The when and how of claiming against an insolvent’s insurance

The finance company collapses have led out-of-pocket investors to seek recourse from their financial advisers’ insurers instead.   

This Brief Counsel looks at when and how such claims might succeed – and finds that, as usual, the devil is in the detail. 

Even if the financial advisor has gone into liquidation, a plaintiff may still have an action against the advisor’s insurer through section 9 of the Law Reform Act 1936 (LRA).  This provides that, where a contract of insurance covers the liability of an insured person to pay damages, the amount of the insured’s liability shall be a charge on all insurance money that is or may become payable in respect of that liability.  Put simply:  plaintiffs may claim against the insurer directly where the policy holder is in liquidation (and the same applies when the policy holder is in bankruptcy).

How do I find out whether the advisor had insurance?

Ask the liquidators of the insured.  A recent Australian case, Snelgrove v Great Southern Managers Australia Ltd (in liq), confirmed that creditors have a right of inspection.  In this case, members of a managed investment scheme successfully challenged a refusal by the liquidators to allow access to the scheme’s insurance policies.  The Court found that the policies were also for the members’ benefit, and that access should be allowed even if merely to ascertain whether a relevant insurance policy exists and to assess the viability of a claim.

Do I need leave from the Court to commence proceedings against the insurer directly?

Sections 9(2) and (4) LRA work in tandem to require a plaintiff to obtain leave from the Court if the insured goes into liquidation at the time or after giving the advice that caused loss to the plaintiff.

Will the Court look at the policy when deciding whether to grant leave?

Section 9(4) LRA says that the charge will be enforceable by an action against the insurer “in the same way” as if it were an action against the insured.  The practical effect of this is that the plaintiff can be in no better position than the insured would have been if making a claim under its own policy.  If the insured couldn’t have made a claim, neither can the plaintiff.  Any limits or exclusions under the policy will still apply.  Expect that the Court will look at the policy in detail when deciding whether to grant leave, and will refuse it if the policy doesn’t respond to the claim that the plaintiffs are alleging. 

A tough threshold:  Chang v Lumley

The recent case of Chang v Lumley General Insurance (NZ) Limited demonstrates how tough a challenge plaintiffs face when seeking leave to commence proceedings against an insurer directly. 

In this case, Wealthcare invested the plaintiffs’ money in collapsed companies such as Bridgecorp Ltd, Capital+Merchant Finance and St Laurence Ltd.  Wealthcare went into liquidation but had a professional indemnity policy with Lumley.  The plaintiffs sought to commence proceedings against Lumley directly by use of section 9(4) LRA and applied for leave of the Court. 

Lumley opposed the application, arguing that the claim was excluded by an endorsement clause in the policy which stated that Lumley would not indemnify Wealthcare if the claim related in any way to “diminution in value of money, securities...or any other item of value”.  The plaintiffs argued that the claim fell within a qualification to the exclusion, which mean that Lumley would be liable if the diminution in value was “caused by an act, error or omission of the Insured in the execution or implementation of investment advice or investment decisions”.  The Court therefore focussed on whether the loss was caused by the “execution or implementation of investment advice”, in which case the claim would be covered.

After close examination of the clause, the Court concluded that it was clear on the ordinary meaning of the words that the claim would be excluded by the policy, as the loss was caused by the investment advice itself and not its “execution or implementation”.  It therefore denied leave for the plaintiffs to commence proceedings.

Other recent cases have followed a similar pattern:  the Courts will not set aside an exclusion clause unless there is a genuine ambiguity, taking into account the natural meaning of the words and whether the interpretation “sits well when read as a whole” (Lumley General Insurance (NZ) Ltd v Body Corporate No 205963).


  • Plaintiffs may have direct recourse against an insolvent advisor’s insurer.
  • They may also have a right to inspect insurance policies in certain cases.
  • However, the Court will grant leave to commence proceedings against an insurer only if the relevant policy would respond to a claim made by the Insured.
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Related topics: Restructuring & insolvency; Insurance; Finance; Finance companies

Insurance; Restructuring & insolvency

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