Catlin Australia Pty Ltd v Diamond World Jewellers Pty Ltd - [2022] NSWCA 282 - NSWCA 2022 case summary — Zoe

NSWNSWCA

Catlin Australia Pty Ltd v Diamond World Jewellers Pty Ltd

[2022] NSWCA 282

Court of Appeal (NSW)|2022-06-27|Before: Leeming JA, White JA, Mitchelmore JA, Schmidt AJ

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At a glance

Source facts

Court

Court of Appeal (NSW)

Decision date

2022-06-27

Before

Leeming JA, White JA, Mitchelmore JA, Schmidt AJ

Catchwords

MetLife Insurance Ltd v Shuetrim (2016) 91 NSWLR 439
[2016] NSWCA 68 Wilkie v Gordian Runoff Limited (2005) 221 CLR 522

Source

Original judgment source is linked above.

Catchwords

MetLife Insurance Ltd v Shuetrim (2016) 91 NSWLR 439[2016] NSWCA 68 Wilkie v Gordian Runoff Limited (2005) 221 CLR 522

Judgment (6 paragraphs)

[1]

Background

On the day after the robbery, Diamond World's general manager and "controlling mind" (J [112]), Mr Khosrow Chohaili, cleaned up the store. The thieves had used heavy hammers to smash six glass-topped showcases inside the store and removed some but not all of the jewellery in those showcases. The jewellery on display in the front windows of the shop was not stolen, nor was jewellery stolen from other undamaged showcases.
On 6 December 2017 Catlin's loss adjustor, Mr Stuart Crofton, attended the shop with a Mr Michael Leigh who was retained by Mr Chohaili as a consultant to assist Diamond World with the preparation and pursuit of its claim under the policy.
On 20 December 2017 Mr Leigh submitted a preliminary claim to Mr Crofton containing a schedule that contained what Mr Leigh stated he believed would be the maximum that would be claimed. The amount of the claim was $1,691,435.70 not including GST. This was shown to be calculated on the basis that the cost price for all of the stock in the shop was $2,314,395.10 which included $792,544.12 of stock held on consignment. From this was deducted the cost price of what was described as "Stock Found" of $632,559.40. This figure included a sum of $35,965 described as "Melting price". Deducting those figures from the stated cost price of the goods said to be in the shop and adding $9,600 for the cost of replacing damaged glass gave rise to the total claim of $1,691,435.70. The estimate of the cost price of the stock on hand (excluding stock on consignment) was $1,521,850.98. It was supported by a letter from Diamond World's accountant and was derived from Diamond World's financial statements for the year ended 30 June 2017 plus a Business Activity Statement for the period 1 July 2017 to 30 September 2017 and a profit and loss statement that had been prepared for the period from 1 July 2017 to 5 December 2017.

On 1 March 2018 Mr Crofton asked Mr Leigh whether, having viewed the crime scene photographs of the six smashed showcases, he could confirm whether the earlier submission that he had made on Diamond World's behalf was accurate. Mr Leigh replied on 2 March 2018 as follows: "Obviously having seen the coloured photographs obtained by the Police Scene of Crimes Officer (SOCO) shortly after the robbery we need to know what happened to the Jewellery in the 6 x display cabinets for which Insured has claimed were stolen. We were both present at the first meeting the morning after the robbery and the display cabinets had been emptied and cleaned possibly of blood and the glass replaced temporarily with timber. At no time did Khosrow Chohaili mention or indicate to me that there was any Items not stolen from the cabinets. Sziba Chohaili was unable to answer any questions when I revisited to again question her to establish what jewellery was in what cabinets. Khosrow stated she had a nervous breakdown and could not answer questions. Sziba was present on this second occasion but continued to cry while I was there. Insured maintained they do not have a stock control book with individual jewellery items entered and with the cooperation of the Insured's CPA Accountant we presented a claim based on reconciliation. At no time did Khosrow mention or indicate that any jewellery in cabinets 1 to 6 had not been stolen. I believe that we should interview Khosrow together when Police hand over the coloured photographs depicting the large quantity of items not stolen. He perhaps was unaware that photographs were taken by the Police. I believe his only argument will be that the jewellery was contaminated by blood but that still does not excuse him from hiding the whereabouts of the items which could have been hygienically cleaned and then deducted from the adjusted value of goods. It does appear that the Police have another agenda re this matter and re the arrested robbers. We really need the photographs to confront Khosrow and I await with bated breath as to what his explanation is going to be."

On 4 July 2019 Mr Chris Ehlers of Matson, Driscoll and Damico Pty Ltd, forensic accountants, provided a report to Lander and Rogers, the solicitors for Catlin. Mr Ehlers stated that on 15 February 2019 Diamond World provided a one-page document which was provided to Diamond World's accountant on 7 July 2017 setting out the values of stock held as at 30 June 2017, which included $1,406,623 of stock on hand and $771,031 of stock held on consignment. In relation to the latter figure, this consisted of stock held for a business called FineStar totalling $310,149 and stock to the value of $460,882 held for a business known as Empire SER. Mr Chohaili was the general manager of the business that traded as FineStar Diamonds. His wife was the sole shareholder of the company that conducted that business. Empire SER Pty Ltd was a company owned and controlled by a Mr Samer Rad. Mr Chohaili had done business with Mr Rad and his father in purchasing jewellery, gold and diamonds. Through different companies, the families had engaged in some small property developments. Mr Ehlers stated in respect of the asserted consigned stock figures: "9. General comments on each of the categories are as follows: a) Empire SER Consignment - the Insured provided a consignment note dated 15 May 2017 for 28 items from Empire SER worth $460,882. On 1 November 2017 it is our understanding the Insured decided to purchase 16 of the 28 items and at that stage Empire SER issued both a new consignment notice for the remaining 12 items worth $221,149 and a purchase invoice for the 16 items worth $239,733. Given the new consignment notice and purchase invoice were for the same 28 items it appears that none of the 28 items were sold in the 5.5 month period between 15 May 2017 and 1 November 2017. The Insured has indicated $11,350 of consigned stock was sold between 1 November 2017 and the date of the Incident and all of the remaining items were assumed stolen. … c) FineStar Consignment - it appears none of the items which were consigned to the Insured in the Financial Year ended 2017 were sold in 2017. We were unable to reconcile the $310,149 held on consignment at the end of the Financial Year 2017 to the new consignment notes provided over the period July 2017 to November 2017 totalling $482,097. In the claim listing we have been able to identify $477,622 of which the Insured has indicated $39,516 of consigned stock was sold between 1 July 2017 and the date of the Incident, $121,933 was recovered, $48,429 was damaged and the balance was assumed as stolen. ..."

