Locked out by section 5: NSW Supreme Court narrows access to insurers under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)

NSW Supreme Court refused leave under s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), finding that, without more, correspondence asserting a contractual right or entitlement to liquidated damages was not a 'written demand for compensation' under the contractor’s professional indemnity policies.

Without a valid demand, no arguable case for indemnity could be made, leaving the principal unable to proceed directly against the insurer.

In issue

• In considering whether to grant leave to a principal under s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Act) to proceed against an impecunious contractor’s insurer directly under s 4(1) of the Act, the NSW Supreme Court considered whether there was an 'arguable case' that the contractor would be entitled to indemnity under the relevant insurance policies if found liable to the principal for alleged breaches of contract. Relatedly, in considering whether there was a 'claim' made during the relevant policy period, the Court was tasked with determining whether the correspondence relied on by the principal consulted a 'written demand for compensation' or 'civil damages' or 'non-monetary relief'.

The background

In December 2020, the plaintiff, 374, 376 New South Head Road Pty Ltd (the principal), who was the registered proprietor of a property at 374 and 376-382 New South Head Road, Double Bay (site), retained SMLXL Pty Ltd, a construction contractor, (the contractor) pursuant to a design and construct contract (contract) to carry out alterations and additions (works) to an existing retail and commercial building at the site.

The contractor went into liquidation on 4 July 2023, following which it ceased the works and abandoned the site. At the time, the works had not achieved practical completion under the contract.

The principal subsequently terminated the contract and claimed it was entitled to liquidated damages suffered as a result the contractor’s various breaches referable to, among others, defective and non-compliant works and failure to achieve practical completion by the dates stipulated by the contract.

With a view to pursuing claims for alleged breach of the contract against the contractor, the principal filed an application pursuant to s 5 of the Act seeking leave of the Court to proceed against the contractor’s insurer, Chubb Insurance Australia Ltd (Chubb) directly (in circumstances where the Corporations Act 2001 (Cth)¹ prevented it from proceeding against the contractor in liquidation).

In a draft pleading that was exhibited to a supporting affidavit filed in support of the principal’s leave application, the principal articulated six categories of claims for which it contended that the contractor arguably had an insured liability and in respect of which it would be entitled to be indemnified by Chubb.

The policies

The contractor held a design and construct professional indemnity insurance policy issued by Chubb covering the period between 30 June 2020 to 30 June 2023 (the policy). The policy was renewed annually for 3 years and the original and renewal policies (the policies) contained terms to the same effect. The insuring clause in the policies indemnified the contractor for 'any Loss resulting from any Claim for civil liability in respect of the conduct of the Professional Services, provided that such Claim is first made against [the contractor] during the Policy Period.'

Relevantly, the policies defined a 'claim' as a 'written demand for civil compensation or civil damages or non-monetary civil relief'.

Leave requirements

Pursuant to a widely accepted principle, an applicant under s 5 of the Act must establish three elements²:

• that it has an arguable case that the holder of the insurance policy is liable to the applicant,
• that there is a reasonable possibility that the holder of the insurance policy will be unable to satisfy in full any judgment that may be entered against it in favour of the applicant in respect of that liability, and
• that there is an arguable case that the holder of the insurance policy would, if found liable to the applicant, be entitled to indemnity under the policy (in other words, that any liability of the policy holder to the applicant is an 'insured liability' within the meaning of s 3 of the Act³).

To succeed, the principal was required to demonstrate each of the above elements to the required standard of an 'arguable case'. In this regard, Her Honour Williams J clarified at [55] that what was required was: (1) an arguable case that 'certain facts exist' and (2) an arguable case that those facts provide legal grounds for relief.

Further, while it was conceded that the standard of an arguable case was 'fairly low', Her Honour emphasised at [57] that even if each of the three elements was established, the Court had a residual discretion to refuse leave 'rather than to permit the applicant to commence an action against the insurer who the applicant otherwise has no right to sue.'

Chubb did not oppose that there was an 'arguable case' in respect of the first two elements, and the hearing of the application proceeded on the basis of the third element alone.

