Newsletter: September 2021 Case Notes

While my ‘Insurable Interest’ newsletter is still new, I am playing around with the ways in which I include it on this site.

If you head over to my Newsletter page, you will see a place to sign up for my monthly email that includes case notes like the ones below. That newsletter comes out on the first Monday of each month. You will also see there, links to the archive, so you can see what you can expect if you sign up. To maintain some exclusivity, each month’s email is added to the archive at least two weeks after it is sent.

Each month, I try to include some commentary or updates on happenings and issues affecting Australian insurance law. That only appears in the newsletter itself. The case notes are here though. Again, I won’t put them up until a couple of weeks after the email.

September's cases of note

Federal Court of Australia

Avant Insurance Limited v Darshn [2021] FCA 1129

In Darshn v Avant Insurance Limited [2021] FCA 706, Moshinsky J found Avant liable to indemnify Dr Darshn for his defence costs incurred as a defendant to a class action. This was despite Dr Darshn having been joined to the proceeding after it had commenced. Avant has appealed that decision.

This month, Avant sought a stay of Moshinsky J's orders and its appeal be expedited. The decision on the stay fell to Yates J, who held that it should not be granted because Avant had not convinced him that a stay would be fair in all the circumstances.

Yates J's judgment is a useful reminder that a successful party at trial will usually be entitled to the fruits of their success. This is particularly the case where the appellant's conduct has created the respondent's precarious financial position, upon which the appellant relies for its stay application.

Here, Yates J was not convinced of Avant's submission that Dr Darshn needed to provide substantial evidence that he was likely to lose his representation if the stay was granted. In the circumstances, where Dr Darshn had already paid $494,000 for costs and disbursements and owed his solicitors an additional $703,000, Yates J did not think it appropriate to put Dr Darshn's lawyers on the spot to reveal if they would continue to represent him. That his solicitors deposed to not accepting an obligation to continue to act if the fees incurred remain unpaid and that there was a risk they would cease to act was sufficient.

The other factor that was important to Yates J's decision was that Avant was not seeking as stay on an order to pay Dr Darshn's defence costs incurred after 23 August 2021 (the date of Moshinsky J's order). That raised the inference that Avant accepted Dr Darshn's risk of losing representation if his fees remained unpaid.

AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168

This proceeding concerned an insurer’s right of subrogation or recoupment under a contract of marine insurance.

The insured, Technology Swiss, shipped a consignment of fog cannons from Melbourne to Bangkok. In the course of the journey, the fog cannons were damaged.

The cost, insurance and freight value of the fog cannons was $770,095.58.
The relevant policy’s limit of liability was $500,000 for any one conveyance.

While AAI accepted liability for the insured’s claim quickly, it did so subject to quantification of the loss. That point was to end up the subject of litigation in the Federal Court (First Federal Court Proceeding).

In the First Federal Court Proceeding, the insured, sought the full indemnity, the cost of storing the fog cannons (under a sue and labour clause), interest and costs.

Shortly after the First Federal Court Proceedings commenced, AAI paid $200,000 to the insured as the amount it said was sufficient to repair the cannons. It also accepted liability for storage, subject to evidence that those costs had been incurred. This was not sufficient to resolve the First Federal Court Proceedings as, amongst other things, the insured claimed the fog cannons were a constructive total loss.

Ultimately, AAI and the insured settled the First Federal Court Proceeding for an all-in offer of $425,000. Unfortunately, for the parties, the settlement agreement did not identify which of this amount related to the policy’s indemnity and which related to costs or other un-indemnified amounts.

Importantly, pursuant to the settlement, the parties agreed that there be no order as to costs in the First Federal Court Proceeding.

The insured subsequently commenced proceedings in the County Court of Victoria seeking damages from the freight forwarder. They did so without AAI’s involvement because they had not been able to reach agreement on cost sharing. The insured was awarded $863,758.70 in the County Court Proceeding. That was the impetus for the current proceeding, in which AAI sought to recoup the amounts paid to the insured.