He stated (at [37]) that he had been able to reconcile the amounts held on consignment on behalf of Empire SER at the time of the incident but this may have been a typographical error for "unable". He stated that "we have been able/unable [sic] to reconcile the amounts held on consignment on behalf of FineStar…". He expressed scepticism about the stated figures stating that on the stated figures it would take the insured at least six years, with no additional purchases, to sell the claimed stock on hand at the time of the incident. His conclusion was: "Overall 48. The Insured has listed a total of 396 items as stock on hand on the date of loss and 196 items as stolen. 49. The biggest 20 claimed stolen items total $510K. 50. The Insured does not have an electronic stock recording system, monthly stock take reports, stock identification numbers recorded on purchases I sales or the stock take reports. The lack of information limits our ability to perform an accounting exercise to estimate on the stock on hand at the date of the Incident. 51. Given the above comments an approach taken to estimate the likely stock level of $1,306,868 at the time of the Incident is as follows: a) Begin with 30 June 2017 stock level - $1,406,623 per the Income Tax Return and Financial Statements; b) Less sales in the period 1 July 2017 to 4 December 2017 as set out by the Insured of $155,629 - it should be noted this is slightly less than using the sales listing included with the December 2017 BAS; c) Plus purchases of $55,874 as set out in the December 2017 BAS in the period 1 July 2017 to 4 December 2017, it should be noted this figure is: i) Exclusive of GST; ii) Exclusive of the converted Empire SER consignment notice given the concerns set out in Paragraphs 34 to 42 above: and iii) Exclusive of the Empire SER and FineStar consigned stock given the concerns set out in Paragraphs 34 to 42 above. 52. If we then deduct the amounts declared as recovered by the Insured of $375,226 (Counters 7-12) and $221,318 (Location 2) from the likely stock level of $1,306,868 at the time of the Incident we would estimate the maximum figure at $710,324 which would include the following: a) Damaged I melted stock in the amount of $392,022; b) Some losses attributable to the Group category; c) Some losses attributable to the Queen category; d) Some losses attributable to the SkyReach category; e) Some losses attributable to the Modern Sky category;"

On 18 July 2019 Lander and Rogers, on behalf of Catlin, provided Pikes and Verekers with a copy of Mr Ehlers' report of 4 July 2019 stating that that report concluded that the maximum amount of stock stolen or damaged as a result of the incident was estimated to be $710,342, that this figure included $392,022 of melted stock, and that he noted that no supporting information had been provided for the majority of the claim for melted stock. Lander and Rogers advised that the underwriters did not consider that Diamond World was entitled to recover any amount for melted stock. They made the following offer: "Offer 26. Notwithstanding Underwriters' concerns, Underwriters are willing to make a first and final payment to DWJ of $326,920 (Payment Sum) in respect of the Claim on a without admission of liability basis. 27. The Payment Sum is based on MDD's report and has been calculated as follows: (a) $318,320 for jewellery (being $710,342 less $392 ,022 of melted stock); plus (b) $9 ,600 for property damage repairs; less (c) $1,000, being DWJ's Policy excess. 28. The Payment Sum does not include an amount for stock held on consignment from Empire SER or Fine Star Diamonds as Underwriters are not satisfied that these amounts have been properly substantiated (see paragraph 14 above). 29. This payment is conditional on the following: (a) your client entering into a deed of settlement, satisfactory to Underwriters, that , amongst other things , will contain a full release and warranty from your client that payment of the Payment Sum will constitute full and final settlement of the Claim, and/or all claims your client has, had or may have against Underwriters arising directly or indirectly out of the Incident; and (b) that, if ultimately, for any reason , Underwriters are found by a Court to have no liability under the Policy then DWJ will be liable to repay the Payment Sum into Lander & Rogers trust account within 7 days of that decision being made . Next steps 30. Underwriters continue to reserve all rights at law and under the Policy, including to reduce any indemnity ultimately granted to the extent of any prejudice suffered as a result of the matters conduct outlined above. 31. Please let us know whether your client wishes to accept the Payment Sum on the above proposed terms . If your client agrees to the Payment Sum, we can transfer the Payment Sum to your trust account within 7 days of agreement."

