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The Full Federal Court has unanimously confirmed insurers’ right to recoup payments it made to the insured despite a deed of release between the insurer and the insured not expressly identifying the amounts paid by the insurer by way of compromise or indemnity under the policy (i.e. making the amounts of the insured and uninsured losses unclear).[1]
The decision provides some important guidance as to how subrogation and recoupment should be considered by insurers when resolving indemnity with an insured.
Facts
In April 2014, Technology Swiss Pty Ltd (Technology Swiss) entered into a contract of marine insurance, being a combined cargo policy, with AAI Limited trading as Vero Insurance (Vero), for the period 24 April 2014 to 24 April 2015 (the policy). The policy provided for a limit of indemnity for exports of $500,000 or location, the basis of valuation being cost, insurance and freight (CIF) plus 10%, with an excess of $250 each and every loss.
In December 2014, Technology Swiss shipped a consignment of fog cannons from Melbourne to Bangkok, with a CIF value of $770,095.58. It did so by contracting with a freight forwarder, Famous Pacific (Vic) Pty Ltd (FP Shipping).
During the voyage (the carriage), the fog canons were damaged. The fog cannons were insured goods under the policy.
Technology Swiss made a claim under the policy for $500,000 (Insurance Claim). Vero accepted liability to indemnify Technology Swiss but denied liability for the quantum of the claim.
On or around 28 August 2015, on a without prejudice basis, Vero indemnified Technology Swiss for EUR127,500 (Indemnity Payment) and started making without prejudice payments to the insured for the (monthly) costs to store the canons but approximately a week later, Technology Swiss commenced proceedings against Vero seeking payment of the full amount of indemnity of $500,000 plus the monthly costs of storing the fog cannons (Storage Costs Claim).
Vero denied liability for the Insurance Claim and in the Proceedings except to the extent of the Indemnity Payment (the Dispute).
On or about 1 June 2017, Technology Swiss and Vero entered into a deed of release (the Deed), settling the Dispute. Relevantly, Clause 2 of the Deed provided:
“(a) Technology Swiss agrees to accept $425,000 (the Settlement Monies) from Vero in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute.
…
(c) Vero agrees to make payment to Technology Swiss of the storage costs it incurred for the Consignment in Bangkok, Thailand from 1 March 2017 until the date of the execution of this Deed by Vero (Storage Costs Settlement Monies).
…
(e) Technology Swiss hereby releases, forever discharges and holds harmless Vero its servants, agents, and officers from and against all actions, claims, suits, causes of action, and demands of every kind which it now has or may at any time have, or which, but for the execution of this Deed it would or might have had against Vero arising from the circumstances recited in this Deed, the Carriage, the Insurance Claim, the Storage Costs Claim, the Proceedings, and the Dispute.”
Technology Swiss and Vero agreed to share the costs of pursuing FP Shipping but an agreement was not reached on the costs sharing arrangement which led to Technology Swiss bearing the recovery costs itself.
On 13 November 2019, Technology Swiss obtained a judgment against FP Shipping for $863,758.70 (i.e. a sum considerably higher than the CIF value, and also greater than the EUR 127,000 Indemnity Payment and the Settlement Monies, which totalled $625,000).
Who benefits from the recovery?
Vero contended that it ought be able to recoup the Indemnity Payment and the Settlement Monies it paid under the Deed ($425,000). Vero relied on authorities that hold an insurer is entitled to be subrogated where it has paid the insured (even though it may have had no actual liability to do so under the policy so long as it has done so in a bona fide belief that it was paying under the policy).[2]
However, Technology Swiss asserted that, it was only the Indemnity Payment which was made by way of indemnification and the $425,000 payment made by Vero under the Deed was made by Vero pursuant to a contractual obligation under the Deed rather than an obligation under the policy – meaning that Vero had no entitlement to recoup any of it.
The trial judge did not accept either view but concluded that it was still possible to allocate the $425,000 between the insurer and the insured despite the Deed not providing any machinery for its allocation.
His Honour accepted Technology Swiss’ submission that a right of subrogation would arise when payment is made even if it is not legally required under the policy so long as it is honestly intended to be in satisfaction of a loss under the policy. He found as a fact that Vero had paid the $425,000 believing its actions to be in satisfaction of its obligations under the policy. His Honour did not, however, accept that this entitled Vero to recoup the full $425,000.
His Honour undertook the exercise of identifying the objective mutual intention of the parties as to which part of the $425,000 was a payment by way of indemnity and thereby subject to the right of recoupment. Two aspects of Technology Swiss’ claims referred to in clause 2(a) of the Deed could not be claims on the indemnity, namely:
1 the costs of the Proceeding[3] totalling $277,260.16; and
2 the unpaid storage costs incurred before 1 March 2017 totalling $30,969.42.
The primary judge then combined these two sums to arrive at a total of $308,229.58, which his Honour reasoned was the maximum amount the parties could possibly be taken to have agreed to settle as payments not made under the policy.
As these were the only elements of the claims in clause 2(a) of the Deed that were not within the principal indemnity in the policy, this allowed his Honour to conclude that the difference between that sum and $425,000 (being $116,770.06) represented the minimum conceivable amount paid pursuant to the indemnity. That sum was to be added to the EUR127,500, the total being the amount of Vero’s entitlement to recoup from the sums recovered from FP Shipping.
The primary judge rejected Vero’s argument that the parties had agreed to pay their own costs of the earlier dispute and that all other amounts were referable to a reduction of the damages suffered by Technology Swiss by reason of the damaged goods.
