Stephen Forgacs v Lumley General Insurance Limited

[2007] NSWSC 1506

CITATION:	Stephen Forgacs v Lumley General Insurance Limited [2007] NSWSC 1506
HEARING DATE(S):	14 December 2007
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	14 December 2007
DECISION:	See paragraph [38] of the judgment
CATCHWORDS:	INSURANCE – disputed claim under householder’s defined events policy – whether binding agreement for compromise reached in correspondence – no question of principle.
PARTIES:	Stephen Forgacs (Plaintiff) Lumley General Insurance Limited (Defendant)
FILE NUMBER(S):	SC 5797/07
COUNSEL:	J E Marshall SC / D S Weinberger (Plaintiff) M Speakman SC / N E Chen (Defendant)
SOLICITORS:	O'Sullivan Saddington Lawyers (Plaintiff) Turkslegal (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

McDOUGALL J

14 December 2007 (ex tempore - revised 21 January 2008)

5797/07 STEPHEN FORGACS v LUMLEY GENERAL INUSRANCE LIMITED

JUDGMENT

1 HIS HONOUR: The plaintiff (Mr Forgacs) insured his house with the defendant (Lumley) pursuant to a householders defined events policy of insurance (the policy) current from 30 June 2006 to 30 June 2007. In April 2007, a water main burst, causing some minor damage to the house. Mr Forgacs made a claim for that. In June 2007 there was an enormous storm, affecting Mr Forgacs’ house among others. Mr Forgacs says that his house suffered major damage as a result of that storm. He has made a claim for that.

2 Lumley asserts that it is not liable to indemnify Mr Forgacs. Nonetheless, it has entered into correspondence with him (both direct and through the respective solicitors) in an attempt to negotiate a compromise. The question for decision is whether a binding compromise has been reached.

3 By order made on 5 December 2007, the questions of whether a compromise was made and, if it were, what were its terms were ordered to be determined separately and in advance of all other issues in the proceedings. In the result, the parties accept that the result of those separate issues can be addressed by reference to prayer one of the summons. In substance prayer one claims a declaration that “pursuant to and by virtue of the exchange of” certain correspondence, Lumley agreed to indemnify Mr Forgacs for a sum equal to the cost of repairs to his house arising from the events in April and June 2007 as assessed by Mr John Meredith of Rider Levett Buchnall (RLB). The parties agreed that if I determined that question in favour of Mr Forgacs then I should not make an order as sought by prayer two (which sought an order that Lumley indemnify Mr Forgacs for the assessed cost), but should reserve liberty to apply.

4 Lumley’s contention in relation to indemnity is based on section 6 of the policy, which sets out a number of “General Exclusions”. One of those, set out in clause 6.1(j), provides that the policy does not cover “faulty workmanship, inherent defect, errors or omissions in design, structural defects and faulty design”. It is a little difficult to understand what separate work that definition does having regard to clause 7(e) of the “defined events”, but it is unnecessary to pursue that fascinating question of construction. Equally, since the parties have not put before the Court any material relating to workmanship, defect, design, errors and the like, the strength of Lumley’s case based on the relevant exclusions can be put to one side. It is sufficient to note that the defence was asserted, and I assume, asserted in good faith.

5 To understand the respective contentions, it is unfortunately necessary to have regard to a number of letters. The first to which the parties took the Court is a letter of 13 September 2007 from Mr Forgacs to Lumley. That letter set out a number of complaints, and said that Mr Forgacs “would like to settle this claim as a matter of urgency as (he) cannot afford to lose any more nights sleep worrying about what is going to happen to the house”. The letter concluded by rejecting an offer of $430,000.00 apparently made by Lumley and threatening the involvement of lawyers.

6 Lumley replied on 19 September 2007. That letter did a number of things, including asserting that in Lumley’s view if it were obliged to indemnify Mr Forgacs, the method of indemnification should be in accordance with something proposed by Mr Andrew Shirley, of Shirley Consulting Engineers (SCE). Having articulated that dispute, the letter made the following points among others:

In the hope of resolving both claims we most recently offered you the sum of $430,000 in finalisation of both the April 2007 and June 2007 claims. We note your letter rejects that offer as well.
As previously discussed, Lumley is, given your rejection of the two offers, prepared to agree to indemnify you for a sum equal to the cost of repairs to the premises subject to those costs being fully quoted and a full scope of works being prepared by an independent building consultant and structural engineer.
In our view, this offer is more than reasonable and represents the maximum extent of Lumley’s potential liability under the policy in relation to both the April and June 2007 claims.