Lander and Rogers dealt separately with the claim for purchased and consignment stock. Significantly, in relation to FineStar stock, Lander and Rogers stated that whilst Pikes and Verekers had provided new information, namely, that "FineStar's consignment stock held by DWJ as at June 2017 was returned to FineStar in July 2017 and new consignment stock taken on from FineStar from July 2017", the underwriters had not been provided with documentation to confirm such a refreshment of stock, such as correspondence, delivery notices, insurances for the movement of jewellery or reconciliations between the consignment notices in 2016 or the amount of returned jewellery. They stated that Diamond World's stock management record keeping was poor and made an offer in the following terms: "Offer 26. Notwithstanding Underwriters' concerns, Underwriters are willing to pay DWJ $500,000 (Settlement Sum) in full and final settlement of its claim first made on or about 20 December 2017 for about $1.7 million for stolen jewellery stock and repair costs (Claim) on a without admission of liability basis (Offer). 27. The Settlement Sum is calculated based on the loss that DWJ has substantiated (as outlined in Our Letter) and an estimate of unrecoverable costs that Underwriters will incur if DWJ commences proceedings against Underwriters. 28. The Offer is conditional on the following: (a) DWJ entering into a deed of settlement, satisfactory to Underwriters, that, amongst other things, will contain a full release and warranty from DWJ that payment of the Settlement Sum will constitute full and final settlement of the Claim, and/or all claims DWJ has, had or may have against Underwriters arising directly or indirectly out of the armed robbery that occurred at DWJ's premises at approximately 4.45pm on 4 December 2017; and (b) that, if ultimately, for any reason, Underwriters are found by a Court to have no liability under the Policy then DWJ will be liable to repay the Settlement Sum into Lander & Rogers trust account within 7 days of that decision being made. 29. The Offer is made pursuant to the principles applied in Calderbank v Calderbank, and Underwriters reserve the right to rely on this letter on the question of costs if the Offer is not accepted. 30. This Offer is open for acceptance until 5.00pm on 11 October 2019, at which time it will lapse. Next steps 31. Underwriters continue to reserve all rights at law and under the Policy, including to reduce any indemnity ultimately granted to the extent of any prejudice suffered as a result of DWJ's conduct outlined above. 32. Please let us know if DWJ accepts the Offer. If DWJ accepts the Offer, Underwriters can transfer the Settlement Sum to your firm's trust account within 7 days of acceptance."

[2]

The policy

The policy provided cover in the following terms: "SECTION 1: STOCK, GOODS IN TRUST, CASH & NEGOTIABLE DOCUMENTS COVER: STOCK AND MERCHANDISE (including Sample Cases) used in the conduct of the Insured's business and cash and negotiable documents, whether the same be the property of the Insured or entrusted to him or them for any purpose whatsoever, against the Perils Insured stated in the Schedule up to the Limits stated in the Schedule (subject to the extensions, terms, conditions limitations and exclusions of this Insurance) whilst: A. At the lnsured's premises stated in the Schedule and/or B. Anywhere else within the Territorial Limits stated in the Schedule including in transit therein or between . BASIS OF SETTLEMENT OF CLAIMS: STOCK & MERCHANDISE : If any Stock and Merchandise is lost , destroyed or damaged settlement will be negotiated on the Basis of Valuation shown on the Schedule or, if no Basis of Valuation is shown, then Historical Cost Price."
There was no dispute that loss or damage to stock occasioned by robbery fell within the scope of the cover against Perils Insured.
The "basis of valuation shown on the Schedule" was stated to be: "Stock: At Cost Price, including tax where applicable Contents: At Cost of Reinstatement or Replacement as applicable. Sendings: At Invoice or Consignment Note Amount as applicable."
The cover was expressed to be subject to the conditions of the insurance. The conditions of insurance are to be read congruently with, and by reference to, the insuring clauses (Wilkie v Gordian Runoff Limited (2005) 221 CLR 522; [2005] HCA 17 at [16]; Allianz Australia Insurance Limited v Rawson Homes Pty Ltd [2021] NSWCA 224 at [10] (Leeming JA)).
