The New South Wales Supreme Court recently held that an insurer who has made payment under an insurance policy is not entitled to claim interest from an insured in relation to that payment unless and until the insured receives full payment from the tortfeasor in respect of the damage suffered by the insured. The insured, however, is not entitled to claim interest from the tortfeasor in respect of loss that has been paid out under an insurance policy.

The plaintiffs were the owners of a property situated at Stanwell Tops. On 25 December 2001, a fire caused by the defendant swept across the plaintiffs’ property causing damage. Liability was not in issue. The majority of the plaintiffs’ property that was damaged in the fire was uninsured. The plaintiffs made a claim against the defendant for the full amount of the loss suffered, which included both insured an uninsured losses.

The plaintiffs held two policies of insurance with different insurers (the insurers) covering home contents and home building and made claims under both those policies. In January 2002, the plaintiffs were paid $66,250 and $259,019 by the insurers representing the home contents and the home building sums respectively, under each policy of insurance, totalling $325,269 (collectively the Principal Insured Loss).

The insurers made claims against the defendant and these claims were settled in or about August 2007. The plaintiffs were notified of this settlement on 28 August 2007.

The plaintiffs’ claim against the defendant was resolved by correspondence exchanged between 12 December 2008 and 3 February 2009. The defendant stated that it was entitled to deduct from the settlement sum, amounts representing “the value of subrogation for the insured losses”. The plaintiffs did not dispute that issue. In finalising its obligation to make payments in accordance with the settlement, the defendant wrote to the plaintiffs on 11 February 2009 indicating that it would be making a deduction of $542,955.27, which it stated represented the value of subrogation. By letter dated 20 February 2009, the defendant stated that the value of subrogation included the Principal Insured Loss paid by the insurers, plus interest on the Principal Insured Loss from January 2002 (the date the plaintiffs received payment in relation to the insured losses) to December 2008 (being the time when the plaintiffs settled their claim against the defendant). The defendant relied upon the decisions of Lord Napier v Hunter [1993] and H Cousins & Co Ltd v D&C Carriers Ltd [1971] in support of its claim to deduct from the settlement the Principal Insured Loss plus interest. Of significance, this letter stated:

The right of subrogation entitles a defendant to recover the amount due to it by subrogation prior to payment to the plaintiffs: Lord Napier v Hunter…

The fundamental basis of the doctrine of subrogation is that the assured be fully indemnified and never more than fully indemnified. In this case, given the plaintiffs have enjoyed the use and benefit of the monies paid to them by [the Insurers], it would be unconscionable for them to also retain interest on monies so paid. This is because they have not suffered a loss in the sum for the intervening period…

That interest is recoverable by subrogation is settled: H Cousins & Co Ltd v D&C Carriers Ltd…

The plaintiffs filed a motion seeking a declaration that the defendant was only entitled to deduct from the settlement monies the Principal Insured Loss, and was not entitled to deduct interest on that amount.

The court held that the defendant was only entitled to deduct the Principal Insured Loss paid to the insurers. The court stated that when the insurers paid the Principal Insured Loss to the plaintiffs, the insurers were subrogated to the rights of the plaintiffs against the defendant. When the defendant settled the claims by the insurers, it acquired the rights of the insurers and was entitled to deduct from any settlement the Principal Insured Loss, either under the principles of subrogation or the principle preventing double compensation.

The court held that the contents of the defendant’s letter of 20 February 2009 (extracted above) were incorrect on the basis that the plaintiffs only had part of their loss met when they received payment of the Principal Insured Loss. The balance of their loss continued until the settlement with the defendant was reached. Therefore, the plaintiffs were not entitled to claim interest on the insured losses, however that did not equate to an entitlement by the defendant to deduct interest on the Principal Insured Loss.

Further, as a general principal, the court held that an insurer (or in this instance the defendant, having acquired the insurers’ subrogation rights) has no right to claim interest from an insured unless and until the insured receives full payment from the tortfeasor in respect of the damage suffered. In this instance, this did not occur until February 2009 and accordingly, the insurers (and therefore the defendant) were not entitled to claim interest from the plaintiffs.

In circumstances where a claimant has suffered both insured and uninsured losses, a defendant should carefully consider the claimant’s entitlement to interest.

McWilliam & Anor v Integral Energy [2009] NSWSC 289 (24 April 2009)