Property Damage: Reinstatement Costs and Consequential Losses resulting from Insurer’s wrongful failure to indemnify

01 Nov 2021

In the recent of case of Worth v HDI Global Specialty SE [2021] NSWCA 185, the New South Wales Court of Appeal considered whether an insured was entitled to the costs of reinstatement of her home and consequential losses for business interruption in circumstances where an insurer wrongfully failed to indemnify her.  

The Facts

Ms Worth lived in a two-story home with her son, from which she also operated a childcare business on the ground floor. On the morning of 1 September 2015, after spending the previous night caring for her parents at their home, she returned to her home for a period of approximately 30 minutes at which time she turned on a cooktop in the kitchen to boil an egg, before leaving her home to visit her ill father who had since been admitted to the intensive care unit at hospital.

Soon after she left her home to visit her father, the insured home was destroyed by fire, which appears to have had two points of ignition: an undetermined source in the living room of the home; and the kitchen of the home, when a ‘200 page game guide book’ caught alight by being exposed to the cooktop element.

Ms Worth held a Home Based Business Property Insurance Policy (Policy) and made a claim for indemnity. On 16 December 2015, Ms Worth and her Insurer, Interhannover, entered into a Deed of Release in which her Insurer granted a conditional indemnity to Ms Worth, on the basis that she repay any moneys paid to her in the event of a finding by a ‘police force’ that she had deliberately caused the fire (Deed). In accordance with the conditional indemnity, the Insurer made preliminary payments to Ms Worth totalling approximately $98,000.

On 23 September 2016, Ms Worth was formally advised that her claim had been denied on the basis that she had deliberately lit the fire.  

In November 2016, Ms Worth commenced proceedings against her Insurer seeking the following relief:

1. the cost of reinstating her home;
2. twelve months of business interruption losses;
3. damages for the consequential loss of her business revenue (after the expiry of the 12 months covered in her policy and continuing);
4. damages for ‘personal inconvenience’ based on her Insurer’s failure to meet her claim; and on doing, so breaching its obligation to act with utmost good faith under section 14 of the Insurance Contracts Act 1984 (Cth).

The claims for relief sought by Ms Worth were based on the Insurer’s breach of contract based on the terms of the Deed, rather than the terms of the Policy.

Ruling at First Instance and Appeal

On 17 April 2020, the primary judge (Parker J) held that Ms Worth deliberately lit the fires and judgment was entered in favour of her Insurer on its cross claim for the sum of $194,5050 plus interest.

Ms Worth appealed the decision on the basis that the primary judge erred in finding she had deliberately lit the fires in the kitchen and living room, and ultimately the relief to which she was entitled.

Ruling on Appeal

Liability

The NSW Court of Appeal (Mcfarlan and McCallum JJA, with Meagher JA dissenting) held that the primary judge erred in concluding the fire had been deliberately lit as, in short:

1. the hypothesis relied on by the Insurer rested on ‘impermissible speculation’ and the primary judge failed to exclude the hypothesis made by Ms Worth’s expert that the fire in the kitchen commenced without human intervention as a reasonable possibility; and
2. the evidence in relation to how the fire ignited in the living room did not allow any reliable inference to be drawn about the matters.

Judgment was awarded to Ms Worth for the sum of $464,384 together with interest and costs.

Consideration of the Relief Ms Worth was entitled to on Appeal

Indemnity Payable for Property Damage

Pursuant to the Policy, Ms Worth was entitled to either $495 000 on a reinstatement basis and $400,000 on an Indemnity basis with respect to her destroyed home. The question before the Court was whether Ms Worth was able to claim the reinstatement value of her property.

As at the time that judgment was delivered on appeal, it had been over 5 years since the fire had destroyed Ms Worth’s home and she had still not commenced the reinstatement of her property.

Ms Worth’s Insurer relied on the following provision in the Policy, (being the basis of settlement for reinstatement claims) (Proviso), which stated:

the work of rebuilding, replacing, repairing or restoring as the case may be, must be commenced and carried out with reasonable despatch, failing which, We will not pay more than the cost of replacement, repair or rebuilding on an indemnity basis. [emphasis added]

Ms Worth alleged her failure to commence reinstatement was reasonable having regard to the Insurer’s refusal to grant indemnity and the that the Insurer was required to pay the reinstatement value of her house, pursuant to a promise it made in the Deed, the terms of which superseded the terms of the Policy. Ms Worth further alleged that the Insurer’s reliance on the Proviso was inconsistent with its duty of utmost good faith and contrary to the ICA.

The Court held that the promise in the Deed was to make payment “in accordance with the Policy”, (which included the Proviso). Further there was nothing to suggest that the Insurer’s delay in granting an indemnity to Ms Worth was prompted by a desire to prevent her from commencing reinstatement so as to enliven the Proviso, nor, in light of the outcome of the dispute in the first instance, can it be seriously maintained that the insurer’s refusal of indemnity was so unreasonable as to be itself a breach of its obligation of utmost good faith.

Ms Worth was awarded the sum of $400,000 by way of indemnity for property damage, together with interest calculated in accordance with the ICA on that amount from 1 January 2016 to 26 August 2021.

Claims for business interruption loss and inconvenience and distress

Whilst Ms Worth was entitled to 12 months of business interruption loss under the Policy, she also sought to recover damages for business interruption losses for the period thereafter until 9 months after the delivery of judgment (during which time she alleged she was unable to operate her childcare business). Ms Worth alleged the additional business interruption losses arose from her Insurer’s breach of the Deed, in which her Insurer had promised to indemnify her.

The Court of Appeal ultimately held that the claim for consequential losses was not maintainable under the policy because it was essentially a claim against her Insurer to ‘damages for the late payment of damages’ and the Deed did not substitute any promise to pay money for Ms Worth’s claims to unliquidated damages for breach of the insurer’s obligation under the policy.

The Court used the similar reasoning to determine Ms Worth was not entitled to damages for inconvenience and distress caused by her Insurers failure to indemnify.

Key Takeaways

• Insurers may not necessarily be held liable for consequential losses caused by delays in granting indemnity in circumstances where they have wrongfully denied indemnity and legal proceedings are on foot.
• When claiming losses for property damage, it is essential that insureds properly consider their obligations under the policy of insurance and act with due despatch where necessary, as the terms of the policy may prevail, notwithstanding an insurer’s wrongful failure to indemnify.

The content of this article is intended to provide a general guide to the subject matter. Specific advice should be sought about your specific circumstances.