Abstract

Business Interruption Insurance - Assessment
Interest on Indemnity
Assignment of Insured's Rights
Federal Court Jurisdiction in Insurance Claims

Article

Business Interruption Insurance Assessment of Indemnity

In Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (No 2)
[2018] FCA 1450, the issue in respect of business interruption insurance was the quantification of  loss of gross profits over the indemnity period from damage to a steel mill. The loss arose from a reduction in turnover and an issue of adjustments arose because the business had been operating for less than twelve months.

The insured could not lead precise evidence on the issue, and the court was obliged to do its best to deal with variables and estimates of a counterfactual production profile with a forecasting component from the start of the indemnity period involving imponderables and uncertainties. Consequently, the analysis had to be based on the possibilities or probabilities inherent in the selection of the methodology, the input assumptions and the robustness or otherwise of the output. The court was encouraged to take a “broad brush” approach. The counterfactual is the actual world without the insured event, that is, the results which would otherwise have been achieved, taking into account all of the actual constraints on the business other than those flowing from the insured event.

The policy provided for the usual adjustment to be made for the trend of the business and for variations in or other circumstances affecting it either before or after the damage or which would have affected it had the damage not occurred so that the figures thus adjusted should represent as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relative period after it. The principles of indemnity in the application of this clause were discussed and applied according to the particular circcumstances of the case.

As to the notion of “additional increase in cost of working”, if it is assumed that the cover provides indemnity for loss of gross profit becuse of a diminution of normal trading conditions, gross profit would usually suffer from a reduction in turnover but the insured may ameliorate or avoid it by incurring expenditure such as. an increase in working costs. Though because of the increased expenditure there will be no loss of gross profit from reduction in turnover, it will be caused by the increased cost of working. Therefore, there must be an allowance for it in the calculation of the loss of gross profit. It normally cannot exceed the amount of the gross profit preserved by it unless there is cover for additional increase in cost of working.

Cover is typically provided for reasonable professional fees and expenses necessarily incurred for the preparation of claims under the Insured’s Material Damage and Consequential Loss insurance. If the cover for preparation costs is not limited to the point the claim is formally rejected by the insurer, or does not exclude claims preparation work for litigation of its claims, it may extend to such work after rejection of the claim provided it is properly applied to that purpose rather than to the purpose of the litigation, where it would depend on the principles relating to an award of costs of the action.

 

 

Interest

Under s 57(2) of the Insurance Contracts Act 1984 (Cth), the insurer is required to pay interest for the period commencing on the day on which it became objectively unreasonable for it to refuse to pay the claim. An insurer has a reasonable period to investigate the claim and determine its position, but if it refuses to pay the claim, in circumstances where a court has held that a liability to pay it, its refusal does not extend its immunity until adjudication, even if its decision was bona fide: Fitzgerald & Anor v CBL Insurance Ltd [2014] VSC 493 at [415] - [416]; Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited [2015] FCA 1135. It is limited to a reasonable time for completion of its investigation of the claim.

 

Assignment of Insured’s Rights under a Policy

Normally a notice of an assignment would be sufficient to convert it from equitable into a legal assignment: Property Law Act, but if the assignor enters into liquidation which commences before the notice, the legal interest is not validly assigned and the assignment is effective only in equity: Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited [2015] FCA 1135.

Federal Jurisdiction in Insurance Claims

As to the jurisdiction of the Federal Court in insurance claims, Section 39B(1A)(c) of the Judiciary Act 1903 (Cth) confers original jurisdiction on it generally. Its language should be construed as expansively as its plain meaning can bear, in contrast to the approach taken to the exclusion of jurisdiction where limitations and implications are to be avoided unless the language plainly requires it: Truthful Endeavour Pty Ltd v Condon (as trustee of the bankrupt estate of Rayhill) [2015] FCAFC 70; (2015) 321 ALR 483 at [50].

Most insurance contract disputes, even a purely contractual claim, involve a matter arising under the Insurance Contracts Act 1984 (Cth) and proceed within the statutory matrix. To arise under a federal law, it is not necessary that the proceeding be founded on federal law or be a dispute about federal law: Truthful Endeavour (supra) at [58]). If it were not so founded, it would need some subject matter of the contract, or right, liability or limitation applying to it, which exists as a result of it: Australian Pipe & Tube Pty Ltd v QBE Insurance (Australia) Limited (No 2) [2018] FCA 1450.