Oakland Investments (Aust) Ltd v Certain Underwriters at Lloyds [2012] 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 determined.
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 claim".
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.
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