Ortiz v Reward Insurance Pty Ltd

[2006] WADC 171

ORTIZ & ORS -v- REWARD INSURANCE PTY LTD [2006] WADC 171

Jurisdiction:	DISTRICT COURT OF WESTERN AUSTRALIA	Citation No:	[2006] WADC 171
Case No:	CIV:909/2002	Heard:	30 JUNE 2006, 21 JULY 2006
Coram:	CRISFORD DCJ	Delivered:	24/10/06
Location:	PERTH
No of pages:	14	Judgment Part:	1 of 1
Result:	Question 1(a)(i) answered "yes"
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Parties:	FERNANDO ORTIZ LISA ORTIZ ORTIZ INVESTMENTS PTY LTD REWARD INSURANCE PTY LTD (ACN 007 118 854)
Catchwords:	Contract of Insurance Action against liability insurer Repudiation Subrogation Whether insurer entitled to recover from insured benefits paid where the insured compromises claim against third party Trial of preliminary issues
Legislation:	Home Building Contracts Act 1991 Trade Practices Act 1974
Case References:	Castellain v Preston (1883) 11 QBD 380 Insurance Commission of Western Australia v Kightly [2005] WASCA 154 Tepko Pty Ltd v Water Board (2001) 206 CLR 1 Till v National Mutual Life Association of Australasia (2005) 13 ANZ Ins Cas 61-640; [2004] ACTCA 26 AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655 Andrews v Patriotic Assurance Co (No 2) (1886) 18 LR Ir 355 Arthur Barnett Ltd v National Insurance Co of New Zealand Ltd [1965] NZLR 874 Baxter v Obacelo Pty Ltd (2001) 205 CLR 635 Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113 Broadlands Properties Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cas 60-552 Burn v Morris (1834) 3 L J Ex 193 Clark v Urquhart [1930] AC 28 Collings Construction Co Pty Ltd v Australian Competition & Consumer Commission (1998) 152 ALR 510 Farrow Finance Co Ltd (in liq) v ANZ Executors and Trustee Co Ltd [1998] 1 VR 50 Globe & Rutgers Fire Insurance v Truedell [1927] 2 DLR 659 Harrison v Zurich Australian Insurance Ltd, unreported; NSWCT; BC9603264, 30 July 1996 Horse, Carriage and General Insurance Co Ltd v Petch (1916) 33 TLR 131 Imperial Bank of Canada v Begley [1936] 2 All ER 367 Lawton v Dartmouth Moving & Storage Ltd (1975) 64 DLR (3d) 326 Lucas v CMT Construction and Metropolitan Tunnels (1986) 4 ANZ Ins Cas 60-752 McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 Monroe Schneider Associates Incorporated v No 1 Raberem Pty Ltd (1991) 104 ALR 397 Morganite Ceramic Fibres Pty Ltd v Solar Basic Australia Ltd (1987) 11 NSWLR 189 Morris Ltd v Perrott and Bolton [1945] 1 All ER 567 Napier v Hunter [1993] AC 713 National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 Phoenix Assurance Co v Spooner [1905] 2 KB 753 Ramyel Pty Ltd v Hassell & Partners Pty Ltd, unreported; SCt of NSW; BC8901770; 1 September 1989 Re Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 80 ALR 545 Re Trivan Pty Ltd (1996) 134 FLR 368 Rice v Canadian Lawyers' Insurance Association 121 DLR (4th) 762 Smith v Maloney (1998) 19 WAR 209 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 Thiess Contractors Pty Ltd v Murchison Zinc Company Pty Ltd, unreported; SCt of WA; Library No 980288; 1 May 1998 Townsend v Stone Toms [1984] 27 BLR 26 Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436 West of England Fire Insurance Co v Isaacs [1897] 1 QB 226

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA

IN CHAMBERS

LOCATION : PERTH CITATION : ORTIZ & ORS -v- REWARD INSURANCE PTY LTD [2006] WADC 171 CORAM : CRISFORD DCJ HEARD : 30 JUNE 2006, 21 JULY 2006 DELIVERED : 24 OCTOBER 2006 FILE NO/S : CIV 909 of 2002 BETWEEN : FERNANDO ORTIZ