His Honour held that the parties’ agreement did not determine their rights inter se as to their apportionment of the $425,000. The consent order to which they agreed was merely the agreed mechanism for putting an end to those proceedings. Consequently, on a proper construction of the Deed, Vero paid an undivided sum to Technology Swiss for all the claims it was making, including its claim costs of the previous litigation, and to free itself from any potential liability in respect of them, all without any attempt to apportion or allocate the sum paid.
The Appeal
Both Vero and Technology Swiss appealed with both parties maintaining their claims to the full amount of the Settlement Monies, and challenging the manner in which the primary judge had apportioned the claims.
In deciding the appeal, Perram J held that:
- Vero’s submission that it should be entitled to the whole of the $425,000 could not be sustained;
- the trial judge was correct to say that the doctrine of subrogation (and, by extension, recoupment) arises to give effect to the equities between the parties;
- an assessment of those equities in this case must include the fact that the parties had a dispute as to the coverage afforded by the indemnity which they have never resolved and which now lies submerged beneath the global sum upon which they agreed;
- the dictates of equity require the understandings of both parties to be brought to account to the extent that they are mutual and ascertainable.
In upholding the primary judge’s approach and assessment, Perram J observed:
“Where the rights and obligations under the indemnity in a policy have merged in a judgment or in a deed which settles those rights as between the parties, it is true to say that new rights and obligations have been created which supplant those which obtained under the policy. However, it would be unthinkable that an insurer who has been successfully sued on a policy to judgment and who has then satisfied the judgment would not be entitled to exercise rights of subrogation because the payment had not been made under the indemnity in the policy but rather under the judgment. If this were so every insurer would run the risk in defending proceedings on a policy of losing any entitlement to subrogation if unsuccessful. Such an outcome cannot be correct and I therefore accept that a right of subrogation arises when an insurer pays a judgment obtained against it in acquittal of an insured’s rights of indemnity under a policy…I do not accept therefore that the fact that the payment was made pursuant to [the Deed] rather than the indemnity can have the consequence that no right of subrogation or as here, recoupment, arises.”
Jagot J also upheld the primary judge’s decision and notably distinguished the decision of Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462, on which Technology Swiss relied.
In Wellington Insurance the insurer expressly disavowed any intention of the payment being made by way of indemnification under the policy of insurance. As a result, no right of recoupment in the insurer arose in that case. Jagot J supported the view that Wellington Insurance confirms that the relevant question is
“whether it can be taken (whether from express words or inferred or implied from the circumstances) that the payment or some part of it was mutually intended to be an indemnity for the insured loss and in that sense be under the policy”.
Further, the right of recoupment in the insurer arises even if the parties believe, wrongly, that the policy of insurance applies and the insurer pays intending the payment to be by way of indemnity under the policy (King v Victoria Insurance Company Limited [1896] AC 250) (the King case).
Jagot J concluded that the requirements for the right of recoupment to arise are that there must be a policy under which there is a right of indemnity, a claim made under the policy, and a payment made by the insurer to the insured in good faith intended to reduce the insured’s loss. Such an intention may exist if:
- the insurer and insured wrongly believe the policy applies and the payment is being made under it (as in the King case);
- the insurer and insured disagree about the application of the policy; or
- the insurer and insured disagree about the extent to which it provides indemnity (as in the present case).
Derrington J held that the primary judge was plainly correct to identify that a right to subrogation arises when an insurer has undertaken by a policy of insurance to indemnify the insured, the insured has made a claim on the policy, and the insurer has made a payment to the insured in respect of the loss for which the latter has claimed the indemnity.
His Honour was also correct to observe that it is immaterial to the existence of its right to subrogation that the insurer has not accepted that it was obliged to indemnify the insured, that it had denied its liability to do so or that it was not actually so obliged as a matter of law.
Implications
The right of subrogation exists even where an insurer may not have accepted that it was obliged to indemnity an insured under a policy or where the insurer has denied its liability to do so (or, even where the insurer was not actually obliged as a matter of law). What is relevant to the right to subrogation is that it arises when an insurer has undertaken by a policy of insurance to indemnify the insured, the insured has made a claim on the policy, and the insurer has made a payment to the insured in respect of the loss for which the latter has claimed the indemnity.
While it is clearly possible to “unscramble the egg” and retrospectively work out allocation, this can be a costly and time consuming exercise if it is done after the fact.[4]
Wherever possible, an insurer who wishes to maintain rights of subrogation or recoupment for sums paid to an insured, an insurer should identify what amounts are paid by way of compromise or indemnity under the policy (even if the payment is made on a without prejudice basis, ex gratia or subject to reservation of rights).
It is in the mutual commercial interests of both insureds and insurers to endeavour to reach written agreement which makes the parties’ intentions clear as to who will benefit from any recoveries. While there will inevitably be situations where no recovery is contemplated at the time the insurer and the insured are resolving indemnity, wherever possible, all attempts should be made to not “kick this problem down the road” and reach an agreement at the outset.
With goodwill on both sides, this discussion should be able to take place without derailing the resolution of the matter between insurer and insured.
Read other items in the Australian Insurance Brief - October 2021
Read other items in Marine Brief - November 2021
Footnotes
[1] AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168.
[2] Sydney Turf Club v Crowley [1971] 1 NSWLR 724; King v Victoria Insurance Company Ltd [1896] AC 250.
[3] Being the proceedings Technology Swiss commenced against Vero seeking payment of the full amount.
[4] Noting this claim for indemnity was made on 29 January 2015 and the Full Federal Court’s judgment was delivered on 17 September 2021.
Insurance and reinsurance
Australia