Nerezov v Insurance Australia Limited

Contract of Insurance

1. The terms and conditions of the contract of insurance are contained in Motor Insurance Product Disclosure statement and policy booklet issued by the NRMA. Although submissions were made in the course of the hearing by the plaintiff that there was no evidence that this document was ever forwarded to or read by the plaintiff the Court is satisfied that this document formed the basis of the terms and conditions of the contract of insurance. The pleadings do not raise any dispute that the document did not form part of the contract between the parties. There is also evidence of a recorded telephone conversation between Mr Daniel Nerezov, the brother and legal representative of the plaintiff, and Ms Andrea Brown a claims consultant with NRMA dated 19 October 2015 whereby Mr Daniel Nerezov states that he had explained to the plaintiff what was contained in the policy conditions.
2. The Product Disclosure Statement provides a number of terms relevant to the issues in dispute.
3. At page 7 under the heading "Cover for loss or damage" the Product Disclosure Statement outlines what events are covered by the policy and how the insurer will indemnify the insured from losses caused by those events: We will cover loss or damage to your vehicle caused by any of the following incidents: * An accident including a collision … We will decide whether to: * Repair your vehicle, or * Pay you the cost of repairing your vehicle, or * Pay you the agreed or market value, depending on the cover listed on your current Certificate of Insurance less any applicable deductions.
4. At page 28 under the Heading "Excesses" the contract insurance provides for the payment of an excess by the insured as contribution towards a claim: What is an excess? An excess is an amount you contribute towards the cost of a claim. There are three type of excess: * Basic * Age * Special. If you make a claim you must pay any excess that applies either to us or to the repairer or supplier. We will tell you who to pay your excess to. We may not finalise a claim until you have paid any excess that applies.
5. At page 27 under the heading "Your responsibilities when making a claim under this Policy" the contract imposes the following obligations upon the insured: You must: * Co-operate fully with us, even if we have already paid your claim. This may include: * Providing us with all the information, documents and help we need to deal with your claim, * Immediately sending us any letters, notices or court documents that you receive about any incident which has resulted, or could result in a claim against you * Being interviewed by us * Where requested by us, allow us to inspect your vehicle. We may also require additional quotations from any repairers we nominate. If we need to move your vehicle, this will be at our expense. You must not: * Carry out or authorise repairs, except if you hold comprehensive insurance or Third Party Fire & Theft Insurance and are entitled to claim those repairs as emergency repairs.
6. At page 29 under the heading "How we settle a claim" the contract of insurance contains additional obligations upon an insured prior to effecting repairs: Repairing your vehicle If you choose to nominate your own repairer * Choose a repairer that has all necessary licences and authorisations required by law * Obtain our authorisation for the repairs and quoted cost before those repairs are commenced.

