Did you know: if your insured settles their claim for uninsured losses with a third party when the third party knew about your subrogated claim for insured losses, you may still be able to recover?
Generally speaking, when a matter is resolved on the basis that it is a “full and final settlement”, that is the end of the story, except for transfer of the settlement funds; however, where there are both insured and uninsured losses, there is a risk that the insured may enter an agreement for the uninsured loss which inadvertently excludes your claim for insured loss (or a third party could deliberately exploit that communication gap to achieve the same end). This issue was explored in Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Pty Ltd (1987) 11 NSWRL 189 (Morganite) and has subsequently become known as the “Morganite Principle”.
In Morganite, Zurich Insurance (exercising its right of subrogation) commenced proceedings against the Defendant (SBA). SBA defended the claim on the basis that (among others) it had already agreed that the Plaintiff (MCF) would accept a return and refund of the goods in settlement of MCF’s (uninsured) claim, and that the settlement was binding upon Zurich in respect of the (insured) consequential losses. Crucially, SBA had been made aware there were substantial insured losses in correspondence which pre-dated the settlement of the uninsured losses and the Court accepted that SBA were aware that there was a subrogated claim to be made.
The Court held, reviewing cases from Australia, the UK, Canada and the US that: “The principle underlying the cases appears to be that it is inequitable to allow a tortfeasor (or a defaulting contractor) with knowledge of the payments made by the insurer, to maintain the release. It is a form of unjust enrichment.”
In Chand v Zurich Australian Insurance Limited [2013] NSWSC 102, the Court relied (in part) upon the Morganite Principle to overturn a consent judgment for uninsured losses, finding the defendant’s insurer had used the entry of judgment in a “crafty” (this was not a compliment!) attempt to exclude a claim for insured losses (again, coincidentally, with Zurich Insurance) which it knew existed, on the basis that the judgment was obtained “against good faith”.
Accordingly, if:
- there is a claim against a third party with both insured and uninsured components; and
- the insured has settled the uninsured component with the third party (or otherwise taken steps to positively exclude insured loss); however
- the settlement occurred at a time when the third party knew of the insured loss so that the release or terms of settlement could be interpreted as “sharp practice” or “bad faith”, then you may be able to maintain the claim for the insured loss despite the settlement and a Court has the power to rule the settlement is only binding with respect to the insured loss.
This is, of course, a “last-ditch” sort of position to take. Our first recommendation is to avoid (and help your insured to avoid) needing to run an argument that “full and final settlement” was not full and final settlement. The takeaway is that if a third party is deliberately exploitative of an insured, you may still be able to pursue them for insured losses and rely upon the Morganite Principle to support that recovery.
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.