In this proceeding, the insured submitted that AAI was entitled to recoup $200,000. In contrast, AAI argued it was entitled to the full $500,000 policy indemnity.

At first instance, Allsop CJ decided that AAI was entitled only to amounts objectively attributable to its indemnity under the policy. His Honour held that entitlement to be only $316,770.06 plus interest. That consisted of the $200,000 paid after the start of the First Federal Court Proceeding and $116,770.06 attributable to indemnity in settlement of the First Federal Court Proceeding.
In separate judgments, the Full Court upheld the Chief Justice’s decision. In doing so, it rejected AAI’s submission that it was entitled to subrogation in respect of any sums an insurer paid to an insured honestly and in good faith. All three members of the Full Court rejected that submission as an impermissible expansion of the principle of subrogation.

As Derrington J points out (at [149]) while there is not requirement that an insurer be actually liable to indemnify before the principle of subrogation will arise:
There must, however, be some assumed obligation to indemnify the payee from which the right of subrogation springs.

The result is that while an insurer must have made a payment referable to an obligation to indemnify under a policy, and that payment has been made to reduce that liability, it is not necessary that the right to indemnity legally exist for the right of subrogation to arise. Practically, that means that had the parties specified an amount attributable to indemnity in the settlement agreement, the Court would have likely accepted that as being the basis for subrogation regardless whether that amount would found to be so attributable on a proper construction of the policy.

Where the parties did not make that kind of attribution, it was necessary for the Chief Justice to determine, objectively, which of the payments made by AAI to the insured were made in respect of its promise to indemnify the insured. Ultimately, he had not erred in doing so.

New South Wales Court of Appeal

Allianz Australia Insurance Limited v Rawson Homes Pty Ltd [2021] NSWCA 224

In this decision, the NSW Court of Appeal has given a reminder that it is important to start any attempt to construe an insurance contract by construing its indemnity clause. As Leeming JA says (at [10]), "That is because until and unless the insuring clause in engaged, the other clauses which qualify the indemnity granted in the insuring clause are inapplicable,"

Here this principle was central to the Court holding that while a hail storm that caused damage to more than 100 residential buildings under construction by Rawson Homes, Rawson Homes' insurance claim for the storm's damage was subject to a deductible for each damaged property. This was the case despite the relevant deductible being limited to '$10,000 Any One Event.'

Rawson Homes is a residential builder, working on many projects at once. It insured those projects against material damage and third party liability under a single construction insurance policy with Allianz.. Allianz then provided cover for 'Insured Contracts', being contracts Rawson Homes entered into to perform construction works. Thus, the policy indemnified each Insured Contract up to the Sum Insured. As Meagher JA noted (at [6]) Rawson Homes' situation is similar to as if a separate contact of insurance had been entered into for each building. In relation to Material Damage, the Schedule established that the total Sum Insured for each Insured Contract was $2,732,000 (subject to individual sub-limits). Each of these Sums Insured was subject to a deductible.

Consequently, though there may have been one event and, seemingly, one policy, the policy essentially offered 'open cover' under which individual contracts were then indemnified over the policy's term.

The result for Rawson Homes was it brought its claim down from $1,400,678 plus interest, at first instance, to $266,671 plus interest.

Khanna v Allianz Australia Insurance Limited [2021] NSWCA 231

There is little principle to be drawn from this proceeding but it is another cautionary tale for insurers relating to settlement of claims.

In 2009, Mr Khanna claimed to have been injured when the tow-tow truck dispatched to repossess his car struck him. Allianz was the relevant third-party insurer.

Allianz settled with Mr Khanna before he commenced proceedings in relation to the claim. The settlement was supposed to have resulted in Mr Khanna receiving $10,000 after Medicare payments. However, Allianz did not pay in 2009. It also did not pay the settlement sum when Mr Khanna commenced proceedings in 2019. Instead, it relied upon Mr Khanna's alleged failure to comply with procedures under the Motor Accident Compensation Act 1999 (NSW). It also relied on a defence under the Limitation Act 1969 (NSW).

