In the recent case of AAI Ltd t/as Vero Insurance v Kalnin Corporation Pty Ltd; Kalnin Corporation Pty Ltd v AAI Ltd t/as Vero Insurance [2017] NSWSC 548, the court found that an obligation under the terms of an indemnity to give notice of a proposed settlement may require the indemnifying party to be given the opportunity to consider the amount of the proposed settlement and take steps before a settlement is agreed.

Background

In early 2001, Mr Laurence Kalnin (Mr Kalnin) decided to develop a property in Redfern through Kalnin Corporation Pty Ltd (Kalnin Corporation).

Kalnin Corporation engaged Definite Dimensions Pty Ltd (Definite Dimensions) to carry out the development.

Definite Dimensions applied for an insurance policy with Vero Insurance (Vero) in relation to works to be undertaken during the development.

Vero issued an insurance policy (the policy) on the basis that Mr Kalnin and the Kalnin Corporation execute an indemnity in Vero’s favour covering all claims arising from the Definite Dimensions’ acts or omissions and all claims by an insured under the policy (the indemnity).

The development was completed at the end of 2004. In November 2008 (at which time Definite Dimensions had been placed into liquidation), Vero received notification from the owners corporation that they intended to make a claim under the policy for allegedly defective work.

Between early 2009 and February 2013, Vero evaluated and assessed the range of alleged defects and ultimately paid $4.232 million to the owners corporation for remedial works. Vero then sought to recover that sum from Mr Kalnin and Kalnin Corporation pursuant to the indemnity.

The indemnity

One of the main issues considered by the court was whether Vero had satisfied its obligation under clause 6(b) of the indemnity to notify Mr Kalnin and Kalnin Corporation ‘promptly of the proposed settlement’ of the claim made by the owners corporation.

While Vero initially provided notice to Mr Kalnin that a claim had been made under the policy, Mr Kalnin heard nothing from Vero for over three years during which time Vero obtained experts’ reports and tenders from remedial builders.

The court held that the purpose of clause 6(b) was to give Mr Kalnin and Kalnin Corporation the opportunity to consider the amount of the proposed settlement and to negotiate the amount for which Vero proposed to settle the claim made under the policy. This was particularly so in circumstances where Mr Kalnin had at an early stage offered to carry out the remedial works for which he was liable.

Instead, Mr Kalnin had not been afforded the opportunity to consider the reports or tenders obtained by Vero or to carry out remedial works himself. In fact, he did not receive any further correspondence from Vero until notification of the indemnity claim following settlement.

Vero had therefore failed to comply with clause 6(b) of the indemnity and had failed to satisfy the condition precedent which ‘of itself, [was] an answer to Vero’s claim’.

Lesson for insurers

In light of the above, it is important that insurers consider what obligations they have under an indemnity to inform an indemnifying party of any proposed settlement. This includes consideration as to whether they should give that party an opportunity to respond to the claim so they are given an opportunity to respond or to undertake their own work to mitigate the amount of the claim. In this case, Vero’s failure to do so meant that its claim against Mr Kalnin and Kalnin Corporation failed.