Characterisation of indemnity payments and insurers’ rights to recoupment

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By Maurice Lynch, Special Counsel and Henry Holland, Associate

The Federal Court of Australia has considered the right of an insurer to recoupment in circumstances where its insured pursued a successful recovery against a third party in respect of a loss that was partially insured and partially uninsured under a policy of marine cargo insurance subject to the Marine Insurance Act 1909 (Cth).

Background facts

In the matter of Technology Swiss Pty Ltd v AAI Limited t/as Vero Insurance [2021] FCA 95, Technology Swiss Pty Ltd (Tech Swiss) shipped a consignment of fog cannons with a CIF value of $770,095.58 from Melbourne to Bangkok.

The consignment was insured under a policy of marine insurance provided by AAI Limited t/as Vero Insurance (Vero).  The policy provided for an indemnity limit of $500,000.00 for any one conveyance or location.

The fog cannons were damaged during the ocean carriage, and Tech Swiss submitted a claim under the policy.  Vero granted indemnity subject to quantification of loss, and made a payment of $200,000.00 to Tech Swiss under the policy (the First Payment).

Tech Swiss asserted that the consignment was a constructive total loss.  The parties were unable to reach an agreement regarding the value of the loss or the indemnity to which Tech Swiss was entitled, as a result of which Tech Swiss commenced proceedings against Vero in the Federal Court (Initial Proceeding).  Vero admitted liability to indemnify Tech Swiss  in the Initial Proceeding but disputed quantum.

The Initial Proceeding was settled by way of a deed of release, pursuant to which Vero made an additional payment to Tech Swiss in the amount of $425,000.00 (the Second Payment).

Tech Swiss subsequently commenced proceedings in the County Court of Victoria against the contractual carrier that was responsible for the damage to the fog cannons, Famous Pacific Shipping (Vic) Pty Ltd (FP Shipping).  Tech Swiss obtained judgment for $863,758.70 in the County Court proceeding.

Tech Swiss then commenced a second proceeding against Vero in the Federal Court in order to ascertain the entitlements to the sum recovered from FP Shipping (the Second Proceeding).  It is the Second Proceeding which is the subject of the Federal Court’s recent judgment.

Characterisation of payment

The crux of the dispute in the Second Proceeding was the characterisation of the Second Payment in the amount of $425,000.00.

Tech Swiss’ primary case was that only Vero’s First Payment in the amount of $200,000.00 could be characterised as an indemnity payment under the policy, and that none of the Second Payment in the amount of $425,000.00 was made under or referable to the policy.

Tech Swiss alleged that the Second Payment was consideration paid for Tech Swiss’ agreement that its claim on the policy in the Initial Proceeding be dismissed and for Tech Swiss’ release of Vero for any claims arising under the policy.  On that basis, Tech Swiss asserted that the Second Payment did not invoke the indemnity principle or provide Vero with an entitlement to subrogation or recoupment in respect of that payment.

In characterising the Second Payment, the Federal Court considered the settlement deed that was executed by the parties, which was silent as to whether any part of the payment related to indemnity under the policy.

The Court then had regard to all of the surrounding circumstances in determining that the mutual intention of the parties was that the Second Payment, or part of it, would reduce the loss insured against the policy, and therefore constituted an indemnity payment.  Vero’s argument was successful.

Decision of the Court and implications

The Court held that Vero was entitled to recoup those amounts that it had paid in reduction of the loss by way of indemnity from the moneys that Tech Swiss had recovered from FP Shipping.

The Court also held that an insurer who wishes to maintain rights of subrogation or recoupment to sums paid to settle or compromise a dispute about coverage should identify what is paid by way of compromise or indemnity under the policy, even if disputed and in that sense ex gratia or compromised, and subject to a reservation of rights.  The reality of these comments is that in an indemnity dispute an insured is unlikely to agree to a deed of release drafted in that manner.

The Court’s indication that insurers are required to expressly identify any amounts that are paid by way of compromise or indemnity in order to maintain rights of subrogation or recoupment appears to be somewhat novel, as it indicates that any interpretation of a settlement deed would operate against an insurer absent clear language, which would be a form of contra proferentem.

However, until such time that this issue is considered by a superior Court, insurers should be especially careful regarding the drafting of any settlement deeds in relation to indemnity disputes with their insureds to ensure that any payments made pursuant to a policy are properly characterised as indemnity payments.

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