Background

Mattress Innovations Pty Ltd (Mattress Innovations) was the owner of commercial premises insured  by Suncorp Metway Insurance Limited (Suncorp).  The insured property was leased by Mattress Innovations to a third party, which  used the insured premises as a mattress and furniture warehouse.

The policy issued by Suncorp to Mattress Innovations  covered total loss of the premises, contents, debris removal as well as  business interruption losses. There was cover up to a total of $2.1m.

A General Condition of the policy, clause 16, related  to payments of claims. Clause 16 provided that Suncorp would calculate claims  inclusive of Goods and Services Tax (GST)  and would deduct any entitlement  of  Mattress Innovations to input tax credits (ITC).

The Claim

On 25 April 2007 the insured premises were totally destroyed by fire, and the total amount of  Mattress Innovations loss was greater than the total of the sums insured. Suncorp agreed to indemnify Mattress Innovations for the loss, electing under the policy to pay the claim over reinstatement.

In applying clause 16 of the policy, Suncorp reduced payment of the full policy limit of $2.1m by 1/11th on account of an ITC Mattress Innovations could, or would be, entitled to claim.

The Proceedings

Mattress Innovations challenged Suncorp’s construction of clause 16, arguing that any 1/11th deduction for ITC should have been applied first when assessing the value of the claim, and if the claim’s calculated value (being the remaining 10/11ths) was above the total of the sums insured then Mattress Innovations was entitled to the total of the sum insured.

Suncorp denied that it had miscalculated the ITC deduction, submitting that in claims where the insured’s loss exceeded the sums insured, the first step would be to reduce the claim value to the insured’s maximum liability (the total sums insured) and then apply the 1/11th ITC deduction.

In the decision at first instance, Justice Dalton described clause 16 as “…infelicitously drafted. It is marked by incorrect use of legal terms …poor word choice, and a lack of conceptual clarity as a matter of ordinary English.”

Nevertheless, Justice Dalton agreed with Suncorp that if the calculation method offered by Mattress Innovations were applied, it was possible that an underinsured party could be “in a better financial position, relatively speaking, than an insured whose claim fell within policy limits.”

Mattress Innovations appealed this decision.

The Appeal Judgment

The Court of Appeal set aside the judgment of Justice Dalton and found that Mattress Innovations’ construction of clause 16 and how it should be applied was correct.

Justice Fraser, with whom Justices Holmes and North agreed, found that Suncorp’s ITC deduction from its maximum liability to Mattress Innovations could only ever result in Mattress Innovations receiving less than the $2.1m it contracted to be the total sums insured:

“Even on the insurer’s construction, there may be one situation in which it will be obliged to pay the whole of the Sum Insured without the benefit of any input tax credit namely, in the case of an insured which is not entitled to claim any input tax credits.

“On the other hand, the construction adopted by the trial judge produces the result that the limit of the insurer’s liability to satisfy its obligations under the policy by payment to the insured is not the Sum Insured stated in the certificate of insurance in simple and unqualified terms, but is instead 10/11ths of that amount. That is such a surprising result as to suggest that the construction which produces it could not reflect the intention of reasonable contracting parties.

Implications

In this instance both the Supreme Court and the Court of Appeal considered the public policy impact of potentially rewarding underinsured parties, against the commercial bargain entered into by the insured and the insurer.

Although these considerations took place in the context of taxation benefits, the contractual interpretation process undertaken by the Court demonstrates that great care needs to be taken when drafting policies; if the wording is unclear and lacks certainty, it will be of little assistance to either party despite the monetary repercussions that may flow.