In Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd [2021] NSWSC 1431, Justice Schmidt considered; whether a policy imposed obligations on an insured to keep proper records, the bilateral duty of utmost good faith, and whether an insurer could press for a finding of fraud if it had failed to plead fraud against its insured it in its defence.

Background

On 4 December 2017, Diamond World Jewellers Pty Ltd (Diamond World) was robbed. During the robbery, six glass-topped cabinets were smashed resulting in some jewellery inside the cabinets being damaged. Diamond World alleged that the stock inside the cabinets was all damaged or stolen.

Diamond World lodged an insurance claim with its insurer the next day, and a couple of days later it lodged a claim for all stock lost during the robbery.

Prior to the insurer’s loss adjustor attending the site, the general manager of Diamond World melted the jewellery that was left behind following the robbery.

The insurer granted indemnity to the Diamond World but disagreed on the damages allegedly suffered by Diamond World. The insurer offered Diamond World $500,000. The insurer did not provide any material in support of its offer, which was subsequently rejected by Diamond World.

It was later revealed that the insurer’s lost adjustor made incorrect assumptions in assessing the value of the items stolen and damaged during the robbery. Upon becoming aware of this error, the insurer did nothing.

The insurer alleged that the records kept by Diamond World were incomplete and unsatisfactory.

The insurance contract between Diamond World and the insurer, did not define what was meant by ‘proper records’, it just stated that (cll 1 and 4) [58]:

“the parties’ obligations and the nature and extent of the indemnity. There are three steps:

  • The combined effect of the two clauses is to cast an obligation upon the insured to keep the appropriate records which, in the event of a claim, could satisfactorily substantiate a claim. The burden or onus lies upon the insured, not the insurer.
  • An entitlement to any payment under the indemnity only arises when those conditions have been fulfilled by the insured.
  • The quantification of the payment to be made under the indemnity only covers loss or damage which is satisfactorily substantiated.”

The insurer asked Diamond World to provide all of its records to substantiate its alleged losses including stocktake lists, handwritten sale records and proof of payments. Diamond World did not have a sophisticated system. However, it was claimed to have been compliant with its legislative obligations and had operated successfully for decades.

Diamond World was unable to provide evidence in support of the damaged stock that was melted down.

Ultimately, Diamond World and its insurer could not agree on the value of the insurance claim and Diamond commenced litigation against its insurer.

Decision

Schmidt AJ granted judgment in favour of Diamond World and made the following findings:

  1. The insurer accepted indemnity, however failed to make a payment to Diamond World.
  2. Both parties breached their duty of utmost good faith.
  3. Disputes over the quantum did not allow the insurer to avoid making payments to Diamond World for the loss that it had substantiated (stolen stock and damaged fittings). This was also a breach of its contractual obligations under the insurance contract.
  4. Diamond was not entitled to payments in relation to the damaged jewellery in the cabinet, as it was unable to substantiate this part of the claim.
  5. Diamond World was not required to produce “proper records” as demanded by the insurer, as it had provided the required material for the insurer to substantiate its claim.
  6. The insurer was required to make decision whilst acting reasonably and in good faith, which it failed to do.

Of interest, Schmidt AJ also dealt with the insurer’s attempt to run an argument of fraud, despite not having pleaded fraud against Diamond World in its defence. He found that:

116. Had fraud been pleaded it would have been for the insurer to establish …

117. This is because a “finding of fraud, including fraud for the purposes of s 56, involves a finding that a person has been untruthful and deliberately so, with the intent of obtaining a financial gain.” Thus, “it is a finding of seriously wrong conduct”: at [57]. Procedural justice therefore not only requires that a person be fairly confronted with the suggestion of fraud at trial, but that it also be clearly pleaded and properly particularised beforehand. Such a pleading must allege not only the acts involved, but that they were done in a manner that involves fraud … [citations omitted]”.

Implications

There are two key implications to be drawn from this case

  1. Both parties have a duty of utmost good faith. This includes an obligation on an insurer to ensure that it accurately assesses claims. In this context, it is important to note that an insurer is not able to impose unreasonable requirements in relation to proof of loss.
  2. If an insurer seeks to make an allegation of fraud, it has a duty to substantiate this claim and ensure that it is pleaded.