09 Mar 2011

Insureds' obligation to mitigate loss: how much do you have to suffer?

An insured has a duty to mitigate its loss – but how far does it have to go? Does it have to subordinate its own commercial interests to the insurer's? Does it have to convert its insured loss into an uninsured loss? The Victorian Supreme Court has given useful guidance on mitigation of loss in insurance in Orica Australia Pty Ltd v Limit (No 2) Ltd [2011] VSC 65 (Clayton Utz acted for Orica).

The Orica decision also helps clarify the meaning of "includes" in insurance policies.

A nautical mishap

Orica Australia Pty Ltd chartered a boat, the M.V. Poolgracht, to carry ammonium nitrate from Canada to Australia. As the cargo had been improperly stowed, it shifted in bad weather. As a result, the vessel listed and had to make port of refuge in Rhode Island to re-stow the cargo. All of this cost money (US$2.4 million), which the owner claimed from Orica. Could Orica claim from its insurer?

Not all of it, according to the underwriters, who maintained that a substantial part of the loss was not covered. They took the position that Orica had failed to mitigate its loss or establish that the disputed amounts claimed were causally related to the insured incident.

The obligation to mitigate loss – how far does the insured have to go?

The vessel was listing in U.S. waters so it was subject to control by the U.S. Coast Guard, which had ordered it to anchor. It was then allowed to berth, but could not sail until the cargo was either discharged or re-stowed.

The vessel owner put some pressure on Orica to find a quick solution, and indeed proposed one which would have involved termination of the voyage and complete discharge of the cargo at the port of refuge. For the owner, this was a cheaper option than re-stowing in part or in total, but not for Orica which would have incurred substantial disposal costs and business losses arising from the lack of this cargo, which was urgently required in Australia.

Assuming that the US authorities would have permitted the entire cargo to be discharged at the port, which was a matter in dispute in the case, was Orica obliged to accept the owner's proposal, effectively subordinating its own commercial interests to those of its insurers? If it did not, would this mean that the costs from that point were no longer caused by the insured peril, the cargo movement in stow, but by Orica's business decision?

Justice Pagone held that

  • an insured dealing with an insured loss, in the interests of itself and its insurers, is entitled to have legitimate regard to its own interests;
  • the insurer needed to show that the proximate cause of the loss was “not the peril insured against, but the failure of the insured to take reasonable steps to protect it”;
  • this meant that the insurer "must make an affirmative case that causally links what is sought against the insurer with something beyond the insured event, sufficient to break the link between loss and insured event."

Here, Orica took into account factors relevant to and flowing from the incident, in order to produce the most efficient and cost-effective solution. It could consider reasonable factors in its own interests and it took reasonable steps to mitigate its loss. There was no extraneous event which caused the costs, nor did it sacrifice the insurer's interest to profit from the insurer. It was not required to incur an indeterminate but more substantial uninsured loss itself, in order to reduce its claim upon the insurer.

Include me out

The second important issue clarified by this decision is the meaning of "include" in insurance policies.

The policy said:

"This policy is to pay such sum or sums as may be necessary, required or deemed appropriate in the settlement of amounts of Compensation to third parties following an accident or occurrence involving a vessel chartered by the Insured for the carriage of a cargo owned by or consigned to or sold by the Insured or in which the Insured has any interest whatsoever.

For the purpose of this policy the Compensation referred to in the immediately preceding paragraph shall include:".

A list of circumstances then followed.

Did this limit the cover to those circumstances, or did the policy cover anything which fell under the first paragraph, including but not limited to the examples listed?

The principle is that words used in a policy are to be given their ordinary meaning unless there is reason to do otherwise, and a business-like interpretation.

In this policy there was nothing to suggest that "include" was meant to limit the cover to the circumstances listed. It would have been easy enough to write the policy to say "For the purpose of this policy the Compensation referred to in the immediately preceding paragraph shall mean", which would have removed any doubt. But the insurer chose not to do that. The Court concluded, therefore, that "include" meant "include", and nothing more.

Key lessons from the Orica decision

First, while an insured is obliged to mitigate its insured loss, it is only obliged to do what is reasonable in the circumstances and can consider its own commercial interest to the extent it is reasonable to do so. It does not have to take a larger hit itself, just to spare the insurer.

Secondly, "include" has an ordinary meaning and that meaning usually is not to limit cover. If an insurer wants to limit its cover to a prescribed list of circumstances, it should say so explicitly.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.