By Daren Curry, Partner 

The NSW Court of Appeal decision in Worth v HDI Global Speciality SE [2021] NSWCA 185 is notable for its analysis of the insured’s entitlement to indemnity for property damage and business interruption losses and demonstrates how that entitlement will be governed by the terms of the policy notwithstanding the insurer’s wrongful failure to indemnify.

Background

In September 2015, the insured’s home was substantially destroyed by fire.

The house and business were insured under the insurer’s Home Based Business Property Insurance policy. By a Deed of Release, and whilst the cause of the fire remained under investigation, the insurer granted a “conditional indemnity”, under which it agreed to pay the insured in accordance with the policy. In turn, she agreed to repay those moneys in the event that a “police force” found that she had deliberately caused the fire. The insurer later advised the insured that it denied her claim, relying in part on a police forensic report concluding that the fire had been deliberately lit.

The insured commenced proceedings seeking the costs of reinstating her home; 12 months of business interruption losses; and damages for consequential loss of business revenue for the period after the expiry of that 12 months and continuing arising from the insurer’s failure to meet her claim and alleged breaches of its obligation to act with utmost good faith under Insurance Contracts Act 1984 (Cth).

The primary judge dismissed the insured’s claims, finding that she deliberately lit the fires in the kitchen and the living room.

Whilst the Court of Appeal found that the primary judge erred in finding that the insured had deliberately lit the fire, the decision is notable for the approach the Court took to the assessment of the damages the insured was entitled to.

The indemnity for property damage

The “basis of settlement” provisions of the policy provided that the insurer’s promise to settle claims on a reinstatement basis was subject to the proviso that the work of rebuilding, replacing, repairing or restoring, must be commenced and carried out with reasonable despatch, failing which the insurer would not pay more than the cost of replacement, repair or rebuilding on an indemnity basis.

At the time of the appeal, it had been five years since the fire destroyed the insureds home, and reinstatement had not yet commenced. As a result, the insurer argued that the insured was only entitled to be paid her property damage on an indemnity basis.

The insured attempted to argue that the deed of release “superseded” the policy and required her insurer to pay the reinstatement value of the house. This argument was rejected on the basis that the Deed provided included a promise to make payments “in accordance with the Policy”, including the proviso to which the “basis of settlement” was subject.

The insured also argued that the insurer’s reliance on the proviso in the policy was inconsistent with its duty of utmost good faith, and therefore contrary to Insurance Contracts Act 1984 (Cth), s14(1). It was held that there was nothing to suggest that the insurer’s delay in granting indemnity to the insured was prompted by a desire to prevent her from commencing reinstatement and it couldn’t be seriously maintained that the insurer’s refusal to indemnify was so unreasonable as to be itself a breach of its obligation of utmost good faith.

For that reason, the insured was entitled to an award by way of indemnity, not reinstatement.

The business interruption claim

Under the policy the insured was entitled to 12 months of business interruption losses. However, she had claimed damages for business interruption losses for the period after that date on the basis the insurer was in breach of the insurer’s statutory obligation to act with the utmost good faith (Insurance Contracts Act 1984 (Cth), s 13) and alternatively for breach of its obligation to indemnify within a reasonable time.

The claim was for consequential loss, being the business revenue that would have been received had the business operated during the period of delay, which the insured claimed was continuing.

The Court held that her claim for such losses was not to a claim for indemnity under the contract but was a claim for damages for consequential losses arising from the insurer’s breach of its promise to indemnify. The Court held, applying Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470 that such a claim was not maintainable under the policy because it was a claim for damages for late payment of damages.