LISA ORTIZ
First Plaintiffs

ORTIZ INVESTMENTS PTY LTD
Second Plaintiff

AND

REWARD INSURANCE PTY LTD (ACN 007 118 854)
Defendant

Catchwords:

Contract of Insurance - Action against liability insurer - Repudiation - Subrogation - Whether insurer entitled to recover from insured benefits paid where the insured compromises claim against third party - Trial of preliminary issues

(Page 2)

Legislation:

Home Building Contracts Act 1991

Trade Practices Act 1974

Result:

Question 1(a)(i) answered "yes"

Representation:

Counsel:

First Plaintiffs : Dr P R MacMillan
Second Plaintiff : Dr P R MacMillan
Defendant : Mr M R B Hemry

Solicitors:

First Plaintiffs : Gibson Lyons
Second Plaintiff : Gibson Lyons
Defendant : Talbot & Olivier

Case(s) referred to in judgment(s):

Castellain v Preston (1883) 11 QBD 380
Insurance Commission of Western Australia v Kightly [2005] WASCA 154
Tepko Pty Ltd v Water Board (2001) 206 CLR 1
Till v National Mutual Life Association of Australasia (2005) 13 ANZ Ins Cas 61-640; [2004] ACTCA 26

Case(s) also cited:

AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655
Andrews v Patriotic Assurance Co (No 2) (1886) 18 LR Ir 355
Arthur Barnett Ltd v National Insurance Co of New Zealand Ltd [1965] NZLR 874
Baxter v Obacelo Pty Ltd (2001) 205 CLR 635
Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113
Broadlands Properties Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cas 60-552

(Page 3)

Burn v Morris (1834) 3 L J Ex 193
Clark v Urquhart [1930] AC 28
Collings Construction Co Pty Ltd v Australian Competition & Consumer Commission (1998) 152 ALR 510
Farrow Finance Co Ltd (in liq) v ANZ Executors and Trustee Co Ltd [1998] 1 VR 50
Globe & Rutgers Fire Insurance v Truedell [1927] 2 DLR 659
Harrison v Zurich Australian Insurance Ltd, unreported; NSWCT; BC9603264, 30 July 1996
Horse, Carriage and General Insurance Co Ltd v Petch (1916) 33 TLR 131
Imperial Bank of Canada v Begley [1936] 2 All ER 367
Lawton v Dartmouth Moving & Storage Ltd (1975) 64 DLR (3d) 326
Lucas v CMT Construction and Metropolitan Tunnels (1986) 4 ANZ Ins Cas 60-752
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381
Monroe Schneider Associates Incorporated v No 1 Raberem Pty Ltd (1991) 104 ALR 397
Morganite Ceramic Fibres Pty Ltd v Solar Basic Australia Ltd (1987) 11 NSWLR 189
Morris Ltd v Perrott and Bolton [1945] 1 All ER 567
Napier v Hunter [1993] AC 713
National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514
Phoenix Assurance Co v Spooner [1905] 2 KB 753
Ramyel Pty Ltd v Hassell & Partners Pty Ltd, unreported; SCt of NSW; BC8901770; 1 September 1989
Re Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 80 ALR 545
Re Trivan Pty Ltd (1996) 134 FLR 368
Rice v Canadian Lawyers' Insurance Association 121 DLR (4th) 762
Smith v Maloney (1998) 19 WAR 209
Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322
State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228
Thiess Contractors Pty Ltd v Murchison Zinc Company Pty Ltd, unreported; SCt of WA; Library No 980288; 1 May 1998
Townsend v Stone Toms [1984] 27 BLR 26
Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436
West of England Fire Insurance Co v Isaacs [1897] 1 QB 226
(Page 4)

1 CRISFORD DCJ: The Court is asked to determine preliminary issues which have arisen between the parties. It is agreed that such a trial pursuant to O 32, r 4 of the Rules of the Supreme Court 1971 may dispose of or at least limit some of the issues for final hearing. In order to understand the context of the preliminary issues it is necessary to canvass the relevant background to the action.

Facts

2 The first plaintiff owned property at 13 Riversea View, Mosman Park from 28 June 1996 to 16 October 1997.

3 For the purposes of this judgment there is no relevant distinction between the two plaintiffs.

4 The second plaintiff owned the property from 16 October 1997 to 23 July 2001.

5 On 20 August 1997 the first plaintiff and Oldfield Knott Architects Pty Ltd entered into an architect agreement to construct a home on the property.

