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Euphemia Dimos and Daniel Turk | May 2013 | Commercial Disputes & Transactions

The government has introduced a bill to amend existing legislation relating to distribution of proceeds from insurance subrogation. The changes will favour the party that funds a recovery action whether it be the insured taking the action or the insurer exercising a right of subrogation.

Who does this impact? Insurers who undertake recovery action in the name of their insureds to maximise salvage. Insureds who undertake recovery action after an insurance claim has been paid.

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Insurance Recoveries New Rules Affecting Priority

Background Under an insurance arrangement, unless excluded by the terms of the contract, the insurer has the right to bring proceedings in the name of its insured against third parties that have contributed to causing the insurable loss. Recovery action by an insurer on behalf of its insured is undertaken in accordance with the principles of subrogation. By way of example, in the case of trade credit insurance a trade credit insurer may take action in the name of its insured against the insured’s debtor (the buyer) or a third party guarantor liable under guarantee for the loss.

Legislative Change On 13 March 2013 the Federal Government introduced the Insurance Contracts Amendment Bill 2013 (“ICAB”). The ICAB will repeal the existing section 67 of the Insurance Contracts Act 1984 (“section 67”), which deals with insurer subrogation, and provide new rules. The proposed changes to section 67 will put in place a set of default rules that outline how recovered moneys are to be distributed between an insured and insurer. Simply put, the rules give priority to recovered money to the party that funds the recovery action and carries the associated risk. Under the proposed section 67, the money recovered is to be distributed as follows:

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a. Recovery of legal and/or administrative costs The party who funds any recovery action, (whether it be the insurer or insured) will receive priority over the non-funding party with respect to the reimbursement of any legal or administrative costs incurred in seeking the recovery. In situations where the recovery is funded jointly by both the insurer and insured, any recovery made is to be distributed on a pro-rata basis between the funding parties, reflecting the original contributions made by each party towards the recovery costs. b. Distribution of recovered money once legal and administrative costs have been deducted Insurer funds recovery If the recovery action is funded by the insurer, then the insurer is entitled to recover an amount that is equal to the amount that it has paid to the insured in accordance with the contract of insurance. Once the insurer has been reimbursed for the amount it has paid to the insured, then the insured will be entitled to any of the surplus funds recovered by the insurer, to the extent of the full amount of the insured’s loss. The insurer will be entitled to any windfall funds (if available) once the insured has been reimbursed for the total amount of its loss. Insured funds recovery If on the other hand, the insured funds the recovery action, then the insured will be entitled to retain an amount that reimburses it for the total amount of its loss. That is, the difference between the total amount of its loss and the claim amount paid by the insurer. Once the insured has been reimbursed for the total amount of its loss, the insurer will then be entitled to any surplus funds recovered by the insured, but only up to the amount that it paid to the insured under the Contract of Insurance.

The insured will be entitled to any windfall funds (if available) once the insurer has been reimbursed for the total of the claim amount paid to the insured. Both the insurer and insured jointly fund the recovery In situations where the recovery action has been funded by both the insurer and insured, and there are insufficient funds to reimburse them both in full, then the amount recovered is to be distributed on a pro-rata basis reflecting contribution to funding the recovery.

Express Provisions in Insurance Contract Regarding Salvage

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Insurance Recoveries - New Rules Affecting Priority Euphemia Dimos and Daniel Turk | May 2013

The parties may contract out of section 67. The rights of the insurer and insured may be modified by the terms of the insurance contract or by subsequent agreement after the loss.

Third Party Beneficiaries Third party beneficiaries under insurance contracts will be treated as insureds for the purposes of the proposed legislation.

Interest The new section 67 also deals with the payment of interest. Any sum recovered with respect to interest is to be apportioned between the parties by reference to by whom the principal amount was recovered, whether both parties funded the recovery and the period of time over which each party carried the loss.

Commencement The proposed section 67 of the ICA is due to take effect on the day six months after the date of Royal Assent of the ICAB and will apply to contracts of general insurance that are entered into (or renewed for older policies) after commencement.

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Conclusion The proposed changes will benefit parties that have funded the recovery action. Insurers who want to be entitled to priority in any recovery will need to fund the recovery action. If the insurer leaves it to the insured to progress a recovery it must be content with the insured having priority to any amounts recovered. Of course if the insurance contract provides for some other basis for the distribution of recoveries (such as pro rata) or a subsequent distribution is agreed between insurer and insured then this will apply, irrespective of who has funded the recovery action.

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Insurance Recoveries - New Rules Affecting Priority Euphemia Dimos and Daniel Turk | May 2013

For more information, please contact: Euphemia Dimos Lawyer T: 02 8257 5786 M: 0409 329 563 effie.dimos@turkslegal.com.au

Daniel Turk Partner T: 02 8257 5727 M: 0408 667 220 daniel.turk@turkslegal.com.au

www.turkslegal.com.au Syd | Lvl 44, 2 Park St, NSW 2000 T: 02 8257 5700 | F: 02 9264 5600 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099

Insurance Recoveries - New Rules Affecting Priority  

The government has introduced a bill to amend existing legislation relating to distribution of proceeds from insurance subrogation. The ch...

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