Section 57 of the Insurance Contracts Act 1984 (Cth) imposes an obligation on insurers to pay interest on unpaid claims where it is found that the insurer is liable to pay a claim and has not done so. Interest under this section is to be paid by the insurer to the insured from the day on which it becomes unreasonable for the insurer to withhold payment of a claim to the day on which payment is actually made. In other words, insurers are allowed a “reasonable period” to investigate and pay claims. Interest becomes payable if no claim payment is made on expiration of that reasonable period. What is considered a reasonable period depends on the facts of each case and is at the court’s discretion.

The rate at which section 57 interest is to be calculated is set out in Regulation 32 to the ICA. According to the regulation, interest is calculated on the formula of Y + 3%, where Y is the 10 year treasury bond rate at the end of the relevant half-financial year.

The rate of interest as at today’s date would therefore be 6%, calculated as follows:

Y = 10 year treasury bond rate as at 30 June 2012 which was 3.04% (rounded to the nearest lower quarter of 1% would be 3%)

+ 3%  

In the recent case of Summers v The National Mutual Life Association of Australasia (No 2) [2012] TASSC 9, the Tasmanian Supreme Court looked at when interest runs from, and in doing so held that, in the circumstances of the case before them, a reasonable time to investigate the total and permanent disability claim (TPD claim) was 3 months. After this time, the court found that it was unreasonable for the insurer to withhold benefits. The insurer was ordered to pay over $100,000 in interest pursuant to section 57 for the delay in insurance payments.

In that case, the plaintiff insured suffered shoulder and knee injuries and subsequently made a TPD claim in respect of those injuries. Benefits were paid by the insurer under the plaintiff’s insurance policy until 20 January 2000, when the Financial Industry Complaints Service (FICS) determined that no further benefits were payable to the insured under the policy. However, on 13 April 2000, and in spite of the FICS determination, the insurer received a progress claim from the insured in relation to his TPD claim. The insurer did not make any further payments and the insured commenced proceedings against the insurer as a result. The insured succeeded and the insurer was ordered to pay the claim. Not surprisingly, the insured claimed interest on the unpaid claim payments and the court was asked to determine the date on which interest began to accrue.

The court held that the insurer had been on notice from the date of receiving the insured’s progress claim that the insured had not accepted the FICS’s determination. At that point, the insurer should have taken steps to investigate the claim. The court found that a reasonable time to investigate the progress claim was 3 months. Therefore, interest was found to run from 13 July 2000, 3 months after the progress claim had been received by the insurer. The insurer was ordered to pay interest for the period 13 July 2000 to the date of payment. Interest was payable at the agreed rate of 8.5%.

Although the 3 month period was considered reasonable in light of the particular circumstances of the case, we note that a 3 month period has now been considered by numerous courts in the context of a variety of insurance claims to be a “reasonable period” within which to investigate and pay a claim. This decision and others like it highlight the importance of insurers investigating claims promptly in order to avoid paying large sums of interest pursuant to the ICA.