Do you know who gets paid and in what order in circumstances where you have settled a matter and there are insured and uninsured losses?
Section 67 of the Insurance Contracts Act 1984 (Cth) favours the party that funds a recovery action, whether it be the insured taking the action or the insurer exercising a right of subrogation.
For policies entered after 2013, the following method of distribution will apply at settlement for matters where the insurer has funded the recovery action:
- The insurer gets, at first instance, all of their legal and administrative costs paid. This includes expert fees, legal fees, filing fees etc.
- From what is left of the settlement, the insurer recovers their insured losses.
- Once the insurer has been reimbursed in full, then the insured is entitled to its uninsured losses.
- Any surplus is retained by the insurer.
(Note a different method of distribution will apply to policies of insurance that were entered into before 2013 and have not been renewed since).
For example, you have issued subrogated proceedings for $100,000, interest and legal costs, which is broken up as follows:
| · Insured loss | $75,000 |
| · Uninured loss | $25,000 |
| · Subtotal claim | $100,000 |
| · Legal costs | $20,000 |
| · Total | $120,000 |
During the course of the proceeding, you accept an all-inclusive offer of $80,000.
In accordance with section 67 of the Act, the funds will be distributed as follows:
- $20,000 legal costs paid to the insurer
- $60,000 insured losses paid to insurer
Because there were no sums left over after costs and the insured losses were paid, the insured receives no payment.
Section 67 might be impractical in matters where the uninsured losses significantly dwarf the insured losses, and it can be contracted out of by entering into a subrogation agreement. A subrogation agreement is preferred in more complex matters and matters involving substantial uninsured loss.
Remember, insurers still have obligations to act with the utmost good faith, which means you cannot simply ignore the uninsured losses where you may otherwise receive a good settlement.
In our experience, open communication from the beginning with the insured and entering into subrogation agreements early in the piece results in less disputes down the track.
About me (Georgia Wiadrowski) – I’ve spent the past four and a half years as an insurance litigation lawyer in the William Roberts Victorian team. I love all things food and wine including picking the grapes, processing them and bottling the wine at my partners family vineyard in West Gippsland, Victoria.