The conditions included the following term: "1. STOCK RECORDS CLAUSE: It is a condition under this insurance that in the event of a claim being made under this policy, the Insured shall provide Underwriters or their representatives with all available information including documentary evidence, whether these be official or unofficial, of all purchases, sales and other transactions of insured stock. This information will be utilised by Underwriters or their representatives to assist in quantifying the amount of loss claimed. In the event that information provided does not satisfactorily substantiate the quantum claimed, Underwriters shall be liable only for the amount of claim accounted for. Any settlement beyond this figure shall be solely at the discretion of Underwriters, unless otherwise endorsed herein. … 4. INFORMATION IN EVENT OF LOSS: The Insured shall in case of loss or damage and as a condition precedent to any right of indemnification in respect thereof, give to the Underwriters such information and evidence as to the property lost or damaged and the circumstances of the loss or damage as the Underwriters may reasonably require and as may be in the lnsured's power."
The primary judge held that Diamond World was not in breach of cl 4 and there is no appeal from that finding.
Although not raised by the pleadings (as to which see below at [40]-[47]) Catlin contended at trial, and counsel appearing for Diamond World accepted, that the principal issue was whether the underwriters (acting fairly, reasonably and in good faith) were entitled not to be satisfied with Diamond World's attempted substantiation of the quantum claimed and to decline to pay any sum otherwise than on the basis of Lander and Rogers' letter of 3 October 2019 quoted at [23] above. They contended that the first stage for decision making by the Court was to determine whether, on the materials available to the underwriters when it made its alleged "decision" of 3 October 2019, the underwriters acted reasonably, fairly and in good faith. Only if that question were answered in the negative, so it was submitted, was the judge entitled to make her own assessment of how much of the claim had been satisfactorily substantiated.
As explained below, the primary judge rejected Diamond World's claim for damaged goods and allowed the claim for stolen goods by awarding damages in the sum of $1,313,304.45. This resulted in judgment in the sum of $1,431,759, being $1,307,597.02 claimed for the stolen stock, $9,600 for damaged fittings, less $1,000 excess and $2,892.55 for the value of the jewellery police recovered. It also included a figure for interest from 4 October 2019 (Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd (No 2) [2021] NSWSC 1540 at [3], [9] and [37]).
There is no appeal from the primary judge's assessment of the quantum of the claim. Rather, Catlin contends that the primary judge erred in finding that it had acted unreasonably and in bad faith in its assessment of the claim.
It is unfortunate that the trial proceeded in the way it did. It was only on the second day of the hearing that the parties agreed on a statement of agreed issues for determination and that description of issues was itself ambiguous. I deal with this below at [63].
Returning to the policy, I do not accept that the second paragraph of the Stock Records Clause, which is one of the conditions applicable to the cover provided for in section 1, has the effect for which Catlin contends. Catlin reads that paragraph as if it provided: "In the event that information provided does not substantiate the quantum claimed to the Underwriters' satisfaction, the Underwriters shall be liable only for the amount of the claim accounted for to their satisfaction".
The insuring clause provides that settlement of a claim for lost or damaged stock will be negotiated on the basis of the cost price of the stock. That is an objective matter. If the negotiations do not result in an agreement, the policy does not provide (unless it be by the second paragraph of the Stock Records Clause) that the quantum of cover depends upon the opinion of the underwriters. Rather, if negotiations do not result in agreement being reached, the determination of the quantum of cover is a matter for the court, or an arbitrator if the parties agreed to arbitration. The determination of the quantum of the claim would be determined on the objective basis of what the insured established to be the cost price of stock stolen or damaged. If one asks in relation to the second paragraph of the Stock Records Clause "satisfactorily to whom?", I would say "to the satisfaction of the judge or arbitrator called upon to determine the question if negotiations do not result in agreement".
In context "satisfactorily substantiate" refers to the quality of the information provided and is synonymous with "adequately". "Satisfactorily" is an ambiguous word. It can mean "adequate, fulfilling the demands or requirements of the case", or it can mean "fully gratifies or contents, that justifies a feeling of satisfaction" (Online Etymology Dictionary). If used in the latter sense, one might refer to a meal as being "satisfying" whereas to say that it is "satisfactory" might mean that it barely passes muster. If a judge says that counsel's submissions are satisfactory, that does not mean that the judge is persuaded that they are correct. Read congruently with the insuring clause, "satisfactorily substantiate" does not mean substantiate to the satisfaction of the underwriters but means adequately, such that the underwriters are then only liable for the amount that has been adequately accounted for.

