In brief - Insurer successfully recovers part of its loss but Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance [2021] FCA 95 is a lesson for insurers of the benefit of expressly stating agreed level of indemnification in a settlement deed 

Chief Justice Allsop in the Federal Court of Australia recently considered how to apportion a recovery obtained from a carrier where insured and uninsured portions of the claimed loss were unclear.

In his decision in Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance, the Chief Justice carefully analysed the relevant case law from a number of jurisdictions and the principles of subrogation and recoupment.

Policy indemnity dispute with insurer settled at mediation but dispute over recovery arises after insured obtains full recovery from freight forwarder

There was a dispute between Technology Swiss Pty Ltd (TS) and the insurer (Vero) about the extent of policy indemnity following a claim arising from damage to a shipment of fog cannons from Melbourne to Thailand. TS considered the goods to be a constructive total loss and Vero thought they were repairable for considerably less than the total sum insured under a marine cargo policy.

Ultimately, after litigation was pursued by TS against Vero in relation to policy indemnity, the dispute was settled by compromise at a mediation.

TS then pursued a claim for indemnity from Famous Pacific Shipping as freight forwarder and ultimately obtained full recovery of the value of the machine, interest and legal costs.

A dispute then arose with Vero as to what entitlement Vero had to recovery of the amount it had paid to compromise the policy indemnity litigation out of the proceeds recovered from the freight forwarder.

The position was complicated as there was no agreement reached about apportionment of recovery proceeds at the time of settlement of the policy indemnity dispute, nor before recovery action against the freight forwarder was commenced - even though an attempt to reach agreement at that latter time was made.

Legal authorities - Wellington Insurance Co Ltd v Armac Diving Services and King v Victoria Insurance Company Limited 

It is accepted that an insured whose loss is covered by a policy of indemnity insurance is not entitled to be more than fully indemnified for its loss (Castellain v Preston (1883) 11 QBD 380 at 386 per Brett LJ).

TS relied upon a decision of the British Columbia Court of Appeal in Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLP (4th) 462. In that case, the insurer had denied policy indemnity but subsequent litigation in relation to policy indemnity was settled for half the amount claimed. The Court concluded that no right of subrogation arose in the circumstances as it was not a payment under the policy but as consideration for abandonment of the claim under the policy.

Vero relied on a Privy Council decision in King v Victoria Insurance Company Limited (1896) AC 250

Court discerns mutual intention of parties at time of payment absent clarity from parties when settling indemnity dispute

Chief Justice Allsop did not consider the two cases to be inconsistent. He noted that there need not be liability under the indemnity policy provided there was a policy and a payment made under it.

He found that the proper approach was to ascertain whether it could be concluded that payment by the insurer or any part of it could be seen as treated by the parties as a payment representing a bona fide compromise of a claim for indemnity under the policy. 

The Court needed to discern the mutual intention of the parties at the time payment was made in circumstances where the parties had not made this clear when settling the indemnity dispute.

He further noted (at [136]) that "(a)n 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…If this requires agreement with the insured, as a matter of mutual commercial interest, so be it. If no clarity is given to the matter, an insurer cannot expect guesswork or surrogate ex post facto negotiation for its benefit."

In his analysis the Chief Justice apportioned some part of the settlement to indemnity under the policy and that proportion was then applied to the recovery of the amount received from the freight forwarder so that Vero recovered part but not all of its loss.

What insurers can learn from decision in Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance

The decision is significant for its analysis of the doctrine of subrogation and as a lesson to insurers, who settle a policy indemnity dispute prior to pursuit of recovery action, of the benefit of expressly stating in a settlement deed the agreed level of indemnification. 

Practically it is recognised that it is not always possible, just as it was not possible in this case, to reach agreement between insurer and insured about recovery apportionment prior to commencement of recovery action. There are benefits, however, if mutual agreement can be achieved in limiting further disputes.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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