Plaintiff's Right to Indemnification

1. The basis of the plaintiff's claim is that the NRMA has breached the contract of insurance by failing to make payment of the cost of repairs. The essence of a contract of insurance is the right of the insured to be indemnified by the insurer against losses arising from the insured event. In Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668, Megaw LJ stated at 673-674: The insured may recover his actual loss, subject, of course to any provision in the policy as to the maximum amount recoverable. The insured may not recover more than his actual loss.
2. Kelly & Ball Principles of Insurance Law reads (at [12.0120.1]): There are two main methods for determining the amount of the insured's loss. The first is by reference to the cost of replacing or repairing the insured property after making allowance for wear and tear. The other is by comparing the market value of the insured's interest in the insured property immediately before the loss with its market value immediately after the loss.
3. In the present case Mr Nerezov claims that his loss is the sum of $11,782.60 being the amount assessed as the cost of repairs to his motor vehicle. However, he has given no evidence that he has paid this amount. There is no evidence that a demand has been made by the repairer upon Mr Nerezov to pay this amount. Mr Nerezov does not give any evidence of being contractually liable to the repairer for the sum of $11,782.60. His own evidence is that he was advised by an independent loss assessor, Mr Stambolis, that the assessed cost of repairs was $11,782.60 and on the basis of that advice he authorised the repairs to proceed. There is no evidence of any communication between Mr Nerezov and the repairer to the effect that the repairer agreed to revise his earlier quotation of $12,576.87 in line with Mr Stambolis' assessment and made an offered to Mr Nerezov to carry out the repairs for the cost of $11,782.60 and that Mr Nerezov accepted this offer.
4. The plaintiff submitted that the Court should infer such a liability exists. The Court considers it inappropriate to draw inferences on matters which the plaintiff could, and should, be capable of giving direct evidence. In any event, such an inference cannot be drawn in circumstances where, by the agreement entered into with Collision Accident Recovery Services Pty Ltd on or about 27 August 2015, Mr Nerezov effectively placed the process of recovery of losses in the hands of others.
5. The plaintiff's has failed to demonstrate that he has suffered a loss of $11,782.60 and therefore he cannot succeed in seeking an indemnification against the defendant for that sum. At its highest the plaintiff can only establish a liability for the cost of repairs on a quantum meruit basis for what might be considered to be the fair and reasonable value of the work carried out by the repairer.
6. There is a further issue worthy of note regarding the plaintiff's right for indemnification under the contract of insurance with the defendant. That issue is the consequence of Mr Nerezov entering into an agreement referred to as "Agreement of Authority, Indemnity and Subrogation" with Collision Accident Recovery Services Pty Ltd on or about 27 August 2015. The agreement provides: 1. The claimant (Mr Nerezov) has incurred damages resulting from the relevant accident, hereinafter called "damages". The damages include but are not limited to: a. Cost of repair b. Car hire c. Expert report costs d. Towing e. Legal Costs f. Costs orders 2. The claimant is to be indemnified for the damages by CARS subject to the conditions 3-12. By indemnifying the claimant, CARS agrees to be liable in place of the claimant for any and all costs of repairs, car hire charges, expert reports towing charges, legal costs and costs orders. 3. CARS indemnifies the claimant for the damages in consideration of the claimant subrogating to CARS his rights to recover the damages from their the [sic] insurer on [sic] another parties insurer.
7. The agreement between Mr Nerezov and CARS bears a strong resemblance to a contract of insurance, having provisions for indemnification, subrogation and a duty to act in good faith. The indemnification covers the same loss as is covered by the NRMA. If the agreement may be characterised as a contract of insurance it may be that the only subsisting right may be the right on the part of CARS to seek equitable contribution against NRMA as a co-insurer rather than a right of subrogation. Issues regarding the application of the doctrine of subrogation and dual insurance have been considered in other decisions such as Sydney Turf Club v Crowley (1971) 1 NSWLR 724 where Jacob JA said at 730: The legal defence that the insured has already been indemnified is only available when the insured seeks to be indemnified in the strict sense twice over. The insured may sue at law any person who is liable to make good to him the damage which he has suffered and in respect of which he is insured whether that liability arises from tort or from contract. If the insured has already been indemnified by his insurer then the insurer is subrogated to the insured's right against the party primarily liable in contract or in tort for the amount of damage. There is, however, no subrogation in the strict sense when there is double insurance. At the most there is in equity contribution.
8. Although the agreement between Mr Nerezov and CARS purports to create a right of subrogation, ordinarily subrogation arises as a remedy against potential double recovery by the insured rather that an separate right that is contractually conferred.
9. The Court forms no concluded view on the consequence of the agreement between CARS and Mr Nerezov as it was not an issue raised in the pleadings or argued at the hearing. It is suffice to note that it is an arrangement which potentially raises complex legal issues regarding the doctrine of subrogation.

Breach of Contract of Insurance

1. The NRMA alleges that Mr Nerezov was in breach of his obligations under the contract of insurance and that those breaches entitle the NRMA to refuse to indemnify him for any loss.
2. The decision by Mr Nerezov to authorise the repairer SFP Bodyworks to commence repairs on 25 September 2015 without first obtaining the approval of the NRMA was in breach of the responsibilities imposed in page 27 of the Motor Insurance Product Disclosure document.
3. In unilaterally authorising repairs Mr Nerezov was also in breach of the obligation to co-operate with the NRMA in that he prevented the opportunity for a co-operative approach to the management of repairs or the cost of repairs.
4. Mr Nerezov also remains in breach of his obligation to pay the insurer an amount for excess in the sum of $2,000.
5. Mr Nerezov also was in breach of the obligation to allow his insurer to inspect the motor vehicle. In an email dated 19 November 2015 a representative of the insurer put forward the NRMA's recommendation of the fair and reasonable cost of repairs. The email states: Please note; if this recommendation is not accepted, please advise our mutual client that their vehicle will need to be made available and that a field assessment will need to be arranged.
6. The response from Mr Daniel Nerezov, on behalf of the plaintiff, on 20 November 2015 was that the recommendation by NRMA was not acceptable and that the motor vehicle would not be made available for inspection. Mr Daniel Nerezov expresses the view that request for inspection was not a proper request under section 169 of the Evidence Act 1995. That view was misconceived. Section 169 applies in the context of adducing evidence in proceedings before a court, however, the request for inspection was made pre-litigation and, accordingly, the legislative provision had no application. In any event, section 169 does not purport to be an exclusive provision in respect to the right of inspection. The NRMA had a contractual right to seek inspection of the motor vehicle. Section 169 Act does not restrict that contractual right.
7. The request by the NRMA for inspection of the plaintiff's vehicle was conditional. The condition precedent to that request was met when the plaintiff rejected the NRMA's recommendation. By refusing that inspection the plaintiff was in breach of his obligations under the terms of the insurance contract.

