Reported Decision : (2002) 12 ANZ Insurance Cases 61-542 New South Wales Supreme Court CITATION : Max Hams & Anor v CGU Insurance Limited [2002] NSWSC 843 FILE NUMBER(S) : SC 50022/01 HEARING DATE(S) : 27/8/02 JUDGMENT DATE : 27 August 2002 Max Hams (First Plaintiff) PARTIES : Judith Hams (Second Plaintiff) CGU Insurance Limited JUDGMENT OF : Einstein J COUNSEL : Mr M Cashion SC (Plaintiffs) Mr P Taylor SC (Defendant) SOLICITORS : Maurice Blackburn Cashman (Plaintiffs) Deacons (Defendant) CATCHWORDS : Interest - S.57 Insurance Contracts Act, 1984 - Date from which it was unreasonable for insurer to have withheld payment on claim - discretionary judgment LEGISLATION CITED : Insurance Contracts Act 1984 Bankstown Football Club Limited v CIC Insurance Limited (unreported NSW Supreme Court, Cole J, 17 December 1993) CIC Insurance Limited v Bankstown Football Club Ltd (1997) 187 CLR 384 Harrison v Zurich Australian Insurance Limited (unreported, NSWSC 30 July 1996, BC 9603264) CASES CITED : Jiwira Pty Limited v MMI General Insurance Limited (unreported, NSWSC, 7 February 1997, BC 9700107) Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 Settlement Wine Company Pty Limited v National and General Insurance Co Limited (1994) 8 ANZ Ins Cas 61-209 Swanson v Guild Insurance Co Limited (unreported, QSC, 17 August 1990) Zurich Australia Insurance Limited v Fruhauf Finance Corporation Pty Limited (1993) 7 ANZ Ins Cas 61-177 DECISION : Interest under s 57 Insurance Contracts Act to be calculated from 21 June 2000. Orders made in terms of the short minutes IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Tuesday 27 August 2002 ex tempore Revised 17 September 2002 50022/01 MAX HAMS & ANOR v CGU INSURANCE LIMITED JUDGMENT 1 Following the delivery of the judgments already given in disparate issues, two matters remain for determination. The first concerns the plaintiff's claim to interest. Section 57 of the Insurance Contracts Act 1984 appears to entitle a plaintiff to interest on the amount of a claim. The entitlement is only to interest for "the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount" of the claim. It follows, I accept, that the entitlement requires the exercise of a discretionary judgment as to when, if at all, refusal to pay the claim was "unreasonable". 2 The respective positions taken by the parties in terms of the claims to interest were that the plaintiffs assert an entitlement to interest under s 57 calculated from 21 June 2000. The proposition for which the plaintiff contends is that they accept that the defendant was entitled to a reasonable period within which to investigate the claim. However, in early June 2000 the plaintiff's solicitors, it is common ground, sent a letter to the defendant's dispute resolution officer, enclosing a copy of the report of Mr McConnell dated 30 May 2000. It is common ground that on 21 June 2000 the defendant advised the plaintiffs that it had rejected their claim. 3 The plaintiff's approach to the issue is to accept that thereafter the dispute became litigious, evidence was led and the Court determined the matter. In the plaintiff's submission that process cannot properly be categorised as part of the reasonable investigation process. 4 The plaintiff's submission is that the defendant had already made the decision to reject the claim and had communicated it by its letter dated 21 June 2000. The plaintiff cites Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390 in support of the proposition that, if an insurer denies liability, the assumption is that its investigations are complete and that a reasonable time within which to make enquiries has elapsed, with the result that interest will start to run from that date. 5 Further the plaintiff submits that the fact that after 21 June 2000 there may have been a bona fide dispute in relation to the claim does not assist the defendant. As the plaintiff points out, in Bankstown Football Club Limited v CIC Insurance Limited (unreported, NSWSC, Cole J, 17 December 1993), the Court rejected a submission that an insurer is not acting unreasonably if it declines to make payment until a bona fide dispute is resolved by a Court. Justice Cole put the matter as follows at pp 3 - 4: "In my view s 57 is directed to a determination of the point of time at which empirically it can be stated that it was unreasonable to decline to make a payment. The decision is not to be determined simply by a determination of whether or not there was a bona fide dispute regarding the entitlement to payment. It is rather to be determined by a finding as to whether or not there was liability. If there was liability found and the insurer to pay, then the presumption must be that the insurer ought be deemed to know of that obligation as ultimately determined, even though it may bona fide have held a different view at all times prior to determination, at least at the first instance level, in relation to the question of liability. A reasonable period is to be given to the insurer to investigate and determine its position. But if it adopts an incorrect position in relation to its obligation to pay under the policy, that, in my view, does not mean that simply because that incorrect position is adopted on a bona fide basis, it becomes reasonable for the insurer to decline to pay the sums otherwise due. That seems to be the correct interpretation of s 57(2), particularly in circumstances of s 57(1) of the Act, where an insurer is liable to pay a person an amount under a contract of insurance." 