…

We urge you to again consider our offer to indemnify you to the extent of the cost of repairs to the premises subject to those costs being fully quoted and a full scope of works being prepared by an independent building consultant and structural engineer.

…


The suggested basis of settlement ($430,000 all inclusive) represents your full entitlement under the policy and the quickest way to resolve the matter. Alternatively, we can proceed to have the works fully costed once the experts, including geotechs, have agreed the method of repair.

7 It is apparent from that letter that the offer made was an offer to settle the claim on the stated basis regardless of Lumley’s contention (which it advanced vigorously) that it was not obliged to indemnify Mr Forgacs at all.

8 On 25 September 2007, Mr Forgacs’ solicitor, Mr O’Sullivan of O’Sullivan Saddington Lawyers, replied. He confirmed rejection of the offer of $430,000.00. He said that Mr Forgacs “is prepared to have the repairs to the property detailed in a full scope of works and, subject to agreement on the scope of works, those repairs could be costed”. The letter did not say what would be the consequence or status of that costing.

9 The letter also noted that Mr Forgacs claimed to have expended substantial sums of money - “in excess of $160,000.00” - by way of mitigation, and reserved his rights in relation to that expenditure.

10 Lumley’s solicitors, Turks Legal, replied on 27 September 2007. They articulated the argument in relation to indemnity by reference to clause 6.1(j) of the General Exclusions and by reference to “the currently available expert evidence”. Having said that, the letter said the following:

However, notwithstanding its entitlement to deny indemnity to your client for both claims, Lumley has proceeded to date to incur significant costs in the investigation of the claim and its causes to assist in the resolution of the claims and to assist your client in the protection of his property. Lumley has also made significant efforts to attempt to resolve the claims on a commercial basis.

…

It is on the commercial basis only, and with no admission of liability, that the respective offers of $400,000 and $430,000 have been previously made by Lumley. (I note that both SCE and Thomas have each estimated the range of repair cost for the property as between $250,000 and $350,000.)

…

Despite the rejection of its offers and the clear questions regarding your client’s entitlement to indemnity at all, Lumley remains committed to resolving the matters on a reasonable commercial basis if possible.

…

It is on the basis of SCE’s recommended method of repair (and no other method of repair) that Lumley agreed, and still agrees, to offer to indemnify your client subject to assessment of the reasonable cost of such rectification and repair as assessed and costed by an independent building consultant and structural engineer.

I am instructed that on a without prejudice basis and with no admission as to liability, Lumley remains prepared to indemnify your client for a sum equal to the cost of the repairs for damage arising from the events in April and June 2007 as assessed and fully costed by an independent building consultant and structural engineer based upon the method of repair as recommended by SCE.

As you are aware, this offer by Lumley is the maximum level of indemnity that your client could possibly be entitled to under the Policy. On this basis, Lumley has been at a loss as to why your client has been hesitant to accept this proposed resolution of the claim to date.

Accordingly Lumley is pleased that Mr Forgacs is now prepared to have the repairs to the property detailed in a full scope of works and to have those works independently costed.

However, I request your confirmation that your client acknowledges, before the process is undertaken, that the claims can and will be resolved based upon the outcome of the assessment and costing process proposed.

…

Despite the grounds upon which Lumley could deny indemnity for both claims, Lumley continues to work towards a commercial resolution of the claims.

The offer that is now made to your client, to indemnify him to the sum equal to cost of repairs subject to a full scope of works and independently costed, is an offer that my client cannot understand why your client is hesitant to accept as it represents the full measure of possible indemnity available to your client under the Policy. I am sure that you have advised your client of this matter already. However I simply point it out again for the sake of clarity.

11 It will be noted that in this letter, as in Lumley’s letter of 19 September 2007, the assertion was made that the offer - whether for a sum of $430,000.00 or for a sum to be costed in the manner set out in the various letters - was said to represent the maximum level of indemnity to which Mr Forgacs was entitled. It is convenient to note at this point that the policy at least arguably offered indemnity for more than the cost of repair of storm damage. It is convenient also to note that if Mr Forgacs had, as he contends he did, spent money on mitigation in respect of an event within the ambit of the insuring clause then on general principles the reasonable cost of mitigation might also be recoverable. On no view did the offers articulated to date (ie, including the letter of 27 September 2007) deal with those other issues.