Breach of Obligation of Good Faith

1. The NRMA submits that Mr Nerezov deliberately breached the conditions of his insurance contract by failing to seek the insurers approval for repairs to be carried out by SFP Bodyworks and that this constituted a breach of his obligation to act with the utmost good faith towards his insurer under section 13 of the Insurance Contracts Act 1984 (Cth).
2. The obligation to act with utmost good faith is not limited to acts of dishonesty. The obligation requires an insured to have regard to the legitimate interests of his insurer as well as his own: CGU Insurance Limited v AMP Financial Planning Pty Ltd [2007] HCA 36 per Gleeson CJ and Crennan J at [15]. In the same decision Kirby J at [131] adopted the views of Owen J in Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97 at 112 that good faith could include "dishonest, capricious or unreasonable conduct" on the part of the insured. The duty to act in good faith is applicable not only to the making of a contract of insurance but also to the performance of the contract: C E Heath Casualty & General Insurance Ltd v Grey & Ors (1993) 32 NSWLR 25 per Mahoney JA at 38.
3. The Court is satisfied that the plaintiff was not in breach of his duty to act in good faith. Mr Nerezov obtained advice from a relative who is a legal practitioner prior to taking steps in relation to the repair of the motor vehicle. It appears that Mr Nerezov acted in reliance with that advice. Whatever the merits of the advice that he received, the Court cannot be satisfied in the present circumstances that Mr Nerezov acted in a manner that was "dishonest, capricious or unreasonable".

