A High Court ruling that allows third-party claimants to join an insolvent defendant’s insurer to proceedings could have significant implications for the industry, according to an international law firm.

Allens says where defendants are insolvent, third-party claimants are vulnerable to any contentious denial of indemnity by the defendant’s insurer, because the insured is unlikely to be able or motivated to challenge the decision.

Claimants have sought “with varying degrees of success” to join insolvent defendants’ insurers to proceedings, but the issue has now been heard and determined by the High Court for the first time.

The liquidators of Akron Roads began an insolvent trading claim against Trevor Crewe, an Akron director, and company Crewe Sharp, a de-facto director of Akron.

The defendants’ insurer, CGU, denied indemnity for the claim under a professional indemnity policy.

Crewe Sharp went into liquidation, and Mr Crewe had insufficient assets to satisfy any judgement against him.

Akron’s liquidators obtained leave from the Victorian Supreme Court to join CGU to the proceeding and to seek a declaration that CGU was liable to indemnify Crewe Sharp and Mr Crewe.

CGU unsuccessfully appealed to the Victorian Court of Appeal and the High Court.

“This decision has important ramifications for the Australian insurance industry because it confirms that third-party claimants can directly involve the insurers of insolvent and potentially insolvent insured defendants in the resolution of their disputes,” Allens says.

“Following this decision, applications to access insolvent or potentially insolvent defendants’ insurance policies and for joinder of insurers to proceedings against those defendants are likely to increase.”

Insurers should expect increased scrutiny of their coverage responses, it says.

Third-party claimants should have greater scope to access relevant insurance policies, and contentious denials of indemnity “are likely to result in direct action by those claimants against defendants’ insurers”.

Insurance Council of Australia (ICA) GM Communications and Media Relations Campbell Fuller told insuranceNEWS.com.au the High Court’s decision has been noted.

“ICA and its members are studying the court’s findings and considering the implications of the decision,” he said.