[3]

The pleadings

By its amended statement of claim, Diamond World sought an order that Catlin indemnify it in respect of the loss and damage that it pleaded, and also sought damages. It pleaded that it was a term of the policy that if stock or merchandise were lost, destroyed or damaged, including by robbery and theft, settlement was to be negotiated on the Basis of Valuation as shown in the Schedule, and pleaded that the Schedule provided that the Basis of Valuation for stock was Cost Price including tax where applicable. It pleaded the circumstances of the robbery and the insurer's request for information. It pleaded that it responded to those requests to the best of its ability and that the insurer refused to provide cover for the Stolen Stock and the Damaged Stock on the basis of Cost Price including tax where applicable, or at all (Amended Statement of Claim paras 6, 7, 11-13, 17, 18 and 20).
It pleaded that in those circumstances Catlin had breached the policy by reason of which it had suffered loss and damage. It also pleaded that Catlin had sought to negotiate a payment of the claim and in doing so had sought to rely on the absence of information as a basis on which to reduce the amount payable. It pleaded that, to the extent Catlin relied upon the absence of information on the basis on which to reduce the amount payable by it, Catlin was in breach of the policy in that it was not entitled to the information requested and Catlin knew, or ought to have known, that Diamond World did not keep such information at the time the parties entered into the policy.
Thus, Diamond World pleaded that it was entitled to the cost price of the goods stolen or damaged, either as a debt due under the policy (the claim for indemnity in para 1 of the relief claimed) or as damages for the underwriters' failure to provide cover. In relation to the claim for damages the damages were particularised as the difference between the cost price of the Stolen Stock and the Damaged Stock including tax where applicable, and such amount as the defendant was otherwise willing to pay (para 26).
Diamond World did not plead that its entitlement to cover depended upon the opinion of the underwriters. It did not seek to identify any decision that the underwriters may have made in respect of its claim. It did not seek to impugn any such decision on the ground that it was unreasonable, unfair or not made in good faith on the basis of the materials available to the underwriters when they made any decision.
Nor was any such case identified in Catlin's Amended Defence. It pleaded that it had offered to pay to Diamond World an amount "in excess of the value of loss that [it] has assessed the plaintiff is entitled to under the Policy" and gave as particulars Lander and Rogers' letters to Pikes and Verekers dated 18 July and 3 October 2019. It pleaded (at para 17) that it was a term of the policy that Diamond World provide it with all available information to enable it to quantify the amount of the loss claimed and such information as to the property lost or damaged as it might reasonably require and as might be in the plaintiff's power. It admitted (at para 18(a)) that Diamond World was entitled to the value of loss that it had assessed Diamond World was entitled to under the policy being $367,990.78.
Notwithstanding this admission, and a request for payment of the admitted sum, the underwriters have not paid anything in response to the claim.
Catlin's answer to the claim is pleaded in para 19 as follows: "19. In further answer to the whole of the claim made by the plaintiff, the defendant says: (a) any claim based upon a breach by the defendant of the contract of insurance; and (b) any claim for damages over and above the assessment of the loss made by the defendant; must fail because the plaintiff has not approached the matter in good faith and has presented a claim which is not a true reflection of its entitlements under the Policy. Particulars (a) During the period of the assessment of the claim the plaintiff failed to respond fully and promptly to reasonable requests for information made by the defendant; (b) The plaintiff has claimed for the loss or destruction of items of jewellery which, upon the basis of the records of the plaintiff and third parties supplied to the defendant, cannot be established to have been taken during the robbery or damaged as a result of the robbery; (c) In response to the defendant's request that it properly prove its claim, the plaintiff has: (i) failed to produce records verifying the consignment of jewellery kept on the subject premises and taken in the robbery; (ii) produced records which neither conform with proper accounting processes or provide a proper means of recording stock, sales and purchases; (iii) produced and relied upon records which do not appear to be an accurate record of the jewellery on the premises as at the date of the robbery. (d) The plaintiff has purported to support the claims by relying upon representations and providing written statements which do not accurately reflect the loss and damage suffered through the robbery; (e) The plaintiff has undertaken measures in respect of unnecessarily dismantling and melting jewellery settings which had the effect of artificially enlarging the potential claim."
Catlin did not plead the stock in trade clause. It did not plead that the effect of that clause was that the cover provided by the policy depended upon the formation of an opinion or the making of a decision by the underwriters that they were satisfied with the quantum of the claim. Catlin did not plead that the claim was fraudulent.
Notwithstanding the pleadings the written opening submissions of counsel for Diamond World included the following: "The Issues 12. Based on the pleadings [sic], and the parties agree (see "Statement of Agreed Facts and Chronology and List of Issues" provided by both parties to the Court) the following issues arise for determination: (a) has the Insurer made a decision; (b) if so, was the Insurer entitled to limit Diamond World's claim by reason of the "limited information and evidence" as to the Stock having regard to the Stock Records Clause; (c) what is the value of the Stolen Stock; (d) what is the value of the Damaged Stock; (e) has Diamond World engaged in the conduct particularised in [19] of the Amended Defence; (f) if so, does that mean that Diamond World has not "approached the matter in good faith and presented a claim which is not a true reflection of its entitlements under the Policy"; (g) if so, does that mean the Insurer is entitled to refuse the "whole of the claim"?"
This statement of issues does not identify as an issue whether, if the insurer had made a decision (as to what is not identified), any such decision was made unreasonably, unfairly or otherwise than in good faith.
In his written outline of opening submissions, counsel for Diamond World said that there was no evidence that the insurer had made a decision and its failure to do so was a breach of its obligations. In their outline of opening submissions counsel for Catlin submitted that there was "…no pleaded complaint regarding the processes adopted by Catlin, but for the sake of completeness it will be proved that Catlin responded appropriately and reasonably to the claim, and in accordance with the terms of the policy". They also submitted that, after proceedings had been commenced, Diamond World had provided more evidence in an attempt to substantiate the claim. They submitted that that evidence was irrelevant because it was not provided to Catlin at the time it was asked to determine the claim.
