Oakland Investments (Aust) Ltd v Certain
Underwriters at Lloyds  QSC 6
The insured in this case, Oakland Investments, was in the
business of lending money to property developers and investors.
When a number of these investors defaulted on their loans, Oakland
claimed on the "mortgage indemnity and impairment"
policies that it had held over a number of years with certain
underwriters at Lloyds. Underwriters accepted that the policies
responded to indemnify Oakland in respect of some aspects of each
claim but declined to indemnify Oakland in respect of other aspects
of those claims.
The amount underwriters were obliged to pay in respect of the
covered aspects of each claim could only be determined on the sale
of the properties secured by the loans made to the defaulting
borrowers. These sales took place over the ensuing year and, as
they occurred, Oakland sought payment of the claims from
underwriters. Over the same period, a dispute developed between
Oakland and underwriters with respect to those aspects of the claim
for which underwriters had declined indemnity. When no payments in
respect of the covered aspects of the claims were forthcoming,
Oakland commenced proceedings against underwriters, claiming
damages for breach of contract.
Underwriters subsequently made payments in respect of the
covered claims. However, these payments were made between 14 months
and 2 years after the secured properties had been sold and the
amount of Oakland's entitlement to indemnity had been
At trial, Oakland submitted that underwriters should have paid
the undisputed amounts within three months following the sale of
the secured property in each claim. They alleged that the failure
to do so was a breach of underwriters' obligations under the
policy. Oakland led evidence to demonstrate that it had fully
co-operated with underwriters and had provided them with all
necessary information within three months of the sale of the
relevant properties. Oakland submitted that, in breach of the duty
of good faith, underwriters had not paid the undisputed amounts
because it gave them "commercial leverage" in the
negotiations over the disputed indemnity issues.
Underwriters did not call any evidence to explain why the
undisputed amounts had not been paid earlier. However, they
submitted that in the normal course of events, underwriters
anticipated that a resolution should be reached in relation to the
entire claim at the one time, and that this provided an explanation
for any delay in reaching partial settlement.
The court did not agree. Justice Applegarth held that
underwriters were liable for a breach of contract for failing to
pay the undisputed amounts within three months after the sale of
the security property in each claim. He emphasised that Oakland had
complied with all requests for information, had provided open
access to its books and records, and that the information provided
to underwriters was sufficient for them to assess the amounts that
were payable pursuant to the policy within three months of the sale
of the secured property in each case.
The court stopped short of finding that underwriters acted in
breach of their duty of good faith. Not wanting to get embroiled in
the murky waters of the good faith debate, Justice Applegarth said
he found it "unnecessary to conclude whether the underwriters
acted with a lack of good faith in not paying undisputed amounts
because they hoped to reach a resolution in relation to the entire
In awarding damages to Oakland, the court concluded that if the
undisputed amounts had been paid in timely fashion, Oakland might
have put them to a variety of uses including the making of loans.
Oakland submitted that its loss from the late payments was
approximately equal to interest on the sums eventually paid by
underwriters, at a simple rate of 10% p.a. In the absence of other
evidence, the court agreed and awarded damages on that basis. Then,
as a final rap on underwriters' knuckles, the court also
ordered them to pay interest on those damages.
The insured's loss in this case was confined to interest on
the unpaid sums at 10% p.a. However, it is clear from Justice
Applegarth's decision that if an insured is able to prove
greater losses as a result of late payment, then insurers will be
exposed to those losses. This case should serve as a warning to
insurers to pay on time, or risk paying more.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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