12 The letter of 27 September 2007 continued by asking a number of question which, clearly enough, were aimed at achieving progress in the commercial resolution. It stated: “If agreement is not able to be reached on a commercial basis, I confirm that Lumley reserves its rights in relation to the issue of indemnity in relation to both claims”. The significance of that paragraph is something to which I will need to return.

13 Mr O’Sullivan replied on 2 October 2007. He said that Mr Forgacs did not agree that the scope of works and cost of repairs could be based on which I might call the SCE method. He suggested that an independent structural engineer should determine the method of repair. He agreed to the appointment of Rider Hunt (as RLB was then known) “for the purposes of preparing a scope of works and costing”. He said that Rider Hunt could seek advice from a structural engineer or a geotechnical engineer chosen by it in relation to the scope of works. Again, the letter did not indicate what the purpose was, or what use might be made, of any scope of works and costing prepared by Rider Hunt.

14 In another letter of 2 October 2007, Mr O’Sullivan reiterated that Mr Forgacs was reserving his rights in respect of expenditure said to have been undertaken in an attempt to stabilise the house. I understand this to be a reservation of rights in relation to the cost of alleged mitigation works.

15 Mr Angus of Turks Legal replied to the first of the 2 October letters to which I have referred on 5 October 2007. He reiterated “that indemnity remains a very real issue” and noted that Mr Forgacs had presented no legal argument as to why he was entitled to be indemnified. It is a little difficult to understand what that legal basis could be if, as I understand was the case, the argument was based not on questions of construction of the policy but the factual application of the relatively clear wording of whichever is the relevant exclusion.

16 Having said that indemnity remained a very real issue, Mr Angus continued:

The details of Lumley’s position regarding indemnity were set out on the basis that those issues in dispute should be very real considerations for your client when he considers the offers put by Lumley, which, given the circumstances, are generous to your client in the extreme.
Nonetheless, in an effort to move this matter forward, I am instructed to respond to the issues raised in your letter of 2 October 2007 as follows:



1. Appointment of Rider Hunt, Property & Construction Consultants

Lumley agrees to the appointment of Rider Hunt to prepare a scope of works and a costing for the repairs to the property for damage related to the incidents of April 2007 and June 2007.

We suggest that John Meredith of Rider Hunt would be an appropriate person to undertake this work.

17 Mr Angus suggested that the letter of instructions to Rider Hunt should include some five matters, one of which (para (b)) was a request to “address, comment upon and verify if appropriate” the findings and conclusions of SCE in relation to cause and method of repair.

18 Having dealt with questions of costs and with the appointment (by Rider Hunt if required) of independent structural or geo-technical engineers, Mr Angus continued:

3. Agreement to the assessment process and costing of the claim

As you are aware, on several occasions, Lumley has requested Mr Forgacs agree to be bound by the outcome of the assessment by the agreed building consultant as regards the cost of repairs as the basis for settlement of the claim. To date no direct response has been received.
My client and I have assumed from the correspondence received from your office that this is now agreed to by Mr Forgacs. If it is not agreed, please advise at your earliest opportunity.

19 Mr Angus wrote again on 12 October 2007. In the second paragraph of that letter he confirmed that Lumley “is keen to resolve the matter as soon as possible”. He stated “that my client essentially agreed to your clients proposal set out in your letter of 2 October 2007 to move the matter forward”. He referred to costs that Lumley was continuing to incur relating to support props and said that Lumley “reserves its rights in relation to those costs”.

20 On 16 October 2007, Mr O’Sullivan replied to the letter of 5 and 12 October. He said :

We refer to your facsimiles of 5 October and 12 October 2007.

The insured agrees to the appointment of John Meredith of Rider Hunt, subject to the insurer paying all costs of Rider Hunt and their appointed experts.

The insured agrees to be bound by the assessment of Rider Hunt as to a scope of works and the cost of works.
It is appropriate that the letter of instruction to Rider Hunt include those matters referred to in sub-paragraphs a), c), d) and e) of your letter dated 5 October 2007.
We do not object to Rider Hunt being provided with the document referred to in paragraphs i), ii) and iii) of your same letter, but do require that Rider Hunt instruct independent structural and geotechnical engineers to obtain advice as to the methods of repair, scope of works and costs.
It is appropriate that you draft the letter of instruction as the insurer is paying all costs.
Please forward the letter to us for approval.

