Queensland Court of Appeal finds insurer not entitled to reduce claim payout by 1/11th

In Mattress Innovations Pty Ltd v Suncorp Metway Insurance Limited [2013] QCA 377 the Court of Appeal found that upon the proper construction of the insurance contract the insurer was not entitled to reduce the  amount payable to the insured by 1/11th on account of input tax credits to which the insured may be entitled.

The case is a further example of a contractual dispute between parties relating to GST. We have seen a number of disputes relating to real property contracts (e.g., whether the price is GST exclusive or inclusive) – some examples are referred to in my paper published earlier this year entitled “GST and Real Estate Contracts – when things go wrong” , but this case shows that disputes can arise in all types of transactions, including insurance.

The clauses at issue included the following:

16.2 Calculating Claims

If You make a claim under this Policy, any payment or supply We make to You in respect of the acquisition of goods, services or other supply (or monetary compensation in lieu thereof) or otherwise in relation to Your claim will be calculated on the GST inclusive cost of Your claim.

In calculating such payment, We are entitled to reduce it by any ITC which You are, or would be, entitled to:

(a) for the acquisition of such goods, services or other supply; or

(b) had the compensation been used to acquire such goods, services or other supply

However, the total of all payments We make to You will not exceed Your sum insured, limit or sublimit of liability, or other monetary limitation.

The sums insured, limits and/or sublimits of liability, or any other monetary limitations are inclusive of any taxes, levies, duties or charges that the payment would be affected by or subject to.

The insured’s building (which was leased ) was destroyed by fire and the loss was greater than the total sum insured. The insurer could elect to pay the insured value of the damaged property or restore the property. The insurer elected to pay the total sum insured, less 1/11th of the sum. The insured used those monies to rebuild the property, and claimed an input tax credit for the building costs. In this regard, one can readily understand the intent of the clause.

At first instance, the insured contended that the effect of the general condition was that the total amount of the loss should be reduced by 1/11th, so that if the remaining amount was more than the total sum insured the insured was entitled to the total sum. The insurer contended that the starting point (for the purpose of the 1/11th reduction) was the sum insured. The primary judge agreed with the insurer, noting that was anomalous that “an insured whose claim is more than the sum insured (ie. an under-insured insured) should be in a better financial position, relatively speaking, than an insured whose claim is within policy limits”.

The Court of Appeal observed that the constructions proposed by both parties resulted in anomalies. Ultimately, the Court of Appeal accepted the construction proposed by the insured over that of the insurer (which had been accepted by the primary judge). The factor which the Court appears to have found decisive was described as follows (at [23]):

On the other hand, the construction adopted by the trial judge produces the result that the limit of the insurer’s liability to satisfy its obligations under the policy by payment to the insured is not the Sum Insured stated in the certificate of insurance in simple and unqualified terms, but is instead 10/11ths of that amount. That is such a surprising result as to suggest that the construction which produces it could not reflect the intention of reasonable contracting parties. Furthermore, for the reasons given earlier, the appellant’s construction of General Condition 16.2, that the insurer’s maximum potential liability after taking into account input tax credits extends to the Sum Insured, more closely reflects the text and structure of that clause in the context of the policy as a whole than does the construction which the trial judge preferred. In my respectful opinion the appellant’s construction is correct.

The decision is a further example of the difficulties involved in drafting GST clauses. The Court (both on appeal and at first instance) commented on the poor drafting of the clause. The primary judge observed that the conditions were “infelicitously drafted” and marked by “poor word choice, and a lack of conceptual clarity as a matter of ordinary English”.

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