Policyholder recovers agreed value of loss despite potential for ‘over-compensation’

The NSW Supreme Court has allowed a policyholder to recover an agreed value of loss, notwithstanding that it may have been ‘over-compensated’ for the loss actually suffered. The Court also ordered interest to be paid on the unpaid claim from the date the insurer declined indemnity.

As a policyholder you should be carefully scrutinising the terms of your policy in the event of a loss, and seeking advice on liability and quantum issues at an early stage to maximise any recovery – it may be possible to overcome limitations on coverage argued by the insurer.

In Cape Byron Power v HSB Engineering Insurance,¹ the plaintiffs (Policyholder) held two interrelated policies of insurance concerning the construction of two electricity generation plants. One policy (a ‘Debt Servicing Standing Charges Insurance Policy’) covered interest payments under a finance agreement during any period in which construction was delayed due to ‘Damage’ insured under another policy (a ‘Construction Risks Insurance Policy’).

One of the electricity generation plants suffered ‘Damage’, and the Policyholder claimed for the interest payments it incurred during the period of delay.

Alleged ‘over-compensation’ of policyholder irrelevant

The Underwriters argued that, as only one of the two electricity plants being constructed was damaged, it would ‘over-compensate’ the Policyholder if it could claim the full interest charges payable during the period of delay. Justice Parker rejected that argument, holding any such over-compensation was irrelevant when essentially the Insurer had agreed to pay by reference to an agreed formula. In summary, Justice Parker’s reasoning was that:

• while the trigger for policy coverage was delay in completion to the works caused by physical damage, the measure of recovery under the policy was the Policyholder’s liability to financiers over the period of delay;
• the policy was properly characterised as covering first party loss, rather than third party liability, and the loss was the economic harm flowing from the delay. However, the terms of the policy meant that there was not necessarily a direct relationship between the amount of the payout (calculated by reference to financing charges) and the relevant loss; and
• the language of the policy in relation to the measure of loss was clear. As such, there was no basis for reducing the recovery on the ground that only one of the two electricity plants being constructed was affected by the relevant damage, and the fact that the payout figure arguably over-compensated the Policyholder for its direct loss was irrelevant.

As a result, the full amount of the interest payments to the financier over the relevant period was recoverable.

Interest

The parties had agreed that, if the Policyholder’s claim succeeded, it would carry interest under s 57 of the Insurance Contracts Act 1984 (Cth). The question then became from when should interest be applied, given the legislation entitles a Policyholder to interest on unpaid claims from the date on which it became unreasonable to withhold payment of the claim.

The claim had been lodged in July 2014, insurers declined cover on 24 December 2014 and proceedings were commenced in October 2015. Justice Parker allowed interest from the date of declinature. His Honour reasoned that:

• while at trial, the Underwriters asserted that the evidence presented by the Policyholder to substantiate its claim was insufficient, on 24 December 2014, they instead chose to decline cover;
• because the basis for their declinature was rejected at trial, it followed that the declinature was unreasonable and interest ran from the date of the declinature;
• however, Underwriters were entitled to ask for further information if they wished - had they done so, and had the Policyholder commenced proceedings without supplying that information, the Underwriters’ conduct might well have been reasonable such that interest had not started to accrue.

Endnotes

1. Cape Byron Power I Pty Ltd v HSB Engineering Insurance Ltd [2017] NSWSC 1081.