Consequences of Breaches

1. The plaintiff submits that even if it established that Mr Nerezov was in breach of obligations contained in the contract of insurance the plaintiff should be excused for those failures pursuant to section 18 of the Insurance Act 1902. Section 18 provides: (1) In any proceedings taken in a court in respect of a difference or dispute arising out of a contract of insurance, if it appears to the court that a failure by the insured to observe or perform a term or condition of the contract of insurance may reasonably be excused on the ground that the insurer was not prejudiced by the failure the court may order that the failure be excused.
2. The purpose of section 18 of the Insurance Act is remedial in that it allows the court to excuse an insured against the consequences of a breach if it is reasonable to do so and no prejudice is caused to the insurer.
3. In Bluescope Steel Ltd v Allianz Australia Ltd [2008] NSWDDT 24 Curtis J considered the operation of section 18 and stated: To my mind a failure to observe a condition of the policy because of innocent mistake, in the sense that the failure was neither advertent nor "fraudulent or intended to overreach", may reasonably be excused. To the contrary, a conscious failure motivated by an ulterior motive may not be reasonably excused even in circumstances where, by happenstance, the insurer suffers no prejudice.
4. I adopt his Honour's views on the operation of section 18. In the present case it cannot be said that the breaches were inadvertent. Mr Nerezov had been informed of the provisions of the policy by his legal representative and elected to proceed in a manner contrary to those provisions. There is no basis for the Court to excuse Mr Nerezov's breaches.
5. At common law a breach of a contractual warranty may allow the insurer to avoid the contract. Section 54 of the Insurance Contracts Act 1984 alters the common law by providing a balance between insurers and the insured so that the right to avoid a claim is assessed according to the prejudice that the breach caused. Section 54(1) provides: (1) Subject to this section, where the effect of a contract of insurance would but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act.
6. Relevantly, section 54(6) provides that for the purposes of the section reference to an "act" includes an "omission". The failures on the part of Mr Nerezov to obtain approval from the insurer prior to authorising the commencement of repairs and to allow an inspection of the vehicle were acts within the meaning of section 54.
7. In Moltoni Corporation Pty Ltd v QBE Insurance Ltd [2001] HCA 73; (2001) 205 CLR 149 (at [16]), the High Court indicated that where section 54 applies, then: … the relevant sum is to be quantified as the amount that 'fairly represents the extent to which the insurer's interests were prejudiced as a result of that act". The reference to "the extent to which the insurer's interests were prejudiced" invites attention to, and requires identification of, the amount of damage which the insurer suffered as a result of the act or omission in question. Because the act or omission may not always constitute a breach of the contract of insurance by the insured, that damage will not always be identifiable as the amount that would be allowed as compensatory damages on a claim by the insurer for breach of contract. Nevertheless, like an amount allowed for compensatory damages for breach of contract, the amount of which s54(1) speaks, as fairly representing the extent to which the insured's interest were prejudiced, will be the actual financial damage that has been or will be sustained as a result of the relevant act or omission.
8. In Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Pty Ltd [1993] HCA 5; (1993) 176 CLR 332 the High Court stated at 342: The prejudice will consist in the existence of a liability which, in whole or in part, would not have been borne by the insurer if the act had not been done or the omission had not been made or in the non-receipt of an additional premium to which the insurer would have been entitled by reason of the doing of the act or the making of the omission.
9. In the present case it is not suggested that the insurer has lost an opportunity to go off risk. Rather, the prejudice is said to arise through an additional liability for cost of repairs which would not have occurred had Mr Nerezov sought the approval of the NRMA before authorising repairs. In particular, the NRMA states that it would not have approved the commencement of repairs at a cost of $11,782.67.
10. Mr Niven, a senior motor vehicle loss assessor employed by the NRMA, gives evidence of the usual practice of the NRMA to arrange for the claim to be assigned to an assessor. The assessment process will result in the vehicle being placed in the hands of a preferred repairer of the insurer or a repairer of the insured's choice. Where the vehicle is placed in the hands of a repairer a quote is prepared and provided to the insurer. The quote is assessed by the insurer's assessor to ensure that proposed repairs will properly reinstate the vehicle to its pre accident state and that the cost is reasonable.
11. Mr Niven states that SFP Bodyworks is not a preferred repairer of NRMA and it is usual practice for vehicles quoted by SFP Bodyworks to be inspected at the repairer's premises. Mr Niven also states that SFP Bodyworks does not prepare quotes in line with IAG preferred real time rates.
12. Mr Vella, a loss assessor employed by NRMA carried out an assessment of the plaintiff's motor vehicle based on the report provided by RnV Assessment Services. Mr Vella made a deduction of the labour rate to $80 per hour. Mr Niven states that in his experience, the range of rates charged by other similar smash repairers in the area is between $80 and $90. Mr Vella also made deduction in relation to time allowances for various tasks in line with a schedule of recommended times referred to in the Luxury Times & Rates system (LTAR).
13. Mr Vella considered that the fair and reasonable cost of reinstating Mr Nerezov's vehicle would be $6,328.34. On 23 December 2015 Mr Vella revised his opinion based on damage to the side intrusion bar and increased his original assessment to $7,411.77.