In the course of the oral opening submissions of counsel for Diamond World the primary judge asked whether the issue to be determined was the construction of clauses 1 and 4. In response, counsel said: "… the way that we see it is this. What the insurer was required to do was make a decision and inform us of that decision, that then required the insurer to go about reaching its decision by having regard to this clause, well the entirety of the policy but relevantly in this case in relation to this clause and the information event of loss clause. What your Honour will see when I take your Honour to it is that in fact the insurer did request various documents and various specific information and it did receive same. If the insurer makes a decision, then the Court needs to look at whether or not that decision was reasonable having to regard to the policy and the information that was provided to the insurer at the time. The reasonableness of that decision needs to be considered against the background of the duty of good faith that's imposed by s 13 of the Insurance Contracts Act. If the Court forms the view that the decision was not reasonable or unreasonable or in breach of the duty of good faith, then in effect the Court steps into the role of a claims officer and makes a decision based upon the material available to the Court at the time of its decision."
This was not how the case was pleaded but it must be accepted that it was how the case was fought at trial. But it left open a number of questions. First, what did the underwriters decide? The only identification of a decision by the underwriters was the correspondence from Lander and Rogers to Pikes and Verekers of 18 July and 3 October 2019. The only decision evidenced by that correspondence was a decision by the underwriters to offer to settle Diamond World's claims on terms that the underwriters would pay $500,000 (as at 3 October 2019), Diamond World would grant a full release to the underwriters, but the underwriters would be free to seek a declaration that they had no liability to Diamond World and if successful, the payment would be refundable. It might be arguable that the underwriters' conduct evidenced a further decision taken by someone that, if the offer of compromise were not accepted by Diamond World, the claim would be rejected notwithstanding the underwriters' admission that they had assessed the plaintiff as being entitled under the policy to $367,990.78. A refusal to pay that claim would clearly be unreasonable unless the underwriters could establish that their liability to pay that sum was discharged because Diamond World had not complied with its duty of good faith by presenting a claim which was not a true reflection of its entitlements under the policy (para 19 of the defence).
On appeal Catlin did not seek to demonstrate why Diamond World's presentation of a claim for a greater amount than that to which it was entitled, even assuming that the claim for the greater amount was not made in good faith, would discharge the underwriters from their liability to pay the sum which they assessed it was entitled to receive.
The primary judge found that the insurer did not act fairly, reasonably and in good faith, for reasons that included that they were still not paying what they had concluded Diamond World had established it was owed under the contract (at [261]).
Catlin submitted that her Honour erred in making that finding because "it wasn't the way that the case was put against us below".
But this part of the case presented for decision below was not pleaded by either side. It is not clear why Diamond World agreed that its cover depended upon its showing that a decision by the underwriters to decline cover was unreasonable, unfair or in bad faith, but once that issue was embarked upon, neither party was bound by its pleadings.
The basis upon which the parties proceeded at trial appears to have been based upon principles settled by the decision of this Court in TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim (2016) 91 NSWLR 439; [2016] NSWCA 68 concerning the construction of insurance policies where cover depends upon the formation of an opinion by the insurer. In TAL Life Ltd v Shuetrim, the relevant clause of the policy was that an insured would be entitled to cover for Total and Permanent Disability defined as follows: "[10] Under the Basic Policy provided by TAL, TPD was relevantly defined as follows: '…The Insured Person having been absent from their Occupation through Illness or Injury for 3 consecutive months (where the Insured Person's condition is unclear it is reasonable to defer assessment) and having provided proof to the satisfaction of us that the Insured Person has become incapacitated to such an extent as to render them unlikely ever to engage in or work for reward in any occupation or work for which he or she is reasonably qualified by reason of education, training or experience.'" (Emphasis added)
In Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 the policy provided cover for Total and Permanent Disablement defined as follows: "Such state of bodily or mental incapacity resulting from accident, injury or illness or disease as has necessitated the Life lnsured's absence from his or her employment for six consecutive months (the waiting period) and will in the opinion of Zurich Australian Life Insurance Ltd after consideration of such medical or other evidence as it may require, continue to render the Life Insured incapable of resuming his or her previous occupation or engaging in any other occupation for which he or she is qualified by his or her knowledge or training." (Emphasis added)
In Hannover Life Re of Australasia Ltd v Jones [2017] NSWCA 233 the relevant definition of total and permanent disablement provided: "[21] 1.3.1 The Insured Person is unable to follow their usual occupation by reason of accident or illness for six consecutive months and in our opinion, after consideration of medical evidence satisfactory to us, is unlikely ever to be able to engage in any Regular Remunerative Work for which the Insured Person is reasonably fitted by education, training or experience;" (Emphasis added)
In MetLife Insurance Limited v MX [2019] NSWCA 228 the insurer's liability turned partially on its being satisfied that the member of a superannuation scheme had become incapacitated to such an extent as to render him unlikely ever to engage in any gainful profession, trade or occupation for which he was reasonably qualified by reason of education, training or experience (at [2]).
In this case the policy does not provide that Diamond World substantiate its claim to the underwriters' satisfaction, but that they do so satisfactorily. Those are not equivalent expressions.
The primary judge observed that, as a result of the service of written outlines of opening submissions and the insurers' oral submissions in opening, both the previously identified issues in the pleadings were revisited (at [47]). On the second day of the hearing the parties agreed on a reformulation of the issues as follows: "1. Did the Insurer make a decision to refuse to provide cover under the contract shortly before 3 October 2018? 2. Was advice of the decision conveyed by the letter of 3 October? 3. Has Diamond World established that the defendant: (1) breached its obligation of utmost good faith, acting unreasonably or unfairly in making the decision? (2) breached the contract? (3) If so, on what date? 4. Did Diamond World engage in the conduct particularised in [19] of the Amended Defence? 5. If so: (1) was the result that Diamond World did not approach the matter in good faith and present a claim which was not a true reflection of its entitlements under the Policy? (2) does that mean the defendant was entitled to refuse the "whole of the claim"? 6. What damages, if any, should Diamond World be awarded?"
Issue 3(1) raised the issue that arises in cases of which TAL Life Ltd v Shuetrim is an example. Issue 3(2) was ambiguous. It could mean: "Has Diamond World established that the defendant: … (2) thereby breached the contract?" But that would be superfluous. Its other meaning is "Has Diamond World established that the defendant: … (2) breached the contract by not paying the claim?"