Parties’ submissions

The principal contended that there was arguably an 'insured liability' within the meaning of s 3 of the Act, on the basis that there was an arguable case that it made a 'claim' as defined in the polices against the contractor in respect of each of the six defined categories during the policy period (of one of the policies). To this end, the principal submitted that it was arguable that a demand for 'non-monetary civil relief' as included in the definition of 'claim' in the policies, properly construed, extended to a demand to comply with contractual obligations, and a demand to rectify any works that are not in accordance with the requirements of the contract. The principal further submitted that it had an arguable case that each 'claim' was for 'civil liability' in respect of the conduct of the 'professional services', relying on the inclusion of 'design', 'project management', and 'construction management' in the definition of the 'professional services' clause in the policies.

Relevantly, Her Honour observed that the draft pleading had not been served on the contractor during the policy period of any of the polices and had been prepared for the purposes of the leave application.

Chubb submitted that the principal failed to establish an arguable case that its claims against the contractor were an 'insured liability' within the meaning of the Act because:

• the principal did not make a 'written demand for civil compensation, civil damages or non-monetary civil relief' against the contractor during the policy period of any of the policies, so there was no 'claim' as defined,
• any such 'claim' was not a claim for civil liability in respect of the conduct of the 'professional services' within the meaning of the policies,
• any such 'claim' would not result in 'loss' within the meaning of the policies because it would not result in the contractor becoming legally obligated to pay any 'damages, judgment sum, settlement sum' or other amount falling within the definition of 'loss' in the policies, and
• any such 'claim' was not first made against the contractor during the policy period of any one of the policies.

The decision at trial

In dismissing the principal’s application, Her Honour adopted a strict approach and found that the principal had not demonstrated that a 'claim' had been made during the policy period of any of the polices. Her Honour observed that many of the principal’s submissions erroneously focused on whether its categories of claim constituted a 'claim' as defined in the polices, without addressing whether any such 'claim' gave rise to a right of indemnity under the insuring clause.

Accordingly, the principal failed to demonstrate that there was an 'arguable case' that Chubb would be liable to indemnify the contractor if found liable to the principal in respect of the pleaded categories of claim.

Further, even if he had been persuaded that there was an arguable case that some or all of that correspondence constituted an express or implied 'claim', Her Honour noted that he would not have been satisfied that any such 'claim' was 'in respect of the conduct of the professional services', given the pleading deficiencies.

Based on Her Honour’s reasoning, the following principles emerge in relation to consideration what type of correspondence is likely to constitute a demand for the purposes of a 'claim' in claims made policies:

• a mere assertion of contractual entitlement will not constitute a demand. It is not enough that a party alleges a breach or points to a right to damages,
• likewise, a reservation of rights does not amount to a demand. Such language conveys only an intention to preserve future options,
• references to liquidated damages accruing, without an express call for payment, fall short of the concept of a demand, rather than insistence on immediate payment,
• to amount to a demand, the correspondence must contain a present call upon the other party to satisfy a liability – whether by paying money or otherwise compensating for loss, and
• the touchstone is how a reasonable person would understand the communication. If objectively read as a notification of possible liability, rather than a present insistence on payment, it cannot qualify as a demand.

Implications for you

The decision underscores that s 5 of the Act is not a shortcut: leave will not be granted unless all three pre-conditions are strictly met. It additionally demonstrates that, despite a relatively undemanding threshold, insurers can successfully resist s 5 leave applications under the Act by demonstrating that no 'claim' was made under the relevant policy even if underlying liability appears arguable.

In short, under s 5 of the Act, the absence of an 'insured liability' during the policy period gives insurers a decisive defence at the leave stage, while insureds must take care to crystallise claims early and unambiguously if they wish to preserve access to indemnity.

374, 376 New South Head Road Pty Ltd v SMLXL Projects (NSW) Pty Ltd [2025] NSWSC 886

¹ Ss 417B and 500 of the Corporations Act
² Avant Insurance Ltd v Burnie [2021] NSWCA 272 at [8] (McCallum JA and Simpson AJA); Clark v Avant Insurance Ltd [2022] NSWCA 175 at [27] (Meagher and Beech-Jones JJA, Lonergan J) and the authorities there referred to.
³ Section 3 of the Act defines 'insured liability' as 'a liability in respect of which an insured person is entitled to be indemnified by the insurer'.