6 Gatt Constructions Pty Ltd ("Gatt") entered into a contract on 18 September 1997 with the second plaintiff for the construction on the property of the home designed by the architect.

7 In compliance with obligations under the HomeBuilding Contracts Act 1991, Gatt obtained and the insurer issued to the first plaintiff a home indemnity insurance certificate dated 14 October 1997. The certificate provided for a limit of indemnity of $100,000.

8 Under the policy, the insurer agreed to indemnify the first plaintiff by reason of it suffering "loss" caused by the occurrence of risks within the scope of the indemnity.

9 Work commenced under the building contract in late 1997. When construction was partially complete, some time on or about 19 May 1998, the builder, Gatt, was placed into administration. On 12 November 1998 Gatt was placed into liquidation.

10 By notifications dated 22 May 1998 and 25 September 1998, the insurer was made aware that an indemnity was claimed from it pursuant to the policy for losses arising from the failure of Gatt to construct the home in a workman like and competent manner and in accordance with the applicable plans and specifications up to a limit of $100,000.

(Page 5)

11 On or about 13 August 1998, arbitration proceedings were commenced by the second plaintiff against the architect.

12 There were some difficulties in the arbitration proceedings and before these were completed, on 4 May 2001, the second plaintiff and the architect entered into a deed of agreement to settle all disputed matters.

13 It was only during the course of these court proceedings that the insurer became aware of the arbitration and consequent settlement. In the settlement the plaintiffs received an unapportioned amount of $700,000 from the architect in respect of claims relating to the building project.

14 Gatt and the insurer were not joined as parties to the arbitration.

15 As a result of learning about the arbitration and deed of agreement, the issue of a possible defence barring the plaintiffs from further claiming under the indemnity provided by the building insurance policy arose.

Questions for determination

16 The first question to be determined as a preliminary issue is stated thus:

(a)(i) Did the plaintiffs or any of them breach an equitable duty owed to the defendant as an insurer under the doctrine of subrogation by reason of the second plaintiff entering into the deed of agreement between the second plaintiff and Oldfield Knott Architects Pty Ltd dated 4 May 2001 ("settlement deed"); and

(ii) If so, what is the remedy to which the defendant is entitled by reason of such breach?

17 The insurer says that as a result of the settlement with the architect and consequent receipt of the unapportioned sum of $700,000, by the power of subrogation, the plaintiffs are effectively barred from pursuing the claim, they having already received the limit under the insurance policy. Further, they should repay the amount of $100,000.

18 It says that if the answer to the first question is yes then that will dispose of the case. If the answer is no it says the balance of the matters should proceed to trial.

(Page 6)

19 The plaintiffs' position is that if the answer to the first part of this question is yes then any other matters should proceed to be determined at trial. If the answer is no then the further questions can be addressed.

20 It is appropriate to firstly consider par 13A of the Amended Reply to Defence and Counterclaim which provides:

"As to par 6J, 6K and 6KA of the Further Amended Defence the plaintiffs say that the defendant rejected the plaintiffs' claim and the plaintiffs in any event deny that the defendant had an equitable right of subrogation to recover from the second plaintiff any benefit received in diminution or extinction of the loss and damage against which the second plaintiff has been or will be indemnified.

Particulars

The claim was rejected by the defendant's letter dated 6 October 2000."

21 Essentially the plaintiffs' claim that by correspondence of 6 October 2000 the defendant rejected the plaintiffs' claim under the contract of insurance and thereby repudiated the contract of insurance so that the doctrine of subrogation does not apply, there being no contract in place when the deed of agreement was executed.

22 The defendant accepts that if its conduct amounted to a repudiation of the contract of insurance then it may not rely upon its equitable rights of subrogation.

23 The defendant says however that the conduct which is relied upon by the plaintiffs as amounting to a repudiation falls short and as such does not disentitle the defendant from relying upon its rights of subrogation.

Repudiation

24 The plaintiffs allege the defendant in sending certain correspondence to the plaintiffs prior to the entry into the deed of agreement effectively repudiated the insurance policy. That being the case, the defendant was no longer in a position to exercise the power of subrogation.

