Making your mind up: how long does an insurer need to decide to pay out on a claim?

A recent decision sheds some light on how long an insurer has to make its decision on whether a policy responds without being liable to pay interest (McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance plc (No 2) [2009] VSC 49).

If a claim is payable, interest is likewise payable for "the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount" (section 57 of the Insurance Contracts Act 1984 (Cth)).

Frequently from an insured's perspective there is enough information for the insurer to make a decision. From that of the insurer, however, there are still some areas of uncertainty. The crucial question therefore is how long that insurer can take to make its decision without becoming liable to pay interest.

This ultimately will be a question of fact, but the Victorian Supreme Court has given some guidance in how it will be answered.

In this case, the plaintiff, a mining contractor, formed a joint venture with other companies under which it rented out its equipment. That equipment was insured by the defendant. It disappeared from the mining sites, triggering the claim. Complicating the situation was the location of the joint venture, a complex and volatile country, so further investigation and recovery by the plaintiff was too dangerous. Unfortunately, this also made getting to the bottom of the affair rather difficult for both insured and insurer.

The Court said that:

• the existence of a bona fide dispute as to liability is not relevant to section 57 - so it does not matter that an insurer genuinely thinks the policy doesn't respond
• the subsequent course of events in the litigation does not necessarily set the test as to the day upon which it was unreasonable for the insurer to have withheld payment; and
• the fact that the exact circumstances surrounding the loss of the equipment remained unclear, even after the trial, does not mean that an insurer who chooses to request further information and defer a decision on policy liability until such time as the picture is clear (when the practical reality is that the picture may never become as clear as the insurer might wish) can avoid the running of interest on a payment which the Court has ultimately held should have been made by the insurer at an earlier time.

In this case, the reasonable period for inquiry was held to be four months from the time that the plaintiff asked if the policy responded to the loss.

As the Court acknowledged, this is a question of fact to be determined, having regard to all the circumstances of the case, and will be for the Court to determine.