Subrogated recoveries – think twice before agreeing a global settlement!

By Chris Sacré and Madelyne Inch

The Full Court of the Federal Court of Australia has handed down its decision following the appeal of Technology Swiss Pty Ltd v AAI Limited t/as Vero Insurance^[1].

This matter concerned an insurer, an insured and a third party. In short, the insured and insurer settled their litigated claim on the Policy by way of a global settlement. The insured then recovered all its loss from a third party. The insurer, exercising its rights of subrogation, quite reasonably asked the insured to pay back the settlement amount. The insured refused on the basis that the settlement amount was paid in settlement of the contested litigation and not by way of payment under the Policy such that no right of subrogation arose. The Court therefore had to determine the nature of the settlement payment and in doing so analysed the settlement agreement and the parties’ intention.

The result was not in insurers’ favour and, as such, the case provides an important reminder to insurers to focus carefully on the wording of settlement agreement if a subrogated recovery is envisaged.

We reported on the first instance judgment in March 2021: see ‘Upholding insurers’ right to subrogated recoveries: plan ahead or suffer the consequences!’ On appeal, the Full Court upheld the trial judge’s findings and dismissed insurers’ appeal.

Background to the appeal

The underlying factual circumstances of the matter are complex. Briefly, Technology Swiss (the insured) shipped a consignment of fog canons from Melbourne to Bangkok. It held a marine insurance policy (the Policy) with AAI Limited trading as Vero (insurers). The fog canons were damaged in transit. Insurers granted indemnity but argued that the fog canons could be repaired at a cost of $200,000. The insured argued that the fog canons were a total loss. Insurers paid the insured $200,000 for what it considered was its liability under the Policy. The insured commenced proceedings against insurers in August 2015 for the full amount of indemnity under the Policy ($500,000) (First Proceeding). In June 2017, the insured and insurers resolved the First Proceeding with insurers paying to the insured the sum of $425,000 (Settlement). The parties entered a Deed of Settlement (Deed).

After the Settlement, the insured sued the freight forwarder, FP Shipping, for the loss of the fog canons. It obtained a judgment against FP Shipping in the sum of $863,758.70. This litigation revealed a shortcoming in the Settlement in that insurers and the insured had not apportioned the Settlement as between insurers’ liability under the Policy, and liabilities that were not indemnified under the Policy. A dispute arose as to how much of the recovery FP Shipping was obliged to pay to insurers.

In the proceedings at first instance, his Honour found that $116,770.42 of the Settlement could reasonably be categorised as a payment in respect of indemnity under the policy. In that regard, his Honour subtracted from the Settlement those amounts that were not indemnified under the Policy, being the total amount of the insured’s stated legal fees ($277,260.16) and the actual costs incurred to store the damaged fog canons ($30,969.42). His Honour concluded that $116,770.42 represented the minimum conceivable amount paid by insurers pursuant to the indemnity. In reaching this conclusion, his Honour considered the ‘mutual intentions’ of the parties at the time of the Settlement and found that every figure above $116,770.42 could be met with an argument that some lower figure was equally likely.

The appeal

Insurers filed an appeal and the insured a cross-appeal. Both were dismissed.

The Full Court upheld the trial judge’s findings that insurers ought to have stipulated what amount of the Settlement was by way of a reduction of the insured’s loss and was therefore an indemnity payment.^[2] 

The Full Court did not accept the insured’s argument that the trial judge had wrongly disaggregated the Settlement in circumstances where it was a global sum not characterised as a payment under the Policy.^[3] Conversely, the Full Court found that a single payment may be apportioned among several heads if an inference as to the intention of the parties can be properly drawn from the agreement itself.^[4] 

In this regard, the Deed provided that the insured would accept the Settlement from insurers in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute.^[5] Clearly, the parties intended that the Settlement would resolve a variety of disputes, some indemnifiable and some not.

The Full Court also did not accept any of insurers’ arguments on appeal.

Among other things, insurers argued that because the Deed contained a clause that the insured would file a notice of discontinuance providing that each party would bear their own costs,^[6] there was never any intention that the Settlement included an element of the insured’s legal costs of the First Proceeding. The Full Court agreed with the trial judge that the notice of discontinuance in such terms was merely a method of disposing of the proceedings (and to avoid the automatic presumption that the insured would pay insurers’ costs^[7]).

Insurers also, unsuccessfully, argued in the alternative that because the Policy limit was $500,000, the parties must have intended that insurers’ payments were to satisfy that limit and only the remainder should be considered as payment for the insured’s costs. Insurers submitted the initial payment of $200,000 and an additional $300,000 of the $425,000 were paid by way of indemnity and the remaining $125,000 was paid in respect of costs. The Full Court rejected this argument stating the Deed expressly provided that the Settlement was in respect of ‘the Insurance Claim, the Storage Costs Claim, the Proceedings and the Dispute’ and there was no basis for giving precedence to the indemnity.

Finally, insurers argued that the trial judge erred in interpreting the Deed in the interests of one party and, like the contra proferentem rule, should only be used as a last resort. The Full Court again did not accept this argument. It considered that the trial judge was not applying any rule of contract construction but, in circumstances where there was minimal information available and where there was no allocation of the Settlement by the parties, his Honour was merely identifying (by a process of elimination) a portion of the Settlement that could reasonably be attributable to indemnity.^[8]

Notably, the Full Court added that had the trial judge not performed his ‘careful analysis to a reach a construction which provided some return’ to insurers, the only alternative option was that the Deed was insufficient to indicate any allocation to which insurers were entitled by way of subrogation, and its claim must have failed.^[9]

Commentary

The appeal judgment affirms that if they wish to seek a subrogated recovery, insurers must exercise caution when drafting settlement agreements based on a global settlement sum. Insurers should attempt to apportion a global settlement between indemnified and non-indemnified amounts to avoid any dispute as to the allocation of proceeds of any subsequent recovery.

[1] [2021] FCA 95.
[2] AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168 at [121].
[3] TS relied on the case of Wellington Insurance Co Ltd v Armac Diving Services Ltd (1987) 38 DLR (4th) 462.
[4] McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381.
[5] Clause 2(a) of the Deed.
[6] Clause 3 of the Deed.
[7] Federal Court Rules 2011 (Cth) r 26.12(7).
[8] AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168 at 181.
[9] AAI Limited trading as Vero Insurance v Technology Swiss Pty Ltd [2021] FCAFC 168 at 185.