25 Two letters have been referred to by the plaintiff. Paragraph 13A of the amended reply to defence and counterclaim only particularises one letter, a letter of 6 October 2000. This letter is from Australian Home Warranty Pty Ltd, a company agreed to be the agent of the defendant. It

(Page 7)

is written to the agent of the plaintiff. The letter rejects the claim made by the plaintiffs based on a failure to notify of a claim within a time limit set out in the insurance policy.

26 Thereafter there was further correspondence from the agent of the defendant to the agent of the plaintiffs on 25 October 2000. In this further correspondence, a further and separate ground for rejection is stated. The additional ground is that the insurer had already expended the "limit of indemnity" under the policy. It claims payments had been made to the administrator of the builder.

27 It is acknowledged that the defendant now disavows its earlier position of rejecting the plaintiffs' claim on the basis that a relevant time limit had not been complied with. However, it maintains that payments to $100,000 have been made and its liability under the policy thereby discharged.

28 The plaintiff argues amongst other things that this present acceptance of an incorrect basis for rejection as set out in the letter of 6 October 2000 is an acknowledgement of a clear intention to repudiate the contract.

29 The letter of 6 October 2000 sets out that the insurer:

"… must unfortunately reject the owners claim.

… given that the records show that the owners have not written to the builder or the insurer within 60 days of first becoming aware of the problems, they have breached a fundamental pre-condition to a successful claim.

Notwithstanding the rejection of this claim, the owner's policy does cover you for new items discovered after today, during the remaining period of the policy period, if any of those items are properly reported and then deemed valid."

30 In the further correspondence of 25 October 2000 it is made clear that the claim is rejected on two mutually exclusive grounds. Firstly the insurer had expended the limit of indemnity under the policy and, secondly, the failure to notify the insurer within the relevant period were re-stated.

31 The Court was referred to the case of Till v National Mutual Life Association of Australasia (2005) 13 ANZ Ins Cas 61-640; [2004] ACTCA 26; BC200408472 where the Court dismissed an argument by an

(Page 8)

insured that the insurer had repudiated a contract. The insurer had ceased making payments under an income protection policy on the basis that the insured was no longer disabled for the purposes of the policy. The Court held that the evidence simply established that the insurer took an erroneous view of its obligations under the contract. Although the insurer was in error in ceasing to make the payments, it was an error that fell well short of what is needed to establish repudiation.

32 The view of the Court was that an erroneous conclusion on whether the terms of the contract had been complied with was a far cry from drawing an inference that the whole of the contract was repudiated.

33 One need, here, go no further than the letter of 6 October 2000. It is clear that the present claim was rejected. It left the way open for any further claims to be made, each of which would be assessed as and when made. There is nothing to suggest that the fact of rejecting one claim is the same as repudiating the entire contract of insurance.

34 The insurer here has accepted that its earlier interpretation or calculations were incorrect and has distanced itself from that initial incorrect position. It does not amount to a clear intention to not be bound by the contract.

35 The second basis advanced by the plaintiffs for the insurer's repudiation is the letter of 25 October 2000. As noted, this is not relied upon in its pleadings. Despite this but considering the argument advanced, I accept the defendant's submissions that it was an indication that its obligation or responsibility had already been met, that is, the appropriate amount had already been paid. This position is not akin to an intention to repudiate a contract but adopts a position suggesting the contract has already been performed in that the insurer had already met its obligations.

36 The second letter was less than three weeks after the first letter and was available to the plaintiffs well before the deed of agreement was signed.

37 I do not accept that the defendant by its correspondence repudiated the contract.

Subrogation

38 There seems little dispute that the insurance policy in question is an indemnity policy and as such the doctrine of subrogation can apply to it.

(Page 9)

There is little dispute it is a partial policy of insurance. Under the insurance policy Ortiz Investments Pty Ltd was entitled to an indemnity up to $100,000 from the insurer in respect of specified losses resulting from the default of the builder under the building contract. Whilst not for present determination the defendant says that amount has effectively been paid but this is disputed by the plaintiffs.

39 The insurer says, unbeknownst to it, the plaintiffs negotiated a deed of agreement and received a further $700,000 albeit unapportioned. There is nothing in the deed itself to give any clue as to what the $700,000 comprises. It is agreed between the parties that the plaintiffs owe or have paid in excess of $500,000 in legal fees. However, it is not agreed that the $700,000 includes those costs.

