How long is “reasonable” for an insurer to consider a claim and withhold payment? Is an insured entitled to interest under the relevant Supreme Court Act? What is the rate of interest?

Two recent cases considering section 57

There have been two recent cases that have considered section 57 of the Insurance Contracts Act 1984 (Cth)(ICA). The cases are:

  • Khatchmanian, Sargis v Mutual Community General Insurance [2012] VCC 1123 (Khatchmanian) and
  • Summers v National Mutual Life Association of Australasia (No 2) [2012] TASSC 9 (Summers)

How long is “reasonable” for an insurer to consider a claim and withhold payment?

Section 57 entitles an insured to interest (in accordance with section 57(3), see below) for “the period from which it was unreasonable for the insurer to have withheld payment” of indemnity under the policy.

In Bankstown Football Club v CIC Insurance Ltd [Unreported, NSWSC, 17 December 1993] Justice Cole said at paragraph 4:

A reasonable period is to be given to the insurer to investigate and determine its position. But if it adopts an incorrect position in relation to its obligation to pay under the policy, that, in my view, does not mean that simply because that incorrect position is adopted on a bona fide basis, it becomes reasonable for the insurer to decline to pay the sums otherwise due. That seems to be the correct interpretation of s 57(2), particularly in circumstances of s 57(1) of the Act, where an insurer is liable to pay an amount under a contract of insurance.”

Further, at paragraph 7, he said:

“... In my assessment, the cases to which I have referred establish that the question of reasonableness is to be judged by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and to consider its position. The discretionary determination is to be made having regard to the particular circumstances of the case, including the probable issues which require investigation.”

Previous cases have shown that the period depends on the facts of each case and the particular circumstances. For example, in relation to:

  • an insurance claim concerning the disappearance of the insured’s mining plant and equipment in the Central African Republic, 4 months was considered reasonable to consider the claim (in the Supreme Court of Victoria in McDonnel Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc (No 2) [2009] VSC 49).
  • a general store fire insurance claim, within a period of 4 months from the fire was considered reasonable to consider the claim (in the Supreme Court of South Australia in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145).
  • a house fire insurance claim, 3 months from the time of receipt of everything needed to determine the claim was considered a reasonable amount of time to consider the claim (in the Supreme Court of South Australia in Melin v Mutual Community General Insurance Pty Ltd (1991) 6 ANZ Ins Cas 61-057).
  • a fire insurance claim involving suspected arson, 3 months was considered a reasonable amount of time to consider the claim (in the Supreme Court of Victoria in VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2) [1991] 2 VR 311).
  • a claim under a building, contents and business interruption insurance policy following a fire, until after criminal proceedings against the plaintiff (who was alleged to have caused the fire) was considered a reasonable amount of time to consider the claim (in the Supreme Court of New South Wales in Harrison v Zurich Australian Insurance Ltd (unreported, NSW Sup Ct, Rolfe J, 30 July 1996).
  • an insurance claim made following a fire, a short time after a coronial enquiry reported was considered a reasonable amount of time within which to consider the claim (in the Supreme Court of New South Wales in Jiwara Pty Ltd v MMI General Insurance Ltd (unreported Cohen J, 7 February 1997).
  • an insurance claim concerning damage to stock and plant of a business caused by water inundation, approximately 11 months was considered a reasonable amount of time to consider the claim (in the Federal Court in Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909).
  • to a life insurer covering members of a superannuation fund, on receipt of employer’s statement received 10 months after it was requested was considered a reasonable amount of time to consider the claim (in the Supreme Court of New South Wales in Diosdado Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857).

In Khatchmanian, in the County Court of Victoria, Judge Kennedy said that “Mr Seale [for the plaintiff] provided cases to the court to assist in the resolution of this issue. However, those cases appear to be distinguishable on their facts and are of limited assistance. Overall, having regard to all the complexities involved in this case, I consider that the defendant was entitled to have six months from the date of fire to complete its investigations.”

In Summers, in the Supreme Court of Tasmania, Justice Tennent allowed three months to consider and investigate a total and permanent disability claim such that it was unreasonable for the insurer to withhold benefits after that period. Justice Tennent said:

I accept the defendant was in the position of an insurer which had an obligation to determine its level of satisfaction about a particular claim, and that it should have had a reasonable time in which to do so. It seems to me that it should have reconsidered the plaintiff’s position once it received that progress claim because clearly the plaintiff had not accepted whatever the Service’s determination was. Allowing a reasonable time to investigate of, say, three months (while the time frame is arbitrary it was considered reasonable in Sayseng’s case), I conclude that at the expiration of that three month period from 13 April 2000, it was unreasonable for the defendant to withhold benefits.”

