How often have you come across section 18 of the Insurance Act 1902 (NSW)? Regularly overlooked, the section allows the court to excuse breaches of an insurance contract by an insured where the insurer was not prejudiced by the breach. This was a case where an insured successfully argued that its breach should be excused because it had not prejudiced the insurer. The case also raised complex issues regarding the insurer’s conduct following notification of the claim, and the insured’s conduct in settling the claim without the insurer’s authority.
An insurer refused to take over a claim by the insured’s former employee, and refused to indemnify the insured, because of late notification of the claim. The insurer later failed to respond to the insured when asked about settlement negotiations. The insured settled the claim and then sought to recover the settlement amount from the insurer. The insurer argued that the insured had breached the insurance contract by not advising it of the claim as soon as practicable, and by settling the claim without the insurer’s authority.
The NSW Court of Appeal, hearing the matter on appeal from the Dust Diseases Tribunal, agreed with the Tribunal’s decision under s 18 to excuse the insured’s late notification. The Court rejected the insurer’s argument that it suffered prejudice by being denied the opportunity to cross-examine the former employee. As the window of opportunity in which to obtain any cogent evidence from the former employee could have been only small and his answers in the previous cross-examination were ‘by no means expansive’, this opportunity was ‘of no more than speculative value’ and its loss did not result in anything more than theoretical prejudice. However, the Court also concluded that, with a policy of this kind, the insurer had no legal obligation to take over conduct of proceedings once notified of the claim, and was not required to confirm its agreement to indemnify until its liability to do so had been established. The Court sent the matter back to the Tribunal to consider whether, in the circumstances, the insured’s failure to obtain the insurer’s authority to settle was a breach of the contract and, if so, whether it could be excused under s 18. The Tribunal must also consider whether, in its opinion, the insurer’s conduct breached its obligation of utmost good faith.
You can access the reasons for judgment here.