Indemnity Insurance involves payment for loss actually suffered by insured (Australian court)

Donald Dinnie, Norton Rose Fulbright

In the judgment, Swiss Re International Se v LCA Marrickville (Pty) Limited, the court discussed the principle that an insured must, under a contract of indemnity, prove the extent or the amount of the loss claimed because the indemnity only concerns actual loss and the deductions to be made from the losses.

The court confirmed the principle, following a number of Australian judgments, that the insured need not give credit for monies received which are not characterised as extinguishing or reducing the party’s loss but are received independently of the right of redress.

An insurer promises to hold harmless against the loss in accordance with the policy, rather than promising on the happening of an insured event to make a payment reflecting the damage suffered as a result of the event, Accordingly, when an insured receives a payment from a third party, consideration must be given to the intention of the person who made the payment. If the third party intended to compensate for the indemnified, loss the insurer is entitled to recover that payment. If the person intended to benefit the insured person to the exclusion of the insurer the insurer is not entitled to recover the payment.

If the amount paid by a third party means that an expense of the business is reduced, then that reduction must be taken to be in consequence of the interruption or interference unless the payment is incapable of being so characterised. If the cover extends to the circumstances underlying the insured peril, then the expenses saved must also extend to the circumstances underlying the insured peril.

For the reasons given, the government Covid-19 JobKeeper support payments reduced the insured’s loss and expenses in the form of saved wages’ payments. The rental relief received by the insured reduced the insured’s loss and expenses in the form of saved rent payments. Both were deductible from the business interruption losses claimed.

Where a payment has multiple purposes it does not prevent it being characterised as intended to compensate for the loss.

The principle is no different in South African law and has been consistently applied by South African courts.

First published by: Financial Institutions Legal Snapshot