The Supreme Court of New South Wales in the matter of Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2016] NSWSC 912 looked at when an admission of liability by an insurer can be withdrawn by the insurer at a later date.

The facts:-

• The plaintiff, Mobis Parts Australia Pty Ltd, is the owner of a warehouse at Eastern Creek in Sydney that was severely damaged in a storm on 25 April 2015. A large amount of hail accumulated on the warehouse roof and it collapsed.
• The plaintiff made a claim under a Property Damage & Business Interruption Policy issued by the defendant, XL Insurance Company SE (XL), on 8 August 2014 (the Policy).
• A consulting engineering firm was retained by XL to undertake a structural engineering review of the warehouse, the objective of which was to assess compliance with the relevant Australian Standards. This was of relevance to XL because of an exclusion clause in the Policy in respect of "faulty or defective design or materials” (the Exclusion Clause) A preliminary report was provided to XL which concluded that the warehouse was in fact compliant with the relevant Australian Standards (the Preliminary Report).
• According to XL, the maximum limit of liability applicable to the loss was EUR 10 million. The damage was estimated to be in excess of $68 million.
• Relevantly (to the end result), lawyers acting for the plaintiff were putting pressure on XL to make a prompt decision in relation to indemnity to mitigate business interruption loss, and on 26 May 2015, approximately one month after the loss, the solicitors for the plaintiff reminded XL of its utmost duty of good faith with respect to the indemnity decision.
• On 5 June 2015 XL wrote to the plaintiff’s solicitors in the following terms (the Indemnity Letter):-

“…

Investigations into and the adjustment of the loss by XL has been ongoing since the date of the loss. The assertion that XL is in breach of its duty of utmost good faith is rejected.

XL accepts liability under the local policy in respect of the loss on the basis of known facts and circumstances, and subject to the applicable terms and conditions.

…

XL understands that Mobis does not agree that the limit applies to the loss. Accordingly, XL accepts that if Mobis takes payment of [EUR10m] at this time Mobis's rights remain reserved.

XL otherwise reserves its position.’ [emphasis added]

• XL subsequently obtained expert evidence to the effect that the Preliminary Report was erroneous and that the warehouse was not in fact built in accordance with the relevant Australian Standards. XI sought leave to amend its defence to rely upon the Exclusion Clause.

The plaintiff opposed this application on the basis that the Indemnity Letter was an admission of liability, which could not be withdrawn by relying on Chesterman J's finding in Thiess Pty Ltd v ERC Frankona Reinsurance Ltd (2007) 14 ANZ Ins Cas 61-717 (Frankona) at [41] that the "acceptance of the claim is in form and substance an agreement" and "will normally amount to a contract, legally binding on the parties".

Bergin CJ, after considering prior authorities of Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 and Frankona allowed the defendant’s application, and said:-

“The commercial community depends upon insurers dealing with claims with promptitude. The defendant was investigating a large claim (approximately $68 million) in urgent circumstances in which it had received a preliminary report. In complying with its obligations of the utmost good faith, the defendant admitted liability to the extent that it saw fit, reserving its position in respect of the issue that had arisen in respect of the extent of its liability, and qualifying its admission as being made on the basis of the facts and circumstances then known.”

While Bergin CJ did not ultimately decide the point because she allowed the plaintiff to amend its pleadings to include an allegation that XL is estopped from relying upon the Exclusion Clause, her reasoning accords in the writer’s view with common sense, and is consistent with the prior authorities on this issue. If the plaintiff is however ultimately successful with the estoppel defence, this would no doubt have drastic consequences for insureds as insurers simply won’t extend indemnity, with or without qualification, until the insurer is unequivocally satisfied that there are no indemnity issues, which will inevitably result is extensive delays in claim management. It doesn’t look like the issue will be ultimately decided in this matter as the plaintiff foreshadowed that if (as happened) the insurer’s application was successful, it would seek to bring an alternative claim under another policy (the “Master Policy”) issued by XL, by the second defendant, AIG Europe Ltd, and by UNIQA which, it is said, does not contain such an exclusion. That leave was given. The law on this issue does however now appear quite settled.

Insurers, and their legal representatives, should therefore exercise prudence when drafting extension of indemnity letters so that the admission is qualified on the basis of the known facts and circumstances, particularly when the loss is significant and/or there are potential indemnity issues. A failure to do so will normally result in a binding contract with the insured, even if the facts and circumstances do change so that an exclusion clause has clear application.