The recent decision in Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd [2010] QSC 313 reinforces the position that an insurer must be clear and unequivocal in electing to repair damaged property under a policy of insurance. If the election is not sufficiently clear an insurer may be required to pay the full insured value of the property.
The facts
On 8 February 2004 a 1986 Cessna 208 Caravan owned by the insured plaintiff, Cape York Airlines (CYA), suffered engine failure and was ditched into the ocean near Cairns, resting in a partially submerged state. Prior to recovery 42 hours later, the aircraft underwent four periods of complete immersion due to tidal ebbs and flows. The aircraft suffered very little structural damage. However it was not until 10 days later that the aircraft could be washed and corrosion inhibitor applied.
The relevant policy of insurance provided that:
The amount insured under the policy was $1.8 million. However, a respected company based in the USA known as Aircraft Structures International Corporation (ASI Corp) provided an estimate of about US$700,000 for repair, cleaning and corrosion protection in order to return the aircraft to service. This estimate was based on experience and photographs forwarded to the repairer, no inspection took place.
After preliminary telephone discussions regarding the intention of the defendant QBE to have the aircraft repaired, on 26 February 2004 QBE formalised their intention to CYA in a letter stating, amongst other things:
The substantive content of this letter was repeated to CYA on 22 March and another Authority to Repair was enclosed.
On 23 March 2004 CYA sent a fax to QBE outlining concerns held with returning an aircraft to service that had been fully and repeatedly immersed in tropical salt water. It was of particular concern to the insured that a company based in the United States would not satisfy the requirements of CASA such that the Certificate of Airworthiness could be reissued and that the insured may suffer exposure to liability should the aircraft be returned to service and fail in some respect due to corrosion.
On the following day a letter was sent by QBE to CYA addressing these concerns and assuring that the relevant enquiries had been made to ensure the aircraft would be repaired in accordance with regulations and noting that:
From this date forward, correspondence was exchanged between the parties as to the viability of returning the aircraft to service. During this time the aircraft continued to deteriorate due to corrosion.
On 19 November 2004, the repair of the aircraft was estimated at AU$1.4 million due to the additional corrosion. QBE advised CYA that they now required the repairs to proceed and that CYA should bear the difference due to their delay in allowing the repair of the aircraft, limiting the repair amount to approximately $1 million.
No agreement for repair was reached and proceedings were then commenced in the Supreme Court of Queensland seeking payment of the $1.8 million insured value.
The decision
CYA submitted that QBE had not made an unequivocal election under the policy to repair or pay for the repair of the aircraft and as such were required to pay the agreed value of $1.8 million.
QBE argued that the three letters extracted above were unequivocal notice of an election to repair.
Justice Daubney held that none of the correspondence to CYA constituted an unequivocal election. The inclusion of the advice that liability was limited to the cost of the repair estimate by ASI Corp was not an option available under the policy as the estimate was not a binding quote.
Further, the request to authorise the repair was unnecessary and was not an election, as had QBE elected to repair, they held a legal right without authorisation to take and reinstate the aircraft and CYA could not prevent it from doing so. There was no evidence of an unconditional demand on CYA to deliver up the aircraft, nor any refusal of CYA to do so.
As no election was made, the plaintiff was entitled to the agreed value under the policy including interest and a claim for loss of use with the judgment amount totalling $3.17 million.
Conclusions
When damaged insured property is capable of repair for less than the agreed value, it is vital to make a clear election to the insured that the property will be repaired in accordance with the terms of the policy.
In time critical matters such as corrosion, difficulties can arise when consulting the insured as to their authorisation of repairs and the appropriateness of doing so, when it is the insurer's election alone as to whether to repair. An insurer must state specifically which option is chosen and in the instance of repair, take unconditional steps to do so.
Doubtless, with the benefit of hindsight, QBE would now be less ready to be consultative with its insured to obtain agreement on the proposed course of action. Its claim personnel no doubt considered that they were better to proceed with the repair option with the concurrence and authority of the insured in the hope that a later dispute would be avoided as a result. However, in this instance that attempt to reach agreement on repairs back-fired for the insurer with most unfortunate consequences.
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