rank
alongside all other unsecured creditors.
If the insurer is local, then s 9 applies and the injured claimant is
incentivised to pursue the insurer. However, if the insurer is based overseas,
there is no reason (or ability) for the claimant to do so. The insured, or its
receiver or liquidator, is incentivised to pursue the insurer and apply any
proceeds to the creditors generally.
Although it is theoretically possible for a claimant to obtain the benefit of
an insurance payment, this will require two sets of proceedings and the
agreement of the insured party. The claimant would need to establish its
liability against the insured person (typically by suing them), and then fund a
claim by the insured against its insurer. In those circumstances, the claimant
is entitled to retain the proceeds of the recovery action against the insurer
(up to the value of their debt and their costs incurred). Although this is
possible in theory, the process is convoluted, time-consuming, and relies on the
agreement of the insured, in circumstances where there will often be no real
incentive for the insured to agree.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.