40 The issue to be determined is whether the plaintiffs breached the obligations required by the doctrine of subrogation in negotiating the deed of agreement with the architect. Conducting a trial of preliminary issues is often fraught with difficulty. Such a trial should only be embarked upon when the utility, economy and fairness to the parties are beyond question. (Tepko Pty Ltd v Water Board (2001) 206 CLR 1 at 18). (See: Seaman, Civil Procedure Western Australia).

41 Given assurances that the purpose of this trial was to eliminate wasted expense in a long and protracted trial "estimated at probably 10 days with experts and all sorts of expensive bells and whistles", I have adopted a broad approach to the question posed as 1(a)(i).

42 It is not so much whether the plaintiffs breached the obligations required by the doctrine of subrogation in negotiating the deed of agreement but whether as a result of the settlement, they are subject to the power of subrogation. I intend to view the question in that slightly broader light on the basis that this answer may be of assistance to the parties in the future conduct of the matter.

43 The doctrine of subrogation is founded upon equitable principles which are calculated to prevent an insured making a double recovery in circumstances in which the insurer has undertaken to indemnify the insured against actual financial loss.

44 It gives the insurer the right to require the insured to pursue any remedy available against a wrongful party for the benefit of the insurer. It further gives the insurer the right to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified.

(Page 10)

45 An early statement of the doctrine can be found in Castellain v Preston (1883) 11 QBD 380 at 388 where Brett LJ stated:

"As between the underwriter and the assured, the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be or has been exercised or has accrued and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished."

46 The doctrine of subrogation would give to the insurer the right to require the second plaintiff to take action against the builder to recover in respect of any indemnified losses. It involves a duty on the second plaintiff to bring any action in its name to recover damages from any wrongdoer who may have contributed through default to an indemnified loss. The insurer's position here is that by reason of releases given to the architect in the deed of agreement by the second plaintiff any such action to further pursue matters against the builder is impossible.

47 It is useful to consider the timing of any arbitration proceedings. These commenced on or about 13 August 1998. This was after correspondence had been forwarded to the insurer on 22 May 1998, notifying it that an indemnity was claimed from it pursuant to the insurance policy. Despite this, there was no attempt, so it would appear, to involve the insurer or even advise the insurer of the action to be taken by way of arbitration which touched upon actions by the builder.

48 The plaintiffs have argued that this is a policy of partial insurance and as such it is open to the insured to pursue the litigation itself. Whilst this may well be the case, it is necessary to balance that with some recognition of the insurer's rights by virtue of the insurance policy and as it impacts on the builder.

49 The crucial issue is to ensure an insured does not obtain double recovery and also to ensure that an insurer is able to pursue all its rights, due to subrogation, against a third party wrongdoer.

50 So, whilst there is little doubt that an insured can pursue any recovery itself, in the circumstances of this case, there is an obligation upon the insured to conduct its litigation with proper regard for the

(Page 11)

insurer's interests. It goes further than simply the insured acting without mala fides. There is an obligation to take cognisance of the insurer's position. That is likely, at the very least, to involve notifying the insurer of what and who is being pursued and if necessary actively involving the insurer.

51 Thus the first question to be tried deals more appropriately with an issue of not so much the entering into the deed of agreement but the manner in which that deed was settled including, most importantly its terms. A breach of duty here revolves around a failure to quantify or allocate any amount insofar as it related to the builder and thus may have duplicated any indemnification under the insurance policy. The deed of agreement was, in essence, a settlement from the architect in respect of a claim relating to the building project.

52 The defendant argues that there is substantial overlap between the loss for which the plaintiff claims an indemnity pursuant to the insurance policy and the settlement of $700,000 contained within the deed. In the statement of claim, the various plaintiffs identify the loss said to be suffered arising from the failure of the builder to construct the home in a workmen like and competent manner and in accordance with the applicable plans and specifications. In particular, Sch A of the statement of claim sets out four alternative formulations of the loss for which the indemnity is claimed under the policy:

(a) demolishing the existing works and constructing the building anew;

(b) the cost of completion;

(c) alternatively, the loss on the contract, being moneys expended on construction and a loss because construction was to be demolished or rectified at a cost greater than the construction cost;

(d) alternatively, the loss on contract in (c) less capital realisation of improvements and selling commission.