6 On appeal to the High Court (CIC Insurance Limited v Bankstown Football Club Ltd) (1997) 187 CLR 384 at 393, 410 - 411, the High Court noted those observations without comment. 7 On the defendant's side of the bar table the submission is advanced that a number of matters tend to preclude a finding that it was unreasonable for CGU to have withheld payment of the claim as from late May 2000 and, I presume, in terms of the plaintiff's now contention that the appropriate date was 21 June 2000. Those facts are said to include the following: · Mr McConnell's 30 May 2000 report being an insubstantial, so it is submitted, and indeed superficial, so it is submitted, analysis, which consisted of no more than a page and a half of what are put as generalities. (The plaintiffs submit that on analysis it will be seen from this report that Mr McConnell made no attempt to investigate the possibility of inundation of the Koralta Homestead from Treloar Creek) · Aside from the question of the cause of inundation it was not until, so it is submitted, Mr Sinclair's affidavit of 24 May 2001, that the plaintiffs quantified their claim. · It was not until about 21 June 2000 that the parties agreed on the amount of the claim. 8 The defendant submits that it is most significant, furthermore, that the question of inundation of the Koralta Depression by water from Treloar Creek remained highly contentious - even after the "agreement" on the claim amount. The submission is that in considering whether or not the defendant acted unreasonably in withholding payment until that matter had been judicially determined, it is significant that: · Mr Hams was interviewed by Dr Markar immediately after the inundation in March 2000, and indicated to Dr Markar that he thought the water had come from sources including Treloar Creek. · CGU's refusal of the claim had been based upon the proposition that external floodwater, including water from Treloar Creek, had been at least partly, responsible for the inundation. This was made clear in the original 14 May 2000 letter of refusal and in the subsequent confirmation letter of 21 June 2000. · Ultimately the resolution of the claim depended upon very close timing in relation to the arrival of the water from Treloar Creek and the actual inundation of the homestead. Indeed the timing issue was ultimately found to be so "nice" that it involved only a matter of hours and the plaintiff's claim actually failed in relation to some of the buildings that were the subject of the claim. 9 The defendant then submits that although the claim was ultimately upheld on the basis of the timing issue, the claim had been presented by the plaintiffs on a wider basis - namely a denial that Treloar Creek water had entered the depression around the homestead. The plaintiffs point out that even at the time of Mr McConnell's second report of 25 May 2001, he had not really investigated the possibility of inundation from Treloar Creek, and that Mr McConnell did not concede the arrival of water from Treloar Creek until his report of 18 September 2001 - when his review of the satellite image acknowledged that the concession had to be made. 10 The plaintiffs then make the point that even in Mr Hams' affidavit of 9 September 2001, he endeavoured to emphasise that the overland flow path from Treloar Creek through Cane Grass Swamp had not operated and to suggest that there was no noticeable turbid water (from Treloar Creek) within the Koralta Depression until about 9am on Tuesday 22 February 2000. 11 The defendant then submits that it follows that despite CGU having made clear from its first refusal of the claim in May 2000, its contention that the inundation of the property had been at least partly caused by external water (and in particular water from Treloar Creek), the plaintiffs continued to present their claim, at least until September 2001, on the basis that there had been no inundation from Treloar Creek. 12 The defendants point out that Mr Hams' suggestion or assertion that there was no relevant "turbid water" until 9am on Tuesday 22 February 2000 required careful investigation in the light of: · the satellite image; · Mr McConnell's concession that the Treloar Creek overflows had reached the Koralta Depression "by a shorter route than that conceded in my previous analysis". · Mr McConnell's revised estimate that the Treloar Creek overflow in the vicinity of the Koralta buildings "would not have been until around 9pm on the Monday." · Mr McConnell's concession that the arrival of Treloar Creek overflows "would provide a plausible explanation" for the surge of water observed by the Hams early on Monday 21 February 2000 "if the timing of its arrival was consistent." 