Liability insurance: defence costs

When the UK passed its first Workmens Compensation Act in 1897, the legislation contained a short provision conferring on an injured worker a statutory charge against the proceeds of any insurance policy taken out by the employer to cover its liability for personal injury. That provision proved to be unsatisfactory, and was replaced in 1906 by a transfer to the employee of a right to claim against the insurers in the event of the employer’s insolvency.

That provision was adopted in modified form by the Third Parties (Rights Against Insurers) Act 1930, which – until the Third Parties (Rights Against Insurers) 2010 is brought into force – remains good law. The statutory charge has, however, remained in place in both New Zealand and in the Australian state of New South Wales. By coincidence, in both jurisdictions the same question has arisen in the last couple of years: does the statutory charge apply to all sums payable under the policy including defence costs, or is it confined to sums available under the policy to indemnify the assured against claims?