Don’t let your right of subrogation or recoupment turn to mist!

11 October 2021

The Federal Court considered an insurer’s right of recoupment against an insured in circumstances where the insured received the benefit of a settlement in relation to an indemnity dispute with the insurer and also successfully recovered losses from a third party.

In Issue

  • The court considered the insurer’s entitlement to recoup funds recovered by an insured in circumstances where the insurer paid a global sum to the insured in settlement of an indemnity dispute.

The background

Technology Swiss Pty Ltd, the insured, shipped a consignment of fog cannons from Melbourne to Bangkok, the cost of insurance and freight (CIF) value of which was $770,095.58. It did so by contracting with a freight forwarder, Famous Pacific (Vic) Pty Ltd (FP Shipping). During the voyage, the fog cannons were damaged as a result of having moved during transit, most likely due to inadequate stowage.

The insured had entered into a contract of marine insurance with AAI Limited t/as Vero Insurance (Vero) which had a policy limit of $500,000 for any one conveyance with the basis of the valuation being CIF plus 10%. The insured made a claim under the policy. Vero granted indemnity but took the view that the fog cannons could be repaired for $200,000. The insured did not agree and contended it had suffered a constructive total loss. A litigated dispute followed. In the meantime, the insured paid for the fog cannons to be stored in a bonded warehouse in Thailand.

After commencement of the litigation, Vero made a payment of $200,000 to the insured, which was its assessment of the costs of repairing the fog cannons. Subsequently it indicated it would indemnify the insured for the costs of storing them in the bonded warehouse, but only after the insured provided evidence that those costs had actually been incurred.

After two years of litigation, the parties negotiated a mediated resolution of their dispute. The settlement was recorded in a deed of release (the deed) with Vero agreeing to pay the insured an additional $425,000. The deed identified that the settlement sum was paid in full and final settlement of 4 disputes between the parties including:

  1. The claim for indemnity for damage to the fog cannons and whether Vero’s liability was $500,000 or $200,000;
  2. The claim for storage costs up to 1 March 2017;
  3. The litigated proceedings; and
  4. Various disputes about the operation of the policy.

Following the settlement, the insured commenced third party proceedings against FP Shipping for the loss of the fog cannons and obtained judgment which included the full invoice value of the fog cannons ($738,615.40).

Vero subsequently sought to recoup its payments in the sum of $625,000 from the insured. The insured accepted that Vero was entitled to recoup $200,000 but disputed any entitlement of Vero to recoup a portion of the further $425,000 paid pursuant to the deed. Further proceedings were therefore commenced to resolve this issue.

The decision at trial

Notwithstanding that the deed provided for payment of a global sum to the insured, the primary judge concluded that it was possible to apportion the $425,000 between the 4 disputes. Two of the disputes (relating to storage costs and the cost of the litigated proceedings) could not possibly be characterised as falling within the scope of the indemnity in the policy for the loss of the fog cannons. The primary judge noted that the value of both these disputes had ascertainable upper limits which could be deducted from the global sum of $425,000, thereby enabling identification of $116,770.06 being the minimum conceivable amount paid by Vero to the insured pursuant to the indemnity. The primary judge reasoned that whilst the insured and Vero might well theoretically have intended some higher sum to be apportioned to the indemnity claims, no such intention could be inferred from the available material. As such, the court held that Vero was entitled to recoup $116,770.06 from the insured.

The Decision on appeal

Vero’s appeal and the insured’s cross appeal were dismissed. The Federal Court noted that the position adopted by each of the parties was too extreme. The real issue, which the primary judge correctly identified, was how the payment of $425,000 was to be treated given that it was a global sum said to be in full and final settlement of not only the insurance claim, but also storage costs, the proceedings and the dispute.

The exercise the primary judge undertook was to identify 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. The Federal Court held that this approach reflected the principles properly derived from the authorities as to the nature of the right of recoupment, adapted to the facts of the case. It said that any alternative approach to the calculation involved mere speculation and was contrary to the more persuasive inferences drawn by the primary judge.

Implications for you

This judgment serves as a reminder for insurers and their legal practitioners to, where possible, expressly identify how a settlement sum has been calculated in the resolution of an indemnity dispute. By identifying what sums have been paid pursuant to an indemnity and, for example, what sums have been paid for costs, the parties may avoid future disagreement in relation to subrogation and/or recoupment.

AAI Limited t/as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168

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