53 Wasted consultants costs are claimed in relation to each of these.

54 The matters in issue between the second plaintiff and the architect in the arbitration were alleged breaches of contract and of a duty of care and breaches of s 52 of the Trade Practices Act 1974.

(Page 12)

55 These include an alleged failure to design the house with due care, failure to specify material fit for the purpose, failure to select a suitable builder, failure to properly supervise the work of the builder, wrongful certification of defective work by the builder and failure to instruct the builder to make good defective work.

56 It further included, as a result of alleged breaches, the cost of demolishing the existing work and rebuilding or alternatively rectifying existing work and engaging a new builder, wasted consultants costs and wasted amounts paid for work which was alleged to be worthless.

57 The defendant argues that these are all items of loss that the plaintiffs claim to be within the scope of the indemnity under the insurance policy for which the insurer is liable to the plaintiffs.

58 The very global nature of the settlement in the deed has precluded the involvement of the insurer in testing or determining whether the settlement was appropriate and what part of the settlement related to the areas of overlap.

59 I accept there is prima facie evidence the plaintiffs have received money which may reduce the loss suffered through Gatt's default. It is for the plaintiffs to explain to what the money relates and how it was apportioned.

60 The defendant relies heavily upon the recent decision of Insurance Commission of Western Australia v Kightly [2005] WASCA 154. It argues that the Court of Appeal settled the principles to be applied in a case where an insured settles claims for an unapportioned sum without the involvement or consent of a subrogated insurer in respect of some of the settled claims.

61 The plaintiff argues that this case can be distinguished from that of Kightly in that it does not involve the same "injury". It argues on that basis Kightly can not possibly apply to the present factual scenario. I am of the view that the dual proceedings in Kightly to recover did deal with the same injury but importantly the two proceedings involved different heads of damages, not altogether different from the situation here. The crux of the two actions here is to try to recover money lost at the hands of the builder.

62 Whilst it is clear there are differences in the factual situation, it is important to consider what Steytler P said when dealing with the insured's obligations:

(Page 13)

"[48] The competing submissions in this respect requires some further consideration of the basis for the operation of the doctrine of subrogation. I have said that, in this context, the basis for its operation is the avoidance of double indemnity. There are, in this respect, dicta which suggests that the principle of subrogation arose as a remedy against unjust enrichment:…"

63 The learned President goes on to reiterate the proposition of Brett LJ in Castellain (supra) that an insured "shall be fully indemnified, but shall never be more than fully indemnified."

64 This principle allows the insurer to ensure that the insured does not receive more than a full indemnity in respect of his loss. Steytler P continues:

"That, in turn, has led to acceptance of the principle that an insured must not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his rights of subrogation: Brisbane Stevedoringabove at p 241 per Barwick CJ."

65 I am of the view as a result of the deed of agreement there exists a right of subrogation in favour of the insurer. Given the commonality of the loss sought to be recovered in the court proceedings and the arbitration proceedings, the right of subrogation could have been exercised by the insurer in respect of the plaintiffs' claim against the architect insofar as it related to the builders default. However, the settlement or release set out in the deed of agreement of 4 May 2001 has effectively precluded the insurer from pursuing this matter.

66 The very nature of the deed of agreement by its wording has prevented the parties or this Court from knowing the basis upon which the settlement was reached, whether it relates to the common issues between the parties or to costs or both. What would therefore seem to follow is that as in Kightly,the insurer should receive all that has been paid by it to the plaintiffs under the indemnity policy. No due consideration was given to the insurer's interest.

67 In all the circumstances, question 1(a)(i) should be answered yes.

Question 1(a)(ii)

68 In Kightly the case was one where a partial indemnity had already been paid by the insurer. The Court held that the insured's conduct had

(Page 14)

rendered impossible an apportionment of the settlement amount so as to determine the amount for which the insured was required to account to the insurer in reduction of the indemnity.

69 The trying of a preliminary issue is only appropriate in clear and simple cases where questions can be clearly understood and the facts can be agreed. It is clear that there is no agreement as to whether $100,000 has been paid or paid appropriately to the plaintiffs pursuant to the contract of insurance.

70 Whilst I accept the orders sought by the insurer may cover this possibly given there is no agreement on the facts, I do not intend to answer the balance of the question.

71 I will hear from counsel in relation to the relevant orders that should be made to progress this matter.