In the aftermath of the recent bushfires, the Victorian Supreme Court's decision in McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance plc (No 2)  VSC 49 (20 February 2009) is a timely reminder that insurers faced with a claim valid on its face should not delay in confirming indemnity and paying out on the policy, lest they be faced with a large interest bill pursuant to section 57 of the Insurance Contracts Act 1984 (Cth) (s57).
In 2000, McConnell Dowell Middle East LLC (McDonnell Dowell) had some valuable plant and equipment stolen from its diamond mine in the Central African Republic (CAR). Following its own attempts at locating the equipment, in March 2001 McConnell Dowell notified its insurance brokers, seeking Royal & Sun Alliance Insurance plc's (Royal & Sun) involvement under two policies which it considered might respond, given the potential for liability if the plant could not be recovered.
Royal & Sun appointed a loss adjuster, who advised them on 9 May 2001 that the situation looked to be a case of theft, and that "it occurs to us that there is an admissible claim in respect of the plant and equipment". The loss adjuster concluded by seeking "comments and instructions on policy response and, in turn, recovery".
On 31 August 2001, McConnell Dowell requested that Royal & Sun comment on legal advice it had obtained as to the prospects of recovering the equipment, and otherwise asked its insurer for direction. No response was received.
After several meetings and requests for information, McConnell Dowell became frustrated at the ongoing delay. They contacted the loss adjuster on 10 January 2002 informing them that in their view "it is high time that [their insurer] provide a definitive response on policy liability".
In February 2002, Royal & Sun sought further information and queried whether the equipment had in fact been stolen. In May 2003, after further delay, McConnell Dowell issued proceedings against Royal & Sun.
McConnell Dowell pleaded the insurance policy and alleged that it had suffered a "total loss of the plant and equipment", the equipment comprising 77 items in CAR from where it could not be retrieved (initial claim). It did not specifically plead, at that stage, that the equipment, worth over $2 million, had been stolen.
McConnell Dowell subsequently amended its claim several times to include additional items; to seek "replacement value" or in the alternative "indemnity value"; and in July 2007, to plead that loss of the plant and equipment was attributable to theft.
In November 2008 the Court delivered judgment in favour of McConnell Dowell for the amount representing the claim under the policy; however interest and costs remained in dispute.
Both parties agreed that Royal & Sun was liable to pay interest on the judgment amount pursuant to s57, which provides that "the period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the defendant to have withheld payment of the amount" (start date) (emphasis added).
McConnell Dowell submitted that the start date of the initial claim was 9 May 2001, being when the loss adjuster "acknowledged that the claim appeared to be valid". It was submitted that the proper basis for the claim (loss attributable to theft) was articulated by the loss adjuster at that time, and because the loss adjuster had "recommended payment of the claim" from 9 May 2001, it was unreasonable for the insurer not to pay the amount of the initial claim even though McConnell Dowell had not specifically pleaded that the loss was attributable to theft.
A claim for the balance of the items was first pleaded on 11 May 2006, where McConnell Dowell submitted it was unreasonable for Royal & Sun not to pay the amount of the claim for the balance of the items from this date.
McConnell Dowell submitted that the start date should be 1 August 2007, which was four weeks (for the insurer to investigate the claim) after it first pleaded "loss attributable to theft" as that was the claim on which McConnell Dowell ultimately succeeded at trial. Royal & Sun argued that McConnell Dowell had succeeded on a claim "wholly different" from that initially pleaded.
Justice Hanson concluded that "the existence of a bona fide dispute as to liability is not relevant to s 57 ... [T]he subsequent course of events in the litigation does not necessarily set the test as to the day upon which it was unreasonable for the insurer to have withheld payment".
In so finding, his Honour agreed with McConnell Dowell's submission that from 2001 until judgment, the "essential nature of the plaintiff's claim did not change ... [T]he plaintiff's claim invoked the terms of the policies..., and notwithstanding the addition of some items to the claim, the nature of the items the subject of the claim remained fairly constant".
Accordingly, his Honour decided that 1 January 2002 was the appropriate start date, being four months (for the insurer to investigate the claim) from when McConnell Dowell requested Royal & Sun to comment and/or provide direction in its letter of 31 August 2001. His Honour considered that this request was "in effect ... seeking a response as to liability".
Justice Hanson's decision is a valuable lesson for all insurers that when confronted with a claim which is valid on its face, and allowing for a reasonable period of time in which to investigate the claim, it should not delay in confirming indemnity and making payment to the insured.
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