Insurers are on notice that undisputed amounts under a policy of insurance must be paid within a reasonable timeframe. The Supreme Court of Queensland recently considered a decision by insurers to withhold undisputed amounts of a claim for indemnity by an insured, while indemnity was in dispute in relation to other parts of the claim.
In Oakland Investments (Aus) Limited v 'Certain Underwriters at Lloyds' & Anor [2012] QSC 6, the Supreme Court of Queensland considered whether Underwriters had breached the terms of a Mortgage Indemnity and Impairment Policy (the policy) issued to Oakland Investments (Oakland) by delaying payment of undisputed amounts under the policy.
Background
Oakland had issued a number of loans to borrowers, which included conditions that interest and certain fees arising from the borrowing be paid at the time the loans were drawn down. Oakland advanced amounts to the borrowers for pre-payment of interest and fees specified as payable in the loan documentation. Oakland's policy with Underwriters provided cover for losses sustained by Oakland as a result of payment defaults on the loans by borrowers.
As it transpired, a number of the borrowers defaulted on the loans. Oakland issued Statutory Default Notices on the defaulting borrowers and sold the securities provided to guarantee the loans. Oakland sustained losses, as the securities provided did not cover the total cost of the loans. Accordingly, Oakland submitted a claim to Underwriters for indemnity in relation to those losses, being the gap amounts between the amount of the loans and the amounts recoverable from the sale of the securities.
The insuring clause in the policy was triggered upon the issuing of the Statutory Default Notices within the policy period. A dispute arose between Underwriters and Oakland due to a term of the policy which Underwriters maintained excluded claims for amounts advanced by Oakland to borrowers for payment of interest and fees payable to Oakland in relation to the loans.
The policy provided that Oakland would be indemnified for any "Outstanding Principle Amount" advanced under a loan, excluding:
- "any amount advanced for the payment of interest or as a provision for possible future payments of interest whether or not retained by [Oakland] for that purpose.
- any fees or or charges payable to [Oakland]."
Decision
Oakland argued that it did not lend loan money for the specific purpose of paying interest and fees and that borrowers were at liberty to pay the interest and fees on their loans by other means. However, the evidence revealed that all borrowers had actually paid the interest and fee components using the amounts lent by Oakland.
The Court noted that a policy of insurance must be given a business-like interpretation. This required regard to be given to the mutual intention of the parties at the time the loans were entered into. The Court determined that the amounts advanced for payment of interest and fees were clearly advanced for that purpose, as evidenced by the loan documentation. Consequently, Underwriters' decision to deny indemnity in relation to these aspects of the claim was itself upheld.
The second issue for the Court's consideration was whether Underwriters were in breach of the policy for delaying payment of undisputed amounts. The undisputed amounts had remained unpaid while the dispute with Oakland in relation to indemnity for certain parts of the claim (as discussed above) was played out.
The Court held that Oakland had complied with all of its obligations to provide evidence to Underwriters with respect to the value of the losses that it had suffered. The Court held that although certain parts of the claim were disputed, this should not have prevented Underwriters from paying the undisputed amounts within a reasonable period from when the undisputed amounts were capable of assessment.
Underwriters argued that no date of breach of contract had been proved. The Court held that it was sufficient for Oakland to nominate a date for breach of contract, which Oakland submitted was at the latest three months after the final sale of security on each claim.
Underwriters were held to be in breach of the policy and were ordered to pay the undisputed amounts plus 10% interest on those amounts from the date nominated by Oakland. Interestingly, interest was ordered to be paid pursuant to the Supreme Court of Queensland Practice Direction rate, and not pursuant to section 57 of the Insurance Contracts Act.
This case serves as a timely reminder to insurers that undisputed amounts under policies of insurance must be paid within a reasonable period, even when other parts of the claim remain disputed. The amount of delay which a Court will determine as unreasonable will be a factual matter which will vary from case to case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
