February 20, 2020

Insurance

WHAT DOES IT MEAN WHEN AN INSURER GRANTS INDEMNITY “BASED ON KNOWN FACTS AND CIRCUMSTANCES”

introduction

Insurers may use this expression when, under pressure from the Broker or in trying to reassure their Insured, they grant indemnity on an early basis. The prevailing thinking being that concluding a formal grant of indemnity with the expression “on the basis of known facts and circumstances and subject to the applicable terms and conditions” provides carte blanche to reverse that decision should new material come to light. However, the granting of indemnity on such terms, whilst obviously well intentioned, can be fraught with danger.

the law

In Thiess Pty Ltd v. ERC Frankona Reinsurance Limited [2007] QCA 004 Chesterman J said:-

“an insurer’s acceptance of its insured’s claim does away with the potential uncertainties and their capacity to generate costs which the insurer may have to bear, if the claim is litigated, and replaces them with the insurer’s intimation (or promise) that it will pay the claim.  There is, in accepting a claim, an element of compromise, or of admission that the insured is entitled as a matter of contractual right to the indemnity contained in the policy.  The consideration is the benefit to the insurer that it will not be liable to pay the insured’s, and its own, costs of an action, and the detriment to the insured of forbearing to sue for the proceeds of the policy. The acceptance of the claim is in form and substance an agreement.  Moreover it will normally amount to a contract, legally binding on the parties...

So an open admission or extension of indemnity can represent a separate contract that the insurer will “pay up” under the policy. A contract is created where the Insurer states that it accepts liability to indemnify the insured under the policy and where the Insured has given consideration in the form of a forbearance to sue the Insurer.

Each case will of course turn on its own facts.

In Mobis Parts Australia Pty Ltd v XL Insurance Company [2017] NSWSC 1321[1] (“Mobis”) a letter from the Insurer stated “XL accepts liability under the policy in respect of the loss on the basis of known facts and circumstances and subject to applicable terms and conditions” but ended with the words “XL otherwise reserves it position.” The Insured thanked them but also reserved their position. In other words, it was pretty clear no one had agreed to anything. So it was not surprising when the Judge determined that whilst the letter contained an admission it did not evidence a contract, given the Insurer’s promise was heavily qualified and there was no forbearance to sue actually promised by the Insured.

WHAT IS A KNOWN FACT OR CIRCUMSTANCE?

In Mobis, the Insurer later obtained an expert report which suggested that a roof which had collapsed at an insured factory had not been designed in accordance with the relevant standards. This potentially activated a “faulty design” exclusion. It was lucky for the Insurer that no contract was created because the Court would otherwise have found that the qualified grant of indemnity on “known facts and circumstances” would have bound the Insurer to indemnify because this later expert report was not a relevant change “in the facts and circumstances known” to the Insurer. Rather, this second opinion from a structural engineer was held to be “a means chosen by XL to evaluate the significance of the known facts and circumstances.”

The Court commented that it was not prepared to superimpose the words “as presently advised” at the end of the expression “known facts and circumstances” in a strong indication that this aspect will be read strictly the Court.

DOES THIS EXPRESSION CONSTITUTE A WAIVER BY ELECTION

An election by an Insurer to accept or deny liability under a policy, does not, without more, constitute an irrevocable election.[2]  In Mobis the court said:-

          “acceptance by the insurer of a claim by an insured to which the policy does not extend cover cannot amount to an election”.

In order for there to be a waiver by election, the election must be made with knowledge of the relevant facts.  The court said:-

          “the knowledge that the insurer would have had to have had in order to make an election in this case is the (alleged) fact that the warehouse was defectively designed.”

At the time they made that election they did not hold that knowledge so there could be no election.

IS RECANTING FROM THE ADMISSION A BREACH OF utmost good faith under section 14 of the insurance contracts act?

In Mobis, the Court found that because the admission letter did not form a settlement contract nor a waiver by election there was no basis on which to conclude that the Insurer’s subsequent reliance on the faulty design exclusion amounted to conduct contrary to its obligation to act with utmost good faith.

CONCLUSION

Ultimately, avoiding being bound by its early admission was a pyrrhic victory for the Insurer as the faulty design exclusion was held not to apply due to an inability to prove noncompliance with the relevant Building Code.

What the above discussion illustrates, however, is that while an early grant of indemnity from the Insurer will be a source of comfort to an Insured faced with a significant claim the benevolent Insurer must be aware that if such a grant is made, there can be difficulties in changing your position if new evidence comes to light.

A separate contract may well be created and this new contract won’t contain the exclusion relied upon. Further, what you might regard as a fact of significant consequence might be categorized as not a fact at all but rather just a different evaluation of the claim.  Unless you are sure of your position, reserve your rights on indemnity until you are fully appraised of all the facts.


[1]    Appealed on other grounds to the NSW Court of Appeal in the decision of Mobis Parts Australia Pty Ltd v. XL Insurance Company SE [2018] NSWCA 342 but unchallenged on this point.

[2] National Vulcan Engineering Insurance Group Limited v Transfield Pty Ltd [2003] 59 NSWLR 119.