13 The defendant submits that CGU was clearly entitled to a reasonable period in which to investigate a claim that was presented and pursued in this way, and in support of this proposition cite Zurich Australia Insurance Limited v Fruhauf Finance Corporation Pty Limited (1993) 7 ANZ Insurance Cases 61-177 at 78013. 14 The defendant then submits that in the circumstances of the present claim that entitlement precludes regarding it as unreasonable to have withheld the payment of the claim as from late May 2000. No doubt they suggest the same in relation to the date 21 June 2000. 15 The defendant admits that it is equally clear that CGU was entitled to a further period in which to carefully investigate the claim after the receipt of Mr McConnell's further affidavit of 18 September 2001. That report, of course, made it clear that the fate of the claim was likely to turn upon a very "nice" question of timing in relation to the flooding of the homestead, the possible arrival of water from Treloar Creek and the rate of possible inundation of the Koralta Depression from local run-off. 16 The defendant submits that the conditional concession made by Mr McConnell both justified and required further investigation by CGU to determine whether the surge reported by Mr and Mrs Hams on the Monday morning was or was not consistent with the arrival of floodwater from Treloar Creek. CGU did not obtain the results of that further detailed investigation by Dr Markar and Dr Porter until their reports of 1 February and 6 February 2001. 17 The defendant submits that it is important to bear in mind that the timing issue in relation to the arrival of the Treloar Creek water was not the only matter in significant contest at the hearing. CGU, as is clear, also relied on the "dry lake" defence - a defence that had a reasonably arguable basis, it is put, on the evidence. 18 The defendant then submits that the analysis of those issues was, as the hearing showed, complicated. Furthermore the accuracy of the analysis particularly in relation to the estimation of the timing of inundation from the local run-off was critically dependent upon the survey information provided by Mr McConnell and the analytical assumptions which he had made applying it to the dimensions of the Koralta Depression and the sequence in which it is filled. 19 The submission is that the fact that the plaintiff did not provide the totality of Mr McConnell's analysis until the hearing itself, has a relevance on interest. The defendant points out that Mr McConnell conceded that his information and assumptions about the stage/storage relationship were important and agreed that without this information, it would have been unsafe to draw relevant conclusions from parts of Dr Markar's reports. 20 The defendant further refers to Ms Anderson's affidavit of March 2002 dealing with the plaintiff's delay in providing the McConnell information. 21 The defendant submits that the question of reasonableness is not restricted by reference merely to the period of investigation but is a question of fact in each case, Settlement Wine Company Pty Limited v National and General Insurance Co Limited (1994) 8 ANZ Ins Cas 61-209 at 75318. 22 The defendant then treats with the question of the authorities on the subject and refers to judicial comments to the effect that the existence of a bona fide dispute about the claim may not suffice to characterise refusal of the claim payment as reasonable: CIC Insurance v Bankstown Football Club (1997) 187 CLR 384 at 393 and 410-411. The submission is that comments of these kinds cannot operate as a gloss on the statutory formula and that the question is essentially one of fact in each case. The consequential submission by the defendant is that the critical factual question is whether the conduct of the insurer was "unreasonable" in all of circumstances. The submission is that by framing the criterion as one of reasonableness, the statutory discretion must be taken to have implicitly recognised that the mere judicial vindication of a claim does not establish a claimant's automatic right to interest. The submission is that, to the contrary, the statutory provision must be taken to imply that in appropriate circumstances a valid claim will not, or may not, justify an award of interest. 