It was when Allianz's dismissal application came before the District Court that the judge noticed that the claim had been compromised. Allianz then made an open offer to pay the settlement sum plus interest. After Gibbs DCJ explained the difficulties with Mr Khanna's substantive claim and his easier claim under the settlement agreement, Mr Khanna and Allianz agreed to consent orders.

The appeal here concerned Mr Khanna's attempt to set aside the consent orders on the ground that he was unable to understand the the effect of the consent orders before agreeing to them because of a medical condition. Ultimately, the Court refused Mr Khanna's application for leave to appeal but declined to order he pay Allianz's costs. The reason for this was its view that Mr Khanna only commenced the proceeding because of Allianz's failure to pay the settlement sum. Allianz also had the opportunity to honour the agreement once proceedings had commenced. That it fell to Gibbs DCJ to identify that the settlement agreement was relevant didn't help Allianz.

Finally, the Court noted Allianz's duty under the Motor Accidents Compensation Act to resolve claims as justly and expeditiously as possible.

The judgment doesn't explain why Allianz did not pay (in fact it noted that the failure was 'inexplicable') or raise the settlement once Mr Khanna commenced proceedings. Mr Khanna was self represented, perhaps explaining his lack of realisation earlier. For insurers, however, it shows the value of good record keeping in even the seemingly most trivial of matters.

Victorian Supreme Court

Insurance Australia Ltd v Milonas [2021] VSC 602

This decision comes from an appeal from a VCAT decision relating to a domestic building dispute involving a defectively built pool. The pool was built shorter and narrower than specified. Dr Milonas sued the pool’s builder’s insurer, Insurance Australia Ltd (standing in the shoes of Lumley General Insurance Ltd), in relation to the defects. VCAT held that IAL was liable to indemnify Dr Milonas up to the policy limit of $200,000 plus interest and costs. IAL appealed to the Supreme Court.

IAL’s defence relied on a policy term limiting indemnity for loss or damage, including Structural Defects (as defined), to loss or damage occurring six years after either the completion date or termination of the building contract. Its submission was that Dr Milonas’s loss did not occur until she had actual knowledge of the defect because the defect was a latent defect.

While McDonald J accepted that VCAT had erred in several respects, he held that IAL was liable to indemnify Dr Milonas. In doing so, he held that the size of a pool was not a latent defect. His Honour further held that loss, in the form of rectification costs, crystallises on a party taking possession of defective building works. As his Honour said (at [66]):

"While the contract remained on foot there was a prospect of Paradise Pools complying with its contractual obligations and building a pool in accordance with the approved plans. However, once the contract was terminated, there was no longer any prospect of this occurring. Once Dr Milonas took possession of the defective pool, her economic loss crystallised."

The result was that loss occurred on 8 November 2008, within the policy’s indemnity.

Ultimately, leave to appeal was granted in relation to VCAT’s orders in relation to interest and costs but not on IAL’s substantive liability to indemnify Dr Milonas to the policy’s $200,000 limit.

Reading list

Each month, there will be cases that I just did not get to, despite best intentions. This month, that includes

Insurance Australia Ltd trading as CGU Insurance v MOS Beverages Pty Ltd [2021] FCAFC 165

A Full Court of the Federal Court of Australia decision concerning whether an "Interests of Other Parties" clause allowed a claim under s48 of the Insurance Contracts Act 1984 (Cth).

I will try to revisit this decision next month because Derrington J's dissent is interesting in that it starts with a long obiter concerning how the IOP clause should have been construed, if only the parties had argued the case correctly.

Gentle Dental Care Group Pty Ltd v Al Mozany [2021] NSWSC 1234

A Supreme Court of New South Wales decision in which a dentist's professional indemnity insurer was joined to proceedings against the dentist by the practice in which he worked for his alleged negligence while engaged there.