In summary, Courts will look at what is a reasonable period to consider a claim and consider its position and will take into account the type of case, the circumstances of the case and the probable issues which require investigation and whether requested documents have been produced.

Are Bona Fide beliefs relevant?

Of course, if an insurer wrongly denies a claim, even if there was a reasonable basis for doing so, it must pay interest from (at least) the time from which it was unreasonable for the insurer to wrongly deny the claim or withhold payment. So, even if an insurer believes it has good reason to deny a claim, that does not mean that it is not acting unreasonably in not paying the claim until the claim is resolved by a court. If the court rejects the insurer’s defence, the insurer’s belief in relation to the validity of the defence is irrelevant in determining whether it acted unreasonably (see Bankstown Football Club v CIC Insurance Ltd, above).

In Diosdado Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857, Justice Nicholas said at paragraph 7:

In my opinion it should now be accepted that the correct approach to be taken by the court on this question is that taken by Cole J in Bankstown Football Club. …. Under the Act the court is not required to evaluate and pronounce upon the opinion or decision-making process of the insurer. It is not relevant that the insurer acted bona fide in denying the claim, or when the judgment of the court established the insurer’s liability to pay it. In short, the award will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer’s investigation of the claim.”

Is an insured entitled to interest under the relevant Supreme Court Act?

Section 57 provides for the payment of interest on insurance claims and was intended to override state and territory provisions dealing with interest. Section 57(4) provides that the “section applies to the exclusion of any other law that would otherwise apply.” Further, section 57(5) provides that “in subsection (4): "law" means:

(a) a statutory law of the Commonwealth, a State or a Territory; or

(b) a rule of common law or equity.

Consequently, previous cases have considered when there is an inconsistency between section 57 and State legislation providing for the payment of interest (for example s 94 of the Supreme Court Act 1970 (NSW); s 58 of the Supreme Court Act 1986 (Vic); s 30C of the Supreme Court Act 1935 (SA); s 35(1)(b) of the Supreme Court Civil Procedure Act 1932 (Tas)).

In Khatchmanian, in the County Court of Victoria, Judge Kennedy said:

A question arose as to whether the plaintiff would also be entitled to interest under s.58 and/or s.59 of the Supreme Court Act 1986. However, pursuant to s.57(4), the section applies “to the exclusion of any other law that would otherwise apply”.

In the light of this provision, I consider that s.57 provides an exhaustive remedy for interest in the present circumstances, and both Counsel generally accepted this proposition.”

The question as to whether the sub-section is wide enough to exclude damages in the nature of interest appears to remain (i.e. the distinction between damages on unpaid moneys and damages for the loss of use of money: see the principle in Hungerfords v Walker (1989) 171 CLR 125).

What is the Rate of Interest?

Section 57(3) provides:

The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations.”

In summary, the rate at which interest is calculated pursuant to section 57 is prescribed by Regulation 32 of the Insurance Contracts Regulations 1985. After 27 August 1997, interest is calculated as the 10 year Treasury bond rate at the end of the relevant half-financial year, plus 3%.

Consequently, the rate of interest as at 30 June 2012 was (subject to Regulation 32(3)) 6.04%, and as at 7 December 2012 was 6.05%.

Summary

When does interest run?

Interest runs from the day as from which it was unreasonable for the insurer to have withheld payment. An insurer is entitled to a reasonable period of time to investigate a claim. When it becomes unreasonable for an insurer to withhold payment will obviously vary from case to case and will determined objectively taking into account the type of case, the circumstances of the case, the probable issues which require investigation and whether requested documents have been produced.

Bona Fide beliefs

Of course, if an insurer wrongly denies a claim, even if there was a reasonable basis for doing so, it must pay interest from (at least) the time it wrongly denies the claim. So, if the court rejects the insurer’s defence, the insurer’s belief in relation to the validity of the defence is irrelevant in determining whether it acted unreasonably.

Is an insured entitled to interest under the relevant Supreme Court Act?

Section 57 provides for the payment of interest on insurance claims and was intended to override state and territory provisions dealing with interest. The question as to whether the sub-section is wide enough to exclude damages in the nature of interest appears to remain.

The rate of interest

The rate at which interest is calculated is prescribed by Regulation 32 of the Insurance Contracts Regulations 1985. The rate of interest as at 30 June 2012 was 6.04%, and as at 7 December 2012 was 6.05%.