23 The defendant's submission is that consistently with that view, the cases acknowledge that where the circumstances of the claim are not only contentious but finely balanced as they were here, an insurer may justifiably and reasonably withhold payment until judicial determination of relevant matters: · Harrison v Zurich Australian Insurance Limited, unreported, NSWSC, 30 July 1996 per Rolfe J at p 20 (delay in payment of claim until a reasonable time after the completion of a coronial enquiry); · Jiwira Pty Limited v MMI General Insurance Limited, unreported, NSWSC, 7 February 1997, Cohen J at p 20, (delay in payment of claim until the completion of a coronial enquiry); · Swanson v Guild Insurance Co Limited, unreported, QSC, 17 August 1990, Derrington J at pp 35-36, (No interest where arson claim highly contentious and insurer's suspicions justifiable having regard to the insured's conduct). 24 The defendant's submission at the end of the day is that in the present case the critical question was the cause of the inundation of the homestead. The submission is that the determination of the claim by CGU was hampered by the plaintiff's persistence in presenting the claim as one where Treloar water had not arrived. The submission is that Mr McConnell's evidence clearly established that he made no attempt to investigate that possibility until after being confronted with the satellite image. The submission is that his delayed concession required further investigation, and in particular close examination of the details of the local catchment and the observed flooding during Monday 21 February 2001. The submission is that that detailed examination was not concluded until February 2002, and even then it was hampered by the fact that Mr McConnell had not provided Dr Markar and Dr Porter with information on which he had relied in his earlier reports. Dealing with the Issue 25 As both counsel have accepted in the course of their submissions, as I have understood it, the matter is one which is essentially an exercise of a discretionary judgment. The critical issue is what was the date as from which it may be seen in the circumstances of the particular proceedings heard before the Court to have been unreasonable for the insurer to have withheld payment of the amount. 26 In my view the defendant's submission placing the degree of significance which is placed upon the suggestion that the defendant's conduct must be tested in terms of reasonableness by the plaintiff's approach and presentation of the claim is not one of substance. It is unnecessary to repeat, for very obvious reasons, the matters to be found in the principal reserved judgment. The doctrine of proximate cause and the extremely difficult factual issues arising in relation to the flooding of the subject property, the very large volume of evidence in relation to the topographic layout of the district, satellite imagery and the general evidence in relation to the area, makes it plain that in a case of the type the subject of the principal judgment, the insurer, in making a decision to reject a claim, draws a line in the sand. 27 In my view the approach taken by Cole J in Bankstown Football Club Limited v CIC Insurance Limited is apposite in relation to treating with the s 57 issue in this present case. Certainly a reasonable period must be given to the insurer to investigate and determine its position. It seems to me that for the insurer in this case, and in these circumstances, to claim that its position ultimately found to have been incorrect, must be measured by the approach taken by this insured in making this claim, does not properly reflect the correct approach where the s 57 criterion has to be determined. If, as here, the insurer adopts an incorrect position in relation to its obligation to pay under the policy, that does not mean that simply because that position was adopted on a bona fide basis, it became reasonable for the insurer to decline to pay the sums otherwise due. I do not accept that there is substance in the proposition that on the facts here, the insurer can be said to have justifiably and reasonably withheld payment until judicial determination of the issue. 28 It seems to me that the cases cited by Mr Taylor SC each deal with particular types of circumstances where, as with completion of a coronial enquiry and as with questions of an insured's conduct, one-off type circumstances arose justifying that approach. 29 This was a claim which the defendant must be taken to have investigated prior to rejecting the claim. 30 This was a case in which that rejection of the claim was shown, albeit after a contested and complex final hearing. 31 For those reasons, in my view, the interest under s 57 should be calculated from 21 June 2000, that being in my judgment, the date as from which it may be said to have been unreasonable for the defendant to have withheld payment of the amount of the claim. 32 In proceedings No 50022/01 I make orders in terms of paragraphs 1, 2, 3 and 4 of the short minutes of order which I initial and date 27 August 2002. I certify that paragraphs 1 - 32 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 27 August 2002 ex tempore and revised 17 September 2002 ___________________ Susan Piggott Associate 17 September 2002 Last Modified: 10/01/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.