The Supreme Court of Victoria recently held that an insurer's bona fide view that it had a defence to an insured's claim under an insurance contract was irrelevant to determining the date from which the insurer is liable to pay interest to the insured under s57 of the Insurance Contracts Act 1984 (Cth) (Act).
The case involved a claim by the insured under a policy of insurance it held with the insurer relating to the loss of plant and equipment in a mine in Central Africa (the insured's loss). The insured's loss was first identified and notified to the insured's broker in March 2001. In early April 2001, the insurer appointed a loss adjustor who prepared a preliminary report which stated that "...the present situation represents a case of theft...". The report did not identify the person/party that committed the theft. Further correspondence was exchanged between the insured, the insurer and the loss adjustor between May 2001 and January 2003. Of significance was the insured's letter to the insurer on 31 August 2001, requesting that the insurer advise the insured what it should do to recover the insured's loss. The insurer did not directly respond to the insured's letter but instead, requested further documents and information (request for further particulars) to clarify the circumstances surrounding the insured's loss. A response to the request for further particulars was provided in January 2002. The insurer formed the view that the documents and information were insufficient to make a conclusive determination on whether the policy responded.
The insured commenced proceedings against the insurer in May 2003 (the first claim). The insured amended its Statement of Claim on 5 separate occasions to include further claims (the second claim). The trial judge gave judgment in favour of the insured. However, issues related to interest payable on the judgment sum and an argument on costs remained outstanding. This article is intended to deal with the issue of interest only.
The insurer conceded that it was liable to pay interest under s57 of the Act and there was no issue as to the applicable rate of interest. The issue related to the determination of when the insurer's liability to pay interest commenced. Section 57(2) of the Act relevantly states:
(2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount....
The insured argued that interest pursuant to s57(2) ought to be calculated from 1 May 2001 in respect of the first claim (being the date that the loss adjustor provided its first report), and from 11 May 2006 in respect of the second claim (being the date that all issues were put in dispute). The insurer argued that interest should run from 1 August 2007, being four weeks from when the insured filed its final amended pleading, thereby providing the insurer with a full understanding of the insured's claim.
The trial judge referred to the decisions of Hams v CGU Insurance Ltd [2002] and HIH Casualty & General Insurance v Insurance Australia (No 2) [2006], both of which quoted and agreed with the decision of Cole J in Bankstown Football Club Ltd v CIC Insurance Ltd [1993]. In that case, Cole J held that a bona fide view that there was a dispute in relation to entitlement under an insurance contract is irrelevant in determining the time in which it would have been unreasonable for an insurer to withhold payment under the insurance contract for the purposes of s57(2) of the Act. He further held that once an insurer is found to be liable to pay under an insurance contract, then the insurer is deemed to have known of its liability to pay under the insurance contract even if, at all relevant times, it held a bona fide view that it was not liable.
In the present case, the trial judge accepted that the insurer took a bona fide view that the insured did not establish that the policy responded to the insured's claim. However, adopting the decisions above, the trial judge held that the insurer's bona fide view was not relevant to the application of s57. He further held that although the insured's pleading changed on various occasions, the substance of its claim did not change, that is, the insured's claim was to invoke the policy to cover the insured's loss.
On the issue of when it became unreasonable for the insurer to withhold payment under the policy, the trial judge referred to the decision in VL Credits v Switzerland General Insurance Co Ltd [1991]. In that case, the court held that a reasonable period for an insurer to investigate issues relating to an alleged arson and to enable the insurer to determine whether the insurance policy responded and if so the amount to pay, was four months.
The trial judge held that the Insured was in essence seeking a response from the insurer in respect of the nsurer's liability under the policy when it wrote to the insurer on 31 August 2001 seeking advice on what it should do to recover the insured's loss. The fact that the circumstances surrounding the insured's loss were unclear resulting in the insurer's request for further particulars does not mean that the insurer could defer a decision on liability under the policy until such time as the picture became clear. The trial judge said four months after 31 August 2001 was a reasonable time for the insurer to investigate the insured's claim. Therefore, the insurer was liable for interest under s57 of the Act from 1 January 2002.
Having regard to the Courts application of the principle in VL Credits v Switzerland General Insurance Co Ltd, insurers must ensure that investigations necessary to determine policy response are carried out without any undue delay.
McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc (No 2) (2009) 15 ANZ Insurance Cases 61-794; [2009] VSC 49 (20 February 2009)
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