Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

CHAPTER 18 – THIRD-PARTY BENEFICIARIES

The longstanding doctrine of privity provides that only parties to a contract are legally entitled to sue under it, otherwise enforce it, or be bound by it. 657 While there may be situations where a third party, as a matter of fact, is directly or indirectly benefited or burdened by a contract, a third party, as a matter of law, cannot enforce the contract nor be subject to liabilities imposed by the contract. 658 This position becomes troublesome in insurance contracts where a policyholder may intend for its policy to indemnify persons or entities that may not strictly speaking be a ‘ party ’ to the policy and may even be unknown at the time of the policy’s inception. This situation arises most often in the case of cover for contractors, consultants or agents of the policyholder. Common law The High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd 659 considered whether a public liability policy that defined ‘ the insured ’ to include the company’s contractors responded to a claim made against a contractor of the company who was not a contractor when the policy was issued. Chief Justice Mason and Wilson J in a joint judgment found ‘ the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind. ’ 660 The contractor, despite not being an ‘ insured ’ at the inception of the policy, was nonetheless able to rely on the indemnities provided. Section 48 of the ICA Section 48 of the ICA abrogates the doctrine of privity in respect of insurance contracts coming within the ambit of the Act, which includes professional indemnity policies. The section provides that a third-party beneficiary has a right to recover from the insurer in accordance with the contract the amount of loss suffered by the third-party beneficiary, even though the third-party beneficiary is not a party to the contract. 662 The third party has in relation to the claim the same obligations to the insurer as they would have if the third party were the insured, and the third party may discharge the insured’s obligations in relation to the loss. 663 While this decision was in the specific context of a public liability policy, the Court acknowledged the broader application of the reasoning to other types of insurance policies. 661

An insurer may defend a claim under section 48 with the same defences it would have available if the claim was made by the insured. 664

657 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 853. 658 Lindy Willmott et al, Contract Law (Oxford University Press, 5th ed, 2018) 430. 659 (1988) 165 CLR 107. 660 Ibid 123–124. 661 Ibid 127 (Brennan J).

662 ICA s 48(1). 663 ICA s 48(2). 664 ICA s 48(3).

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