21 Mr Angus thereupon drafted a letter of instructions to Mr Meredith of Rider Hunt. That letter of instructions set out, among other things, the disputed paragraph (relating to addressing, commenting upon and if appropriate verifying the findings of SCE) from the earlier letter of 5 October 2007. Mr O’Sullivan revised the draft letter of instructions and, among other things, deleted the contentious paragraph. On 18 October 2007, Mr Angus said by email that he was instructed to agree to the amendments. It follows that whatever agreement was reached in relation to the instructions of Rider Hunt (who I think by then had become RLB), there was agreement that RLB was not required to address the SCE method.

22 Mr Meredith was instructed by a letter of 18 October 2007 which was in the form agreed by Messrs. O’Sullivan and Angus. He reported on 5 November 2007. Before then, on 2 November 2007, Mr Forgacs wrote to Lumley. He referred to a suggestion made by geotechnical engineers, said to have been retained by Lumley, that the house should be demolished and rebuilt. He said that he had not wanted to do this, but that he had discovered that there was a significant risk of collapse and had “made the decision to shift out of my house immediately”. He then said that he agreed with the recommendation for demolition and requested RLB to return to the property and assess it. He noted that he would make a claim for the insured value of the house.

23 As I have said, RLB reported on 5 November 2007. It is unnecessary to go to the detail of that report or, indeed, the covering letter. It is sufficient to say that the report addressed two methods of repair - one described as making good and the other described as reconstructing as new - and concluded that the cost would be, in round figures, $1,050,000.00 for the first or $1,040,000.00 for the second.

24 It appears that Lumley may have been somewhat alarmed by that report. On (I think, the date is unclear) 7 November 2007, Mr Angus wrote to Mr O’Sullivan. The letter stated, among other things:

I confirm that Lumley’s understanding of the appointment of Rider Levett Bucknall was to obtain an independent assessment of the repair method, produce a scope of works and provide a full costing for those scope of works. The report of Rider Levett Bucknall was then to be used by the parties as a basis for considering resolution of the claim subject to any issues of indemnity.
I confirm that Lumley still maintains this as the quickest way to attempt to resolve the claim and look forward to your confirmation that this equates to your clients understanding.
I also note that the report of Rider Levett Bucknall dated 5 November 2007 was produced contrary to our jointly approved letter of instruction in that it failed to include independent structural and geotechnical experts’ views on the repair (which is obviously inextricably linked to causation).

25 It seems that there was a telephone conversation between Mr O’Sullivan and either Mr Angus or Ms Wallace from Turks Legal on 7 November. Ms Wallace wrote to Mr O’Sullivan referring to such a conversation and said, amongst other things, the following:

Having reviewed the letter of 27 September 2007 referred to by you, it is clear that the offer asserted by you clearly states that any such costing was to be based on the scope of works provided by SCE. I note that this was opposed by your client.
Further I note that throughout these negotiations the issue of indemnity has been reserved and this is expressly confirmed in your letter of 2 October 2007.
Notwithstanding that no agreement has been reached to the effect that any costing provided by Rider Levett Bucknall will be binding on my client, we do however consider that obtaining an estimation of rectification costs would be a positive step towards progressing this claim towards resolution. Accordingly we urge your client to consent to the re-inspection proceeding on 8 October 2007 as proposed.

26 Mr O’Sullivan replied on 8 November 2007. He agreed with the form of further letter of instruction to Mr Meredith and concluded:

The parties have agreed “ to be bound by the outcome of the assessment by the agreed building consultant as regards the costs of repairs as the basis for settlement of the claim ” (see your letter of 5 October 2007).

27 Further correspondence ensued. I do not think that much is to be gained by looking at it, but it is perhaps significant to note that on 19 November 2007, Mr Angus wrote to Mr O’Sullivan asserting “that the damage to the property ... arose as a result of mine subsidence”. He suggested that Lumley would assist Mr Forgacs in making a claim for compensation against the Mines Subsidence Board, but stated “the issue of the cost of the loss, and, therefore, indemnity available under the Lumley policy is a complex one”. He asserted that Lumley “continues to maintain its reservation of rights on the issue of indemnity at this time”.

