Here is an interesting case from the Supreme Court of NSW.
Background
The Insured lent money to third parties secured against real estate.
The Insured held a policy for mortgage indemnity and impairment with the Insurer. Pursuant to the terms of that policy, the Insurer agreed to indemnify the Insured in circumstances where its loans went into default and the Insured suffered losses as a result.
One of the Insured’s loans (which had been based upon a third party valuation) went into default.
The Insurer agreed to indemnify the Insured subject to various terms and conditions, including the execution of a deed of release. While this was occurring, the Insured commenced recovery proceedings against the valuer.
The proceedings against the valuer were successful. So the question emerged, how much of the amount recovered from the valuer was the Insurer entitled to get.
The deed of release proposed that in return for the payment of the amount agreed upon, the Insurer would recover next. But there was a dispute as to what the Insurer could recover.
The Insurer believed that it was entitled under the deed of release to recover the full amount which it had paid the Insured. The Insured believed that the Insurer was only entitled to recover the amount which it had paid in respect of the claim for loss of the principal amount. The difference in views was roughly $350,000.
Breach of Duty of Utmost Good Faith ?
The Insured argued, amongst other things, that entering into the deed of release was a breach by the Insurer of its duty of utmost good faith. In particular the Insured argued that :
‘It would be a breach of the duty of utmost good faith for the insurer to rely upon the provisions of the deed for two reasons. First, it was a breach of the duty of utmost good faith to require entry into the deed of release as a condition of granting indemnity. Secondly it was a breach of the duty of utmost good faith to propose that the insured execute the deed of release without explicitly drawing to the insured’s attention the fact that the deed altered the insured’s rights under the policy – in particular by modifying its rights to recovery.’
The Court rejected those arguments. Why?
The starting point is to recall that to breach the duty of utmost good faith, a party must have engaged in conduct which is “capricious, unreasonable or involved unfair dealing”.
Against that setting, the Court made the following observations:-
The Insurer outlined in correspondence the terms upon which it proposed to indemnify the Insured;
The Insured was entitled to negotiate those terms and able to negotiate those terms but chose not to do so;
The deed of release captured the terms which the Insurer had proposed.
While the amounts which the Insurer agreed to pay may have been more than it was obliged to pay under the policy, the fact that it agreed to pay that amount to the Insured did not prevent it from seeking to recover any overpayments from the proceeds recovered from the valuer.
The Court could not identify any conduct amongst these observations that was capriciousness, unreasonable or unfair. On the facts in this case, entering into the deed of release did not constitute a breach by the Insurer of its duty of utmost good faith.
Ultimately the Insurer succeeded.
The decision is Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Limited [2015] NSWSC 1511.
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