The NSW Supreme Court has found that an insured’s failure to seek the insurer’s prior written consent to incur costs in connection with legal proceedings did not preclude the insured from being indemnified for those costs under the policy.  However, the insured’s failure to comply with the terms of the policy influenced the Court’s decision to award costs on a party/party, rather than indemnity, basis.  Pandurevic v Southern Cross Constructions (NSW) Pty Ltd (No 3) [2012] NSWSC 1601 indicates that the insurer’s failure to draw the insured’s attention to certain critical policy terms during the claims process may make it difficult for the insurer to rely on those terms in later proceedings to justify a denial of indemnity.


Mr Pandurevic commenced personal injury proceedings against Southern Cross Constructions (NSW) Pty Ltd (Southern Cross) and Allmen Steel (Allmen). Southern Cross was insured through Mechanical and Construction Insurance Pty Limited (Mecon), an underwriting agent. Allmen was insured by QBE Insurance (Australia) Pty Ltd (QBE).

QBE denied indemnity. Allmen cross-claimed against Mecon, relying on a provision in Southern Cross’ policy that extended indemnity to “principals and sub-contractors in contract with them who are not otherwise insured”. In a related judgment, Hidden J found that the Mecon policy responded to Allmen’s claim.

Costs orders

Allmen sought an order requiring Mecon to pay Allmen’s costs of the proceedings on an indemnity basis, or alternatively, on a party/party basis. The Mecon policy provided indemnity for “legal charges, expenses and costs” incurred with Mecon’s “prior written permission”. Allmen had not sought Mecon’s written permission to incur costs in defending the plaintiff’s claim. Mecon argued that it was essential for Allmen to have obtained Mecon’s prior written consent to incur costs in connection with the proceedings, and Allmen’s failure to do so meant that it would not be entitled to be indemnified in respect of the claim.

Allmen argued that its failure to obtain Mecon’s written permission was an omission within the scope of section 54(1) of the Insurance Contracts Act 1984 (Cth). Section 54(1) provides:

…where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim…by reason of some act [including an omission] of the insured…the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

In support of its submission, Allmen referred to:

  • correspondence between Allmen and Mecon, which demonstrated that although Allmen had never sought Mecon’s written permission to incur the costs, Mecon had never referred to the requirement for Allmen to do so;
  • Allmen’s cross-claim against Mecon for indemnity under the policy, in which Allmen pleaded that it had made a claim under the policy and, among other things, sought indemnity in respect of any amount, including costs, which it might be ordered to pay to the plaintiff. Mecon’s defence to the cross-claim did not refer to the fact that Allmen had failed to obtain Mecon’s written consent before defending the proceedings; and
  • the fact that Mecon first raised the issue regarding Allmen’s failure to obtain Mecon’s prior written consent at the conclusion of the proceedings, in its motion relating to costs.

In finding that section 54(1) was applicable, Hidden J observed (at [21]):

…this case presents the very sort of circumstances to which the section is directed. From the outset of its dealings with Mecon, Allmen contended that it was entitled to indemnity under the Mecon policy, obviously in relation to its costs as well as any damages which might be awarded against it. Throughout the proceedings thereafter Mecon did not raise its omission to obtain written consent. It is entirely appropriate that Allmen should be relieved of the consequences of that omission by the application of s 54…

Hidden J also noted that Mecon had not identified any prejudice suffered as a result of Allmen’s omission.

Mecon was ordered to pay Allmen’s costs of its cross-claims against QBE and Southern Cross. Hidden J found that it was only necessary for Allmen to commence the cross-claims because of Mecon’s erroneous decision to refuse to indemnify Allmen. However, in circumstances where Allmen was not “entirely without fault”, Hidden J refused to award costs on an indemnity basis, as his Honour was not persuaded that the case had special or unusual features such as might justify an award of costs on an indemnity basis.

Key points

This decision indicates that:

  • insureds should carefully review policy terms and conditions before incurring legal costs for which they wish to be indemnified, to ensure that they comply with the policy terms such as seeking the insurer’s consent to incur costs before taking any steps in connection with potential or actual proceedings; and
  • during the claims process, insurers should draw an insured’s attention to any key policy terms upon which they will likely rely at an early stage. A failure to bring a matter to an insured’s attention may lead a Court to find that the insurer is precluded from denying a claim, and/or that the insurer has not suffered any prejudice in relation to the failure or omission.