Insurers are on notice that undisputed amounts under a policy of
insurance must be paid within a reasonable timeframe. The Supreme
Court of Queensland recently considered a decision by insurers to
withhold undisputed amounts of a claim for indemnity by an insured,
while indemnity was in dispute in relation to other parts of the
In Oakland Investments (Aus) Limited v 'Certain Underwriters
at Lloyds' & Anor  QSC 6, the Supreme Court of
Queensland considered whether Underwriters had breached the terms
of a Mortgage Indemnity and Impairment Policy (the
policy) issued to Oakland Investments
(Oakland) by delaying payment of undisputed
amounts under the policy.
Oakland had issued a number of loans to borrowers, which
included conditions that interest and certain fees arising from the
borrowing be paid at the time the loans were drawn down. Oakland
advanced amounts to the borrowers for pre-payment of interest and
fees specified as payable in the loan documentation. Oakland's
policy with Underwriters provided cover for losses sustained by
Oakland as a result of payment defaults on the loans by
As it transpired, a number of the borrowers defaulted on the
loans. Oakland issued Statutory Default Notices on the defaulting
borrowers and sold the securities provided to guarantee the loans.
Oakland sustained losses, as the securities provided did not cover
the total cost of the loans. Accordingly, Oakland submitted a claim
to Underwriters for indemnity in relation to those losses, being
the gap amounts between the amount of the loans and the amounts
recoverable from the sale of the securities.
The insuring clause in the policy was triggered upon the issuing
of the Statutory Default Notices within the policy period. A
dispute arose between Underwriters and Oakland due to a term of the
policy which Underwriters maintained excluded claims for amounts
advanced by Oakland to borrowers for payment of interest and fees
payable to Oakland in relation to the loans.
The policy provided that Oakland would be indemnified for any
"Outstanding Principle Amount" advanced under a loan,
"any amount advanced for the payment of interest or as a
provision for possible future payments of interest whether or not
retained by [Oakland] for that purpose.
any fees or or charges payable to [Oakland]."
Oakland argued that it did not lend loan money for the specific
purpose of paying interest and fees and that borrowers were at
liberty to pay the interest and fees on their loans by other means.
However, the evidence revealed that all borrowers had actually paid
the interest and fee components using the amounts lent by
The Court noted that a policy of insurance must be given a
business-like interpretation. This required regard to be given to
the mutual intention of the parties at the time the loans were
entered into. The Court determined that the amounts advanced for
payment of interest and fees were clearly advanced for that
purpose, as evidenced by the loan documentation. Consequently,
Underwriters' decision to deny indemnity in relation to these
aspects of the claim was itself upheld.
The second issue for the Court's consideration was whether
Underwriters were in breach of the policy for delaying payment of
undisputed amounts. The undisputed amounts had remained unpaid
while the dispute with Oakland in relation to indemnity for certain
parts of the claim (as discussed above) was played out.
The Court held that Oakland had complied with all of its
obligations to provide evidence to Underwriters with respect to the
value of the losses that it had suffered. The Court held that
although certain parts of the claim were disputed, this should not
have prevented Underwriters from paying the undisputed amounts
within a reasonable period from when the undisputed amounts were
capable of assessment.
Underwriters argued that no date of breach of contract had been
proved. The Court held that it was sufficient for Oakland to
nominate a date for breach of contract, which Oakland submitted was
at the latest three months after the final sale of security on each
Underwriters were held to be in breach of the policy and were
ordered to pay the undisputed amounts plus 10% interest on those
amounts from the date nominated by Oakland. Interestingly, interest
was ordered to be paid pursuant to the Supreme Court of Queensland
Practice Direction rate, and not pursuant to section 57 of the
Insurance Contracts Act.
This case serves as a timely reminder to insurers that
undisputed amounts under policies of insurance must be paid within
a reasonable period, even when other parts of the claim remain
disputed. The amount of delay which a Court will determine as
unreasonable will be a factual matter which will vary from case to
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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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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