In recent times, with some notable exceptions1, the bar for joining insurers to proceedings has been lowering (see our previous update Courts lower the bar on claims). However, a recent case, Energize Fitness Pty Ltd v Vero Insurance Limited [2012] NSWCA 213 (Energize) (handed down on 19 July 2012), has apparently stemmed the tide. In Energize, the NSW Court of Appeal held that:
the application of the General Steel2 test for summary dismissal is not the appropriate test in respect of an application under section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Act); and
whether an arguable case exists requires evaluation of evidence supporting the pleaded case, rather than merely an acceptance that facts have been pleaded which if true would, on an arguable view of the law, provide a remedy.
The bar falls
The initial proceedings involved a claim against Energize Fitness Pty Ltd by a gym member rendered a paraplegic following an accident (a barbell ‘descended heavily onto his back’) whilst using equipment at one of Energize's gyms. Energize asserted the accident was the result of faulty equipment and, as the equipment manufacturer was insolvent, sought to join the manufacturer’s insurer pursuant to section 6(4) of the Act. The application was denied and Energize appealed.
How hard can it be?
On appeal, Energize asserted that the trial judge had erred in not following the test in General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125 (General Steel) and adopted in Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887. In the latter case, Grove J held that:
…the plaintiff must show three things. First, that there is an arguable case against [the insured]; second that there is an arguable case that the policy responds and, third, that there is a real possibility that, if judgment is obtained, [the insured] would not be able to meet it…3
However, following General Steel, Grove J also adopted the view that ‘once it appears that there is a real question whether of fact or law and that the rights of parties depend on it, then it is not competent for the Court to dismiss the action.’4
In endorsing the trial judge’s approach, the Court of Appeal differentiated General Steel as it related to summary dismissal and as such was not the appropriate test to apply to section 6(4), stating that:
…the onus operated differently in the two types of application. In a summary judgment application, the evidentiary and persuasive onus of establishing that the action is doomed to fail is on the defendant who seeks the summary dismissal. By contrast, when an application for leave is made pursuant to s.6(4) the evidentiary and persuasive onus of establishing that there is an arguable case that the insured is liable, and an arguable case that the policy responds, is on the applicant for leave.5
The Court of Appeal held that ‘a judge should consider directly whether the applicant has shown that there is an arguable case on the relevant matters, without being distracted by the General Steel test.’6
How arguable is ‘arguable’?
Courts have on occasion adopted a seemingly low standard as to what constitutes an ‘arguable case’, often on the basis that the relevant issues will be dealt with at trial. However, this approach has the effect that insurers joined to proceedings are put to considerable expense despite little prospect of success against them.
In Energize, the argument was put that whether an arguable case existed should be determined by reference to the pleadings alone. The Court of Appeal rejected this contention, stating that:
…it could not be right that all an applicant for leave need do is proffer a pleading that alleges facts that, if true, would show that the insured had a liability to the applicant, and that that liability fell within the scope of an insurance policy, regardless of whether there was any arguable basis upon which those facts might be true.7
The Court of Appeal stated that the standard for when it is justifiable to join an insurer is:
…namely that there is an arguable case, but an arguable case exists only when there is both an arguable case that certain facts exist, and an arguable case that those facts provide grounds for legal relief.8
In Energize, one issue in contention was the date of manufacture of the relevant equipment. The manufacturer had operated as a business for some period before incorporating on 15 October 1998. However, the period that the equipment was manufactured spanned both pre and post-incorporation. As pointed out by Campbell JA (whose judgment was unanimously agreed), it was a legal impossibility for the manufacturer to be liable for anything done prior to incorporation.
Energize was unable to present evidence to suggest that the equipment had been manufactured after 15 October 1998. Accordingly, despite the Court of Appeal conceding that manufacture could have occurred after incorporation9 , it held that there was no factual basis for it being arguable that this was more likely than not. As surmised by the Court of Appeal:
The essential question, for the grant of leave, is whether there is an arguable case that [the equipment] was manufactured on or after 15 October 1998. It was not only an available view that there was no such arguable case, in my view it is correct to say that there was no such arguable case.10
The Court of Appeal found that the trial judge was correct in referencing the ‘state and strength’ of the evidence before the Court and this did not amount to a final hearing of the case.
Raising the bar
The significance of Energize is that the Court has formed a baseline for seeking to join an insurer; namely that the relevant party must have both an arguable case that certain facts exist, and an arguable case that those facts provide grounds for legal relief. Further, the Court acknowledged that it was not restricted in reaching a determination based merely on the pleadings but could have regard to the state and strength of the evidence before it.
No doubt a welcome decision for insurers.
[1]For example Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) [2011] FCA 1124 and Al Khaled v Jacaranda Property Developments Pty Ltd [2012] NSWSC 755.
[2]General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125.
[3]Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887 at [6].
[4]Bede Polding College v Limit (No 3) Limited [2008] NSWSC 887 at [9].
[5]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [53].
[6]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [56].
[7]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [59].
[8]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [59].
[9]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [68].
[10]Energize Fitness Pty Ltd v Vero Insurance Pty Limited [2012] NSWCA 213 at [68].