Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd (NSWSC 2021)

Key Takeaways

1. The duty of utmost good faith is reciprocal.
2. The insured bears the onus of substantiating their claim, however the insurer cannot impose an unreasonable threshold on this, e.g. require material beyond what would exist in the ordinary course of the business.
3. An insurer seeking to allege and/or adduce evidence about fraud must expressly plead fraud; fraud cannot be raised at trial in passing to support the insurer's decision.
4. Insurers must assess and pay what a claim is worth after making an accurate and proper assessment of the covered part of the loss claimed.

Brief Facts

On 4 December 2017, Diamond World Jewellers Pty Ltd (Diamond World) were robbed. Six glass-topped showcases were smashed. These contained stock that was either damaged or stolen.

Diamond World notified their insurer of the robbery the next day and on 20 December 2017 they lodged a claim for all stock on display on the day of the robbery. Some of the stock was owned by Diamond World and some was held on consignment, including jewelry left behind but damaged in the robbery.

Before the loss adjuster attended, the General Manager of Diamond World melted down all of the remaining jewelry, claiming everything that had been left behind had been damaged in the robbery.

The offer issue

The insurer accepted that the policy responded, however rejected the sum of the claim. The insurer then offered to settle for $500,000.00, after having assessed the damage at $397,183.37. No evidence was provided in support of the offer, which was rejected as it did not take into account certain consigned stock.

It later came to light that the insurer had incorrect information and had made false assumptions on the quantum of the claim and then did nothing about this.

The insurer never actually paid the insured any amount despite payment being sought. The insurer sought at trial to justify this on the basis that Diamond World had not responded fully to requests for information, for claiming loss of jewelry that was not damaged and for not having acted in good faith. The insurer asserted that it had not paid as it concluded the claim should fail.

The records issue

Throughout the progress of the claim, the insurer contended that the insured had failed to keep 'proper records', which was not a defined term in the insurance contract. The contract simply stated that the insured would provide such information and evidence (as to the property lost or damaged and the circumstances) as the insurer may reasonably require or as may be in the insured's power. The insurer submitted that the information provided was insufficient and continued to seek further information from the insured, which simply did not exist.

Diamond World, in response to requests by the insurer, provided records to substantiate most aspects of their loss. The evidence produced included stocktake lists, sales records made up of daily handwritten notes and proof of payments made. Diamond World did not have sophisticated systems. They had systems that were representative of a smaller, family run business, and which were compliant with legislative obligations. They had successfully operated for decades.

However, Diamond World could not support the cost of the damaged stock that was melted down and at trial it emerged that 30-40% of the melted jewelry was not damaged.

Judgment

Schmidt AJ gave judgment in favour of Diamond World after findings to the following effect:

a) The insurer accepted liability but made no payment.
b) Diamond World did breach their duty of utmost good faith, but not only did the insurer also breach its own obligation of utmost good faith, it had breached its contractual obligations by failing to pay the insured under the policy.
c) Any dispute over quantum could not relieve the insurer of its obligation to pay Diamond World for the loss it had substantiated.
d) Diamond World did substantiate its claim for the stock stolen and for the damaged fittings, but it failed to substantiate that the jewelry in the cabinet was damaged and as such, they were not entitled to this sum.
e) Diamond World was not required to produce 'proper records' as alleged by the insurer, just enough to substantiate the claim, which they did.
f) While the insured needed to provide all information to prove the loss, the insurer was required to approach this decision acting reasonably and in good faith, which was not done.
g) Nothing the insured did in the conduct of the claim relieved the insurer of its contractual obligation to pay for the loss under the policy, once it was substantiated.

Implications

1. There is an ongoing and bilateral duty of good faith on both insurers and insureds while progressing and pursuing a claim. A party is not absolved of observing their duty to act in good faith merely because they form the opinion that the other party is not. An insurer is not entitled to refuse a claim based solely on their opinion on this when it has not acted fairly or reasonably itself and when the correct question about the claim has not been addressed. If the insurer does form and rely upon such an opinion and act in this way, such conduct will constitute a breach of its contractual obligations.
2. Unless there is an express clause in a contract of insurance which sets out and defines what 'proper records' means, an insured is only required to produce enough information and evidence to substantiate their claim in the circumstances. There is no obligation to provide information beyond this, or to a threshold of providing 'proper records' as subjectively defined by the insurer. The insured may provide information in a variety of forms using the means reasonably available to them in the ordinary conduct of their business.
3. An insurer cannot insist on the production of materials, for example, sophisticated financial records that do not exist as part of a pre-established record system. While the obligation remains on the insured to substantiate their claim and it is not for the insurer to assemble such proof, the insurer is obliged to fairly take into account the records that were produced.
4. An insurer seeking to adduce evidence of fraud in support of their case that an insured is not reliable, nor credible and/or that the claim is affected by fraud, needs to plead fraud expressly. In the present case it was not open to the insurer to ask questions during cross-examination, nor advance any arguments, that invited a finding of fraud, in the absence of pleading it. Insurers need to be open to pleading fraud, in appropriate cases, if they are seeking to raise questions, submissions or findings in relation to this. Given the severity of a finding of fraud, procedural justice requires that the person not only be confronted with the suggestion of fraud, but that it be clearly pleaded.
5. When an insurer accepts that a policy responds and the insured produces material to substantiate that claim, it must make an accurate and proper assessment of the loss and then make payment to the insured. This includes having reference to all available materials and ensuring that if errors have been relied upon, these are corrected to ensure an accurate assessment of loss results. An insurer should take care in seeking to negotiate a quick payment of the claim in order to reduce the amount payable, particularly in circumstances where it knows errors have been relied upon.