A recent decision of the Queensland Supreme Court in Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd  QSC 313 has confirmed that in a situation where insurers are responding to claims where they have several options of settlement they must elect and communicate their decision as to the option of settlement. This will be relevant where the insurance cover provides that the insurer is able to decide which basis of settlement to adopt. This Supreme Court case makes it clear that the insurer must prevent legitimate commercial considerations, such as early cash settlement’s, as these will lead to a failure to perform the contract by not unequivocally electing an option within a reasonable time.
The court did not make any new law in this decision, rather applied settled principles to a common scenario: where negotiations take place after a claim is lodged. In this case Cape York Airlines Pty Ltd (“CYA”) made a claim under their insurance policy for the damage done to one of their aircrafts when an engine failed causing it to fall into shallow waters. The insurance policy provided for the insurer to elect between effecting repairs, paying for repairs, or paying for the loss, not exceeding the amount insured. QBE Insurance (Australia) Ltd elected to repair and contacted a company who provided an estimate for the repair of $895,000 which was less that the amount insured of $1.8 million. The insurer then sent a letter to CYA informing them that they instructed a company to repair the airline with an enclosed ‘authority to repair’ for them to sign. This letter further stated that the insurer’s interest was limited to the quoted cost of repairs. CYA refused to authorise the repairs or to accept an equivalent cash payout.
A year later no resolution had been reached and the aircraft had rotted away in storage. CYA commenced an action against the insurer. At trial, the insurer argued that it had selected the option to pay for repairs under the contract. As CYA did not consent to the plane being repaired, the insurer argued that CYA had repudiated the repair contract. CYA argued that no such selection had been made by the insurer, and that the insurer was in breach of the insurance policy. The Queensland Supreme Court held that the three options constituted the only possible means of performance, and that election of an option by the insurer must be either express and unequivocal or implied by behaviour. While insurers can undertake reasonable commercial negotiations in the interests of securing a better settlement, such negotiations will be improper if the insurer fails to elect a basis of settlement as provided in the policy in a reasonable time.
By trying to limit its liability to the amount of the estimate provided the insurer was not liable for the whole costs of repair. The insurer did not effectively select and communicate any of the three options available and as such the insurer was not offering to validly perform the contract. The insurer was found liable to pay the full insured amount. In relation to what constitutes a reasonable time, the court in this case decided that two months was a reasonable time in which to determine that the claim fell within the policy and to select an option. If an insurer does conduct negotiations and discussions with their client, it should be mindful that it must elect an option and of the relevant time period for doing so.