14. Mr Mansueto, a loss assessor formerly employed by the NRMA gives evidence on behalf of the plaintiff regarding the procedures of the NRMA. Mr Mansueto gives evidence even if NRMA had managed the plaintiff's claim the vehicle would have been repaired by SPF Bodyworks if the customer wanted it to be repaired there. Mr Mansueto states that the NRMA would have negotiated a cash settlement with the insured in accordance with the insurance policy. Mr Mansueto states that a legal representative appointed to assist the insured would have assisted in Mr Nerezov negotiating an accurate and fair cash settlement.
15. While I accept Mr Mansueto's opinion that the NRMA may have elected to negotiate a cash settlement with Mr Nerezov and that Mr Nerezov ought to be represented in the negotiation of a cash settlement it does not follow that the NRMA would have agreed to a cash settlement of $11,782.67 or some other figure that the plaintiff considers to be a fair and accurate cash settlement. The decision of Mr Nerezov to authorise the commencement of repairs without approval from the NRMA effectively eliminated the choice of the NRMA arranging alternative repairs. The decision by Mr Nerezov to refuse an inspection of the vehicle also restricted the ability of the parties to negotiate a proper cash settlement.
16. The defendant submits that it has suffered prejudice by the plaintiff depriving the insurer of the opportunity to limit the costs of reinstating Mr Nerezov's motor vehicle. The defendant submits that its prejudice is similar to that identified in the case of Jimaco Clothing Pty Ltd v Norwich Winterthur Insurance (Australia) Limited [1985] VicSC 248; (1985) 3 MVR 150. In that case a claim under an insurance policy for property damage was not made against the insurer until seven months after a motor vehicle accident. By that time the insured's vehicle had been disposed of and the insurer was precluded from deciding whether the damage was consistent with the insured's account and from investigating and potentially settling the claim. Murray J held that the breach by the insured had directly prejudiced the insurer.
17. In the present case, the Court is satisfied that the conduct of Mr Nerezov in authorising the commencement of repairs caused prejudice to the NRMA. The commencement of repairs by Mr Nerezov deprived the NRMA of the opportunity to participate in the management of repairs. It deprived the NRMA of the opportunity to consider whether the vehicle should be repaired by an alternative repairer or to negotiate directly with SFP Bodyworks on the methodology to be used and the cost of repairs. The NRMA is undoubtedly experienced in management of repairs and has a significant market presence within the smash repair industry. It would have a stronger bargaining power than an individual such as Mr Nerezov to negotiate a price for cost of repairs at the lower end of the market range. In determining the price that it would be able to obtain it applied pricing guidelines which it no doubt relies upon in many other claims.
18. The failure to allow the insurer to inspect the plaintiff's vehicle deprived the opportunity for the NRMA to carry out a more detailed assessment of the damage and assess the methodology necessary to reinstate the vehicle and the cost of repairs.
19. In the circumstances, I am satisfied that had Mr Nerezov sought the approval of the NRMA prior to the commencement of repairs that the NRMA would have attempted to negotiated a cost of repairs with SFP Bodyworks or some other repairer in line with Mr Vella's assessment. I am satisfied that the repairs could have been achieved that cost, if not with SFP Bodyworks, then with some alternative repairer. If Mr Nerezov did not accept the option of an alternative repairer then it is likely that NRMA would have been able to offer a cash settlement in line with the NRMA's assessed cost. I can see nothing inherently unreasonable with the NRMA making a cash settlement offer in line with the cost that it would be likely to incur if it managed the repairs. If Mr Nerezov had complied with the conditions of his insurance policy and liaised with the NRMA prior to authorising repairs he would have had the advantage of making an informed decision as to whether to proceed with a repairer of the NRMA's choice or elect to pay more with a repairer of his own choice. It is clear that Mr Nerezov has acted in a manner that restricted the NRMA's ability to manage the cost of repairs.
20. To the extent that the plaintiff asserts that it is entitled to be indemnified for an amount that exceeds what the likely cost would have been had NRMA participated in the management of repairs I am satisfied that this represents, in financial terms, the prejudice caused to the insurer.
21. Finally, the NRMA asserts that it has suffered prejudice by incurring legal costs in these proceedings. The NRMA relies on the decision of El-Kabbout v Insurance Australia Ltd t/as NRMA Insurance [2016] NSWSC 417. In that case the court was dealing with a refusal of a claim based on dishonesty on the part of the insured. There is no dishonesty arising in the present case. In order to be satisfied that the legal costs incurred in these proceedings constitutes "prejudice" within the meaning of section 54 the Court would have to be satisfied that the proceedings would not have been initiated but for the breaches on the part of the plaintiff. I am not satisfied that proceedings would have been avoided. Had the plaintiff elected to comply with the conditions of the insurance he may well have still elected to proceed with repairs with his nominated repairer and sought to recover the amount from the NRMA through these legal proceedings.
22. The NRMA is entitled to reduce its liability to $7,411.77 pursuant to section 54 of the Insurance Contracts Act 1984. It is entitled to reduce this amount by a further $2,000 representing the excess payable by Mr Nerezov under the policy towards the claim which remains unpaid.
23. The Court will enter a verdict and judgment in favour of the plaintiff in the sum of $5,411.77. The Court will allow interest pursuant to section 100 of the Civil Procedure Act 2005. There is no particular date as to when the liability for payment arose on the part of the NRMA, however, the Court accepts that interest should run from the time when negotiations on a cash settlement broke down. The Court will allow interest on the claim from the filing of the statement of claim on 9 December 2015.
24. The question of costs is reserved. Assessor Olischlager Small Claims Division, Local Court of NSW 11 October 2016

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 December 2016