When a seawall collapsed in a mine in WA, damage including business interruption losses followed, but when a policy allows for ‘reasonable adjustments’ to be made when assessing that loss, how far can those adjustments go?
Can a plan (resulting in an increase in notional profits) made purely for the purposes of an insurance claim be a reasonable adjustment?
In issue
- The assessment of a claim for business interruption losses under a Material Damage and Business Interruption policy issued by Infrassure following the collapse of a seawall adjacent to an open cut iron ore mine
- Whether Koolan was entitled to interest under the Insurance Contract Act 1984 (Cth) (Act), as it submitted that payment ought to have been made on 31 August 2017.
The background
Koolan operates an open cut iron ore mine on Koolan Island, WA. On 25 November 2014, a seawall protecting the site collapsed, causing significant damage to the mine and preventing the mine’s operation. Infrassure is an insurer that indemnified Koolan under a Material Damage and Business Interruption Policy (Policy). On 10 June 2021, Infrassure (belatedly) paid Koolan $801,832 for business interruption losses. Koolan alleged that Infrassure should have indemnified it for a total of $8,491,337, and that it was also liable for interest under s57 of the Act.
The $7.7 Million difference in the parties’ positions was attributable to Koolan’s assessment of profit under a particular revised mine plan. Koolan submitted that, according to the revised mine plan, had the seawall not failed, it would have modified its mining plan to mine iron ore at a lower cost, and so on a more profitable basis (Revised Mining Plan, or RMP). The position of Infrassure was that the business interruption section of the policy responded to what Koolan would have mined pursuant to the Existing Mining Plan (EMP).
The crux of the dispute was whether an ‘adjustment clause’ within the policy allowed Koolan to rely upon the RMP for the purpose of calculating its entitlement to business interruption losses under the policy or whether such losses were calculable by reference to the EMP.
The decision at trial
Koolan submitted that the adjustment clause, on its proper interpretation, permitted it to claim the loss calculated under the RMP as the correct measure of loss. Although it acknowledged that the adjustment clause was broad, the Court determined the argument adversely to Koolan. As the RMP had not been proposed, adopted, or implemented by the time the seawall collapsed, it was a variation that ‘did not exist’ inside the scope of the indemnity for which the Policy, read as a whole, provided. Effectively, the Court determined that the scope of the adjustment clause was limited to factual circumstances that existed before the relevant incident.
In addition to the Court’s finding as to the proper construction of the policy, there was a finding of fact that Koolan did not establish that it would have adopted the RMP, in any event.
With respect to the interest argument, the Court found in favour of Koolan. The Court held that once the claim under the EMP crystallised following the provision of reports on 7 December 2020, the insurer ought to have at least paid that amount of the claim while the issues with respect to the RMP and other claims were on foot, as there was no bona fide reason for the insurer not to pay.
Implications for you
The decision reinforces common principles in insurance policy contract interpretation. Namely, insurance contracts will be interpreted not only on their plain reading, but with the commercial purpose of the contract in mind. As such, while broad clauses are still risky and are often interpreted in favour of insureds, such extreme interpretations as the one proposed by Koolan (while theoretically allowed by the language) may not be accepted by a Court.
The Court otherwise made clear that, in certain circumstances, an insurer’s obligation to pay a claim exists even when there is a dispute as to the quantum of that claim. If it is clear there is a ‘minimum’ indemnity that has crystallised (notwithstanding an ongoing dispute about quantum), insurers should consider paying the claim to avoid attracting interest under the Act.
