More options for insureds in suing for damages

An insurer declines to indemnify the insured under a contract. What are the insured's options? A recent case has confirmed that insureds have a few options and can pursue them simultaneously without having to pick only one route - and recover more for all their losses.

Brescia Furniture is an importer and retailer of furniture in Sydney using a three-storey building as its flagship premises. There, it stored, showed and sold furniture, until a fire broke out and burnt all three storeys down to the concrete slab.

Brescia had an Industrial Special Risk Industry Policy providing cover against property damage and consequential loss of profits, but the insurer refused indemnity, so Brescia went to court for a declaration that it was entitled to indemnity under the contract of insurance. For good measure, it asked for damages for the consequential losses caused by the insurer's refusal to indemnify.

This meant in effect that Brescia was claiming that the insurer had breached the contract by refusing to indemnify it and so was liable for the damages the refusal caused Brescia, and at the same time was trying to get the insurer to do what it had promised to under the contract.

For many years there's been some doubt about whether insureds such as Brescia can do this. There's been a school of thought - and a number of cases - saying that the insured had to choose between suing for performance of the contract and suing for breach of the contract.

It was suggested that if the former course was chosen, the insured could only recover the benefits available under the insurance contract (and statutory interest) and could not recover consequential damages, such as loss of profits caused by being held out of the insurance proceeds. On the other hand, if the insured accepted the insurer's repudiation of the contract, the insured could then recover damages at large, including consequential loss.

In Brescia Furniture Pty Limited v QBE [2007] NSWSC 598, the judge said that Brescia did not have to choose between the two.

The implications of this for insureds are:

• if a dispute over indemnity goes to litigation, insureds don't have to limit themselves to one strategy only
• by seeking enforcement and damages for breach, insureds can get both the cover under the policy and damages for losses caused by the insurer's refusal to indemnify them.

The implications for insurers are that

• insurers need to reserve for more than just the contractual benefits, interest and costs and must take into account the potential for consequential losses
• additionally, insurers will need to consider whether such consequential damages are covered by reinsurance treaties, which may exclude such "extra-contractual" losses.

The case concerns a substantial claim, and there's a good possibility it will go on appeal, so we will watch it with interest.

One other matter that arose in the case, although not material to the final decision, is the court's view of section 56 of the Act. It said that it thought that section 56 applies to an insurance claim made outside court as opposed to a claim within court proceedings. This means it would not necessarily operate to preclude a recovery for damages for breach of contract even if part of the claim made within court proceedings proved to be exaggerated. Of course, if this view is accepted in another case, the insured would still have to prove its damages, and a judgment procured by fraud can be set aside.