[4]

Reasons of the primary judge

The primary judge commenced by summarising her conclusions. In summarising her conclusions, her Honour said: "[24] The insurer relied on conduct, which on its case, established Diamond World's failure to adhere to its obligation of utmost good faith, as well as the rejection of its offer, to resist any orders being made in Diamond World's favour. I am satisfied that despite the evidence establishing that Diamond World did breach that obligation, not only did the insurer breach its own obligation of utmost good faith, it also breached its contractual obligations. [25] That there was a dispute over whether the insurer owed Diamond World any more than the $500,000 it offered to pay, could not relieve it of its obligation to pay what Diamond World substantiated it was owed under the contract. That course was not available to the insurer under the contract, either while it sought to negotiate a resolution of the dispute, or later, while resisting the claims Diamond World advanced in these proceedings. [26] The evidence established that Diamond World had substantiated both its claim for the stock stolen in the robbery, as well as the damaged fittings. As to the claim in respect of the damaged stock, while it substantiated the cost price of the jewellery left behind in the smashed cabinets, it did not establish what of that jewellery had been damaged. [27] That was because both Diamond World's claim and what it advanced in these proceedings was that all the stock left behind had been damaged. Mr Chohaili's concession in cross examination that 30 - 40% of that stock had not been damaged, meant inevitably that Diamond World had not substantiated what stock had been damaged, as it was obliged to do under the contract. His concession established that it had in fact never attempted to establish this, with the result that the evidence which Diamond World led was also incapable of establishing this aspect of its case. [28] The insurer not having pleaded fraud, neither Diamond World's rejection of its $500,000 offer, nor the fact that Mr Chohaili's evidence established that part of Diamond World's claim had no basis, can relieve the insurer of its contractual obligation to pay for the loss which Diamond World did substantiate it had suffered in the robbery, given what it had insured under the policy."
Consistently with the way the parties had presented issues for determination, her Honour said: "[229] An insurer is thus not entitled to refuse a claim for a reason which depends on the efficacy of an opinion in relation to the formation of which it has not acted reasonably and fairly, or which does not address the correct question. And if the insurer does form and rely on such an opinion, that will constitute a breach of its contractual obligations. But the Court may not simply substitute its own view for that of the insurer, because it is performing a reviewing function in proceedings such as this: at [86]. [230] Thus, it is also not for the Court to undertake a review of the merits of the insurer's decision, or to substitute its own view for that of the insurer, by reference to additional material not before the insurer: Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214 at [54]."
The primary judge found that the insurer failed to reveal to Diamond World material that was before it when it made its decision (at [234]) and found that Diamond World had established that the insurer breached its duty of utmost good faith given how it handled the claim and what it failed to disclose (at [234]). The primary judge found: "[242] In July 2018 SS1 had been provided to Mr Crofton and the insurer. It cross referenced the jewellery in the police photos with identified records, including purchase invoices, consignment notes and daily sale sheets, which were also provided. [243] It may be accepted, as the insurer submitted, that it was reasonable for the insurer to have appointed Mr Crofton and to rely on his opinions and assessments. That is why its failure to lead evidence about what he did after he provided his second report to the insurer leads to an adverse inference against it. But it also had to consider the records and information on which Diamond World relied to substantiate its claims. It thus could not ignore errors into which Mr Crofton or others on whom it relied fell, when they were drawn to its attention, as they were. … [247] It was in July 2019 that the insurer received Mr Ehlers report, his conclusion being that the finally claimed losses was for $1,705,360, of which $1,313,360 was for stolen stock and $392,022 for damaged stock. He arrived at a maximum figure for the claim of $710,234, but his report was erroneous, beginning as it did with the assumption that there had been no stocktake undertaken in June 2017. [248] That had long been in the insurer's hands and its failure to provide that very pertinent information, also evidenced the breach of its obligations. [249] This report was provided to Diamond World in July 2019, when the insurer's solicitors advised that it had concluded that Diamond World was not entitled to recover any amount for melted stock, in part because jewellery can be remade and does not lose its value once stones are removed and it is melted. Mr Chohaili and Mr Crofton agreed what the cost price of jewellery is comprised of. It includes the cost of manufacture. The insurer paid no attention to this or the differing value which can result, depending how jewellery is manufactured. This approach was thus not only plainly wrong, but unreasonable. … [253] The evidence establishes a decision made in two parts. The first conveyed by its 31 May letter the insurer sent and the second conveyed by its solicitors in their 3 October letter, which reiterated concerns earlier explained. I accept that there does appear to have been a problem with the second decision, failing as it did to reveal to Diamond World the loss the insurer had assessed it suffered. That information was only later provided in the defence and was even later increased in the amended defence. … [255] Because of the way the insurer made and conveyed its decisions and the way it conducted its case, it is difficult both to identify what material was taken into account and how the insurer reached its adverse conclusions. That supports the conclusions which I have reached, in relation to the breach of the insurer's obligations. … [258] In the result I am satisfied that the evidence establishes that the obligation of utmost good faith required the insurer to do more than it did. [259] It should have disclosed what it took into account in arriving at its decision, including Ms Bramble's report and whatever the position was in relation to Mr Crofton's assessment. Further, having accepted as it did that Diamond World had substantiated part of its claim, it should have paid Diamond World that amount, whatever it was. … [261] In my view, it is a matter of simple common sense that making an offer to Diamond World to pay more on terms than it assessed for the losses which had been substantiated, in order to avoid the possibility of its further pursuit of its rejected claim, but the insurer still not paying what it had concluded Diamond World had established it was owed under the contract, because its conditional offer was not accepted, did not accord with the insurer's obligations. [262] That the result of the course which the insurer so pursued also involved a breach of the contract, was also established by its pleaded admissions, which the insurer has still not remedied. … [270] In May 2019 the insurer accepted its liability in respect of some of the stolen stock, which it later quantified by its pleaded admission. How it arrived at that conclusion was not explained. But I am satisfied that all of the information it had to consider at the time it made its decision, which included both Mr Ehlers' first report and the advice of the errors which it contained and the material which revealed those errors, established that a greater loss than it accepted had been substantiated."
The primary judge found that Diamond World had not acted in good faith. In cross-examination Mr Chohaili accepted that some of the jewellery that was the subject of the claim for damaged stock and that had been melted, was not damaged. Her Honour found that Diamond World's pursuit of the claim in respect of undamaged stock that was claimed to have been damaged was unreasonable and irrational (at [226]). Her Honour found that as Catlin had not pleaded that the claim was fraudulent, the insured's failure to pursue the claim with utmost good faith did not justify the insurer in a refusal to pay the claim (at [264]). There is no appeal against that finding.
The primary judge then found that the records relied upon by Diamond World were reliable and that it had substantiated its claim for loss of stolen goods. There is no appeal from that finding.

