An insurance contract may contain an implied term requiring an insurer to make an election within a reasonable time.
Breach of this implied term may result in the insured having a right to damages. One of the issues on appeal in K & M Prodanovski Pty Ltd v Calliden Insurance Pty Ltd  NSWSCA 117 was whether the judge had erred in not holding that the insurer had breached an implied term by failing to make an election to repair within a reasonable time thereby making the insurer liable to pay an amount equal to the sum insured less the excess.
A detailed discussion of the factual background and decision at first instance can be found here. The insured, K&M Prodanovski brought an action against the insurer, Calliden regarding a Lamborghini which was substantially damaged in an accident in May 2009. The insured sought to recover the agreed value of the vehicle, less the excess paid. Issues were raised surrounding the validity of the insurer’s election under the policy and whether the election was made within a reasonable time after the accident.
The Court held that a letter dated 20 April 2011 constituted a valid election to repair in clear and unequivocal terms and noted that whilst it did not condone the delay in making an election following the accident, the delay was not material. The Court affirmed that the damage sustained to the Lamborghini was not “non-repairable damage” and thus the election to repair was a valid one. The Court commented that an insurer is required to comply with its statutory obligations of good faith and that it is good practice to act promptly when making such elections.
An issue on appeal was whether the primary judge had erred in not finding that in the absence of an election within a reasonable time, the insurer was liable to pay an amount equal to the sum insured, less the excess. The insured argued for this result by reference to the construction of the insurance policy. The insured also argued that it was not economical to repair the vehicle as the cost of repair was likely to exceed the agreed value such that the insured was entitled to damages for breach of the implied term in an amount equal to the agreed value. Additionally, the insured raised the issue of whether the primary judge had erred in not awarding the insured storage costs by way of damages for breach of contract.
The Court rejected the notion that in the absence of an election within a reasonable time, the policy required the insurer to pay the insured the agreed sum. The Court affirmed that liability turned upon the proper construction of the insuring clause which provided for an election between repairing, paying the costs of repair or making a cash settlement up to the limit of the sum insured. The Court commented when construing this clause that “the policy provides ‘cover’ or indemnity against ‘accidental’ damage, that ‘cash settlement’ is the amount assessed as being actual loss sustained by the insured. The appropriate measure of that loss will depend on the circumstances and may be the diminution in value of the property insured, the costs of repair or the cost of replacement or reinstatement.” The Court referred to Cape York Airlines v QBE (see our article) where, since the insurer had failed to validly elect to repair, the insurer was held liable to pay the agreed sum because, as a matter of fact, the damage to or costs of repairing the aircraft exceeded that amount.
In the alternative, the insured argued that it was entitled to recover the agreed value of the vehicle as it was likely that the total repair cost would exceed that value. This argument was rejected as the evidence adduced from the insured’s expert was insufficient to support this contention.
Further, the Court considered whether costs were recoverable for storage of the vehicle. It was noted that these costs would only be recoverable as damages for breach of an implied obligation for the insurer to elect to repair or pay the costs of repairing the vehicle or make a “cash settlement”. The Court acknowledged that if time is not fixed by the policy, the insurer must elect within a reasonable time.1 What constitutes ‘reasonable’ is a question of fact and will depend upon the particular circumstances of the case. The insured claimed damages for the costs of storing the vehicle from the time a reasonable period for making an election had elapsed and accordingly, the insurer had breached its implied obligation to do so. In order to recover these costs, the insured was required to establish that had the insurer elected to repair the vehicle or pay the costs of repair within a reasonable time, the insured would not have incurred these costs. The Court held that in all probability, even if an election had been made within a reasonable period, negotiations would have continued between the parties and the insured would have still commenced proceedings to recover under the policy, during which time the vehicle would have remained unrepaired, in storage.
The Court concluded the insurer had breached an implied obligation to elect within a reasonable time. Nevertheless, the insurer was not liable to pay the agreed value of the vehicle nor to pay damages for storage.