Professional Liability Guide

CHAPTER 18 – THIRD-PARTY BENEFICIARIES

Who is a third-party beneficiary? The Insurance Contracts Amendment Act 2013 (Cth) ( 2013 Amendments ) introduced a definition of ‘ third party beneficiary ’, being ‘ a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends ’. 665 In considering whether a particular entity is a third-party beneficiary or a party to the contract, courts objectively analyse what the parties have agreed. It is, therefore, necessary to look at the construction of the contract. Usually (but not always), the question will be answered by the policy definition of ‘ the insured ’ or any reference to ‘the insured’ contained within the policy schedule. ABN AMRO Bank NV v Bathurst Regional Council 666 provides an example where a subsidiary of a policyholder was not considered a party to the contract despite being described as an ‘ Insured Entity ’ by way of an endorsement. In concluding that the subsidiary was a third party rather than a party to the contract, the Court had regard to the fact that only the policyholder had completed a proposal form, and there was nothing to suggest it had negotiated on behalf of the subsidiary as an agent. Ultimately, the question will be decided by referring to the terms of the policy in question and the circumstances. It will not necessarily follow that a party to a policy will be insured under it. Likewise, a person who is entitled to cover need not be a party to the contract. Another mechanism that, depending on the circumstances, may attract the operation of section 48 is the practice of simply ‘ noting the interest ’ of a party in the policy. A common example is a lender noting the interest of a mortgagee in its policy. 667 Obligations of a third-party beneficiary A third party is subject to the same obligations it would have if the third party was an insured ‘ in relation to their claim ’. Section 48(2)(b) of the ICA entitles the third-party beneficiary to discharge the insured’s obligations in relation to the loss that is the subject of their third-party claim. Obligations imposed on a third-party beneficiary include those relating to subrogation and the requirement to account to the insurer for any amount obtained by way of recovery. 669 The provisions of the ICA regarding the insurer’s right to subrogation are also extended to third-party beneficiaries under section 64 of the ICA. Defences available to the insurer Originally, judicial divergence arose as to the defences an insurer was entitled to rely on in a claim by a third-party beneficiary. One interpretation was that the insurer was entitled to defend a claim with any of the defences it would have against the insured, but it would have to prove that the third party was responsible for the act or omission giving rise to the defence. In other words, the conduct of the policyholder or insured would not impede the third party’s right to recovery. 670 665 2013 Amendments s 11(1); ICA s 11(1). 666 (2014) 309 ALR 445. 667 See for example V L Credits Pty Ltd v Switzerland General Insurance Co [1990] VR 938. 668 ABN AMRO Bank NV v Bathurst Regional Council (2014) 309 ALR 445. 669 Estate of Watson v Conolly [2012] NSWSC 741. 670 VL Credits Pty Ltd v Switzerland General Insurance Co Ltd [1990] VR 938. Because the third party’s obligations are confined to those concerning its claim, the pre contractual obligations of the insured (such as the duty of disclosure) do not apply. 668

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