[5]

Grounds of appeal

The grounds of appeal were as follows: "1. The trial judge erred in the interpretation and application of the critical clauses of the insurance contract: a. By failing to apply the correct legal test to determine whether or not the insurer acted unreasonably as to whether it was satisfied that the insured had substantiated its claim; b. By utilising evidence and other material unavailable to the insurer at the time the insurer made its decision to determine whether or not the decision was unreasonable. 2. The trial judge erred by constructively failing to exercise jurisdiction by failing to make those findings critical to the decision as to whether the insurer had acted unreasonably in making its decision on the claim. 3. The trial judge erred by making a finding that the insurer had breached the contract of insurance by failing to make a payment at an unspecified time - a case which was neither pleaded nor advanced by the insured. 4. The trial judge erred: a. When making certain findings of fact unavailable on the evidence; and b. By having regard to irrelevant matters."
Rule 51.18(e) of the Uniform Civil Procedure Rules requires that a notice of appeal state "briefly, but specifically, the grounds relied on in support of the appeal". Rule 51.36(2) requires that submissions raising any challenges to findings of fact must include a statement in narrative form at the end of the submission setting out (a) the findings challenged and supporting references to the judgment, and (b) the findings contended for and supporting references to the transcript and other evidence in the court below.
The appellant made no submission challenging findings of fact in a form required by r 51.36(2).
Ground 4 of the notice of appeal failed to comply with the requirements of the rules. It did not specify what findings of fact were challenged or what were the irrelevant matters to which the primary judge was said to have had regard.
Catlin made no submissions in relation to the primary judge's finding at [259] that the underwriters should have disclosed what they took into account in arriving at their decision, including Ms Bramble's report. The primary judge found (at [13]) that Catlin engaged Ms Bramble as an investigator and Mr Ehlers' report of 3 July 2019 stated that there had been no 2017 stocktake undertaken which was simply wrong as Mr Crofton and the insurer were aware (at [81]). Her Honour found that because Diamond World was not provided with the report the insurer obtained from its investigator, Ms Bramble, it had no opportunity to advise the insurer of errors it contained, some of which would have also been apparent, particularly to Mr Crofton.
Catlin did not submit that the primary judge formulated a wrong test. The test her Honour formulated (at [229] and [230]) quoted at [65] above was in accordance with Catlin's submissions, and correctly states the law where cover depends on the satisfaction of the insurer as to the existence of a fact (Shuetrim at [61]-[62]; Edwards at 77, 536; MetLife at [76]-[80]).
But Catlin submitted that the judge did not apply that test. Catlin submitted that in finding that the underwriters acted unreasonably, the primary judge relied on evidence that was not available to the underwriters when they made their "decision". The matters upon which it was said that the judge relied in making that finding included her Honour's findings in relation to the credibility and reliability of witnesses, the consequences of failing to call witnesses, the report of a Mr Ross Beames, forensic accountant, whose report was provided for the purpose of the trial but was not before the underwriters when they made their "decision" of 3 October 2019, the evidence given at trial including the joint experts' report, other matters emerging at trial, the judge's assessment of Mr Chohaili's credibility, matters that emerged from the cross-examination of Mr Crofton, the judge's assessment of the credibility and motives of Mr Leigh, the evidence of Mr Samer Rad, the judge's favourable assessment of his credibility, and Jones v Dunkel inferences that the judge drew.
It may be accepted that all of these matters would be irrelevant to the assessment of the reasonableness of the underwriters' so-called "decision" conveyed by the letter of 3 October 2019 but although the judge referred to all of the above matters, her Honour did not do so simply for the purpose of deciding whether or not the underwriters' decision was made fairly and reasonably. That was not the only issue.
After describing the issues as presented to her Honour and the pleadings, her Honour first addressed the issue of whether Diamond World adhered to its obligations under cll 1 and 4 of the policy. Clause 4 stated that it was a condition precedent to a right of indemnity that Diamond World give the underwriters such information and evidence as to the property lost or damaged as might reasonably be required by the underwriters and was in the insured's power. Her Honour found that that obligation was not breached and there is no appeal from that finding. It was in the context of that issue that the primary judge referred to evidence given by Mr Crofton in cross-examination that information provided to him was sufficient for him to have assessed its claim. This was an example of a matter which Catlin submitted was evidence relied on by the primary judge in respect of her Honour's finding as to the unreasonableness of the so-called decision of 3 October 2019 because it was not material that was available to the underwriters. But the judge did not so find and the finding was made for a different purpose.
The primary judge then went on to consider various issues of evidence under the heading "Credibility, reliability and the failure to call witnesses and tender documents".
Much of that evidence was not relevant to the issue of the reasonableness of the underwriters' so-called decision of 3 October 2019 but was relevant to other issues in the case. That is true of each of the other matters relied upon by Catlin as establishing error in assessing the fairness and reasonableness of the underwriters' so-called decision of 3 October 2019.
The primary judge was critical of some of the underwriters' responses to the claim for damaged stock, but this was not material. As Catlin pointed out the judge herself rejected the claim for damaged stock, albeit by reason of admissions Mr Chohaili made in the witness box.
Catlin did not address the primary judge's finding that the underwriters' decision was unreasonable for not disclosing to Diamond World material that it had and took into account in arriving at its decision (for example a report of its investigator, Ms Bramble) and in not taking into account all of the information provided by Diamond World in support of its claim.
Irrespective of the detail of those matters, which were not specifically addressed on the appeal, the primary judge was clearly right in finding that it was unreasonable for the underwriters not to pay the amount of the claim for which they admitted liability.
Ground 3 of the notice of appeal states that the judge was in error in taking this matter into account because that was a claim that was not pleaded nor advanced by the insured.
It is true that the claim was not pleaded, but as explained earlier in these reasons, that is because the trial went off on issues that had not been pleaded. Nonetheless the statement of claim did seek indemnity in respect of the loss and damage that was pleaded, and pleaded that the insurer had refused to provide cover for the Stolen Stock on the basis of cost price.
Paragraph [253] of the primary judge's reasons did not identify what was the second part of the insurer's decision. That was the result of the failure of Catlin to identify clearly what was the decision it said it had made. In submissions before the primary judge, counsel for Catlin accepted that the letter of 3 October 2019 was not an "assessment" but an "offer". That is clearly right. The only decision of the underwriters conveyed by the letter of 3 October 2019 was a decision to make the offer of compromise. A decision not to pay the claim unless the underwriters' offer were accepted can be inferred from subsequent conduct.
None of this was pleaded. Understandably, none of it was specifically addressed in the primary judge's reasons. The primary judge was right to say that the way the insurer conducted its case made it difficult to identify what material was taken into account and how it reached its adverse conclusions.
Contrary to ground 3, it was an issue at trial whether the insurer acted unreasonably in not paying the sum for which it admitted liability in its defence.
In para 37 of the opening submissions of counsel for Diamond World, counsel stated that: "37. Even if the above is wrong, it is entirely unclear why, factually or legally, that entitles the Insurer to deny the whole of the claim. Indeed, the proposition is at odds with the Insurer's starting position that it admits that Diamond World is entitled to the value of the loss which it has assessed at being $367,990.78 (see [18] of the Amended Defence). Although it has never paid that amount (or any amount) to Diamond World."
Correspondence from Pikes and Verekers to Lander and Rogers demanding payment of the admitted sum was referred to by the primary judge in her Honour's reasons at [17].
The issues before the primary judge and on appeal were more complicated than they should have been. The issue raised by Diamond World's statement of claim was what the cost price value of the Stolen and Damaged Stock was. Given the rejection by the primary judge of the defence that the underwriters were excused from liability because the claim had not been made in good faith (against which finding there is no appeal) and given the primary judge's rejection of the claim for Damaged Stock, the only remaining question should have been what the cost price of the Stolen Stock was. The primary judge's finding on that question was not challenged on appeal.
Wider issues were raised at trial, in particular whether the underwriters made a decision to reject the claim, or not to pay the claim unless Diamond World accepted the offer of compromise of 3 October 2019. The primary judge's finding that any such decision was not made fairly, reasonably and in good faith, should not be disturbed.
For these reasons I propose that the appeal be dismissed with costs.
MITCHELMORE JA: I agree with White JA.

Catlin Australia Pty Ltd v Diamond World Jewellers Pty Ltd

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (6 paragraphs)

Parties

Cases Cited (10)