28 The respective contentions of the parties can be set out and resolved much more briefly than the recital of the correspondence might indicate. For Mr Forgacs, Mr Marshall SC (who appeared with Mr Weinberger of counsel) submitted that the correspondence up to 5 October 2007 evinced a series of proposals to resolve the claim for damage to the house on a basis that included Lumley’s waiving its arguments in relation to indemnity. He submitted that in the letter of 5 October 2007, Mr Angus on behalf of Lumley had set out a proposal to quantify the cost for the purpose of giving effect to that offer. He submitted that the proposal was accepted, with the exception of the contentious paragraph (b) to which I have referred, in Mr O’Sullivan’s reply of 16 October 2007 and that the issue in relation to paragraph (b) was resolved on 18 October 2007 when Mr Angus agreed to the deletion of the paragraph in question.

29 Mr Speakman SC, who appeared with Mr Chen of counsel for Lumley, submitted that the letter of 5 October 2007 was not an offer to resolve the claim for damages. He accepted that the earlier offers made had been offers to compromise the claim (he submitted, the entirety of the claim and not just the claim for structural damage) by compromising on the indemnity issue. However, he submitted that given two matters, the letter of 5 October 2007 should not be read as furthering the “waiver of indemnity issues” approach hitherto manifested. The matters on which he relied were Mr Forgacs’ failure prior to 5 October 2007 to indicate what, if any, purpose was to be served by any report of Rider Hunt, and Mr Forgacs continued reservation of rights in respect of what it is convenient to call alleged mitigation loss.

30 It is certainly correct to note that the earlier correspondence - that up to and including Mr Angus’ letter of 27 September 2007 - had proposed a resolution on the basis that Lumley would forego whatever arguments it had in relation to the question of indemnity. Whether those offers were put on the basis that the whole of the claim was to be resolved, or whether they were put on the basis that only the issue of repair was to be resolved, is a more difficult question.

31 As I have noted, Lumley asserted repeatedly that its offer (whether as a dollar sum or whether quantified in the manner to be agreed through an independent expert) was all that Mr Forgacs could hope to receive. That statement could only have been correct if the offer were one limited to the cost of repair. It is certainly the case that Mr Forgacs had alleged an additional claim - a substantial one said to exceed $160,000.00 - for alleged mitigation expenses. It is certainly the case that if those moneys or some of them had been reasonably expended on mitigation of an otherwise insured loss then they were recoverable. It cannot be the case that a resolution of the claim through the mechanism propounded in the letter of 27 September 2007 could have given Mr Forgacs the maximum level of indemnity to which he was entitled unless this mitigation claim is to be regarded as entirely spurious. That suggestion has never been made.

32 On that basis, and bearing in mind the reiteration of the proposition that the offer was all that Mr Forgacs was entitled to, I think that the proper construction of the offer, viewed objectively, is that it was one put on a commercial basis to resolve the claim for structural damage.

33 That conclusion does not mean that the revised offer put in the letter of 5 October 2007 should be regarded as an offer that, upon acceptance, would lead to an obligation on Lumley to pay whatever was determined to be the proper cost of the proper scope of repair. Whether or not the offer is to be so construed is a question quite apart from the issue as to the “maximum” or “full” measure of indemnity.

34 As I have indicated, Mr Speakman submitted in effect that the basis on which the earlier offer was put - that acceptance would lead to a legally binding compromise as part of which Lumley waived its arguments on indemnity – did not apply to the letter of 5 October 2007. He enquired why Lumley should be taken to have given way not only on the question of the SCE method of repair (as on any view in which it had done by 5 October 2007) but also on its arguments in relation to indemnity.

35 In my view, the letter of 5 October 2007 cannot be construed out of context. If it were looked at in isolation then the position for which Mr Speakman contends may well be right. But it would be a mistake so to scrutinise it without taking into account the continuous exchange of views and proposals and counter proposals, of which, in a sense, it was the culmination.

36 In this context, I return to the penultimate paragraph of the letter of 27 September 2007. As I have noted, that paragraph stated that if agreement were not reached on a commercial basis then Lumley would reserve its rights in relation to the issue of indemnity.

37 In my view, that paragraph makes it plain that the following negotiations - including Mr O’Sullivan’s letters of 2 October 2007, Mr Angus’ letter of 5 October 2007 and the following correspondence relating to the letter of instructions – were a continuation of negotiations seeking to reach agreement on a commercial basis. In other words, I think that the paragraph of the letter of 27 September 2007 to which I have referred informs the basis on which the following offers and counter offers were made. I would in any event reach that conclusion having regard to the entire context starting with the letter of 13 September 2007. But, in my view, the paragraph to which I have now referred several times, makes it clear that the letter of 5 October 2007 was proposing a resolution on a commercial basis regardless of the arguments as to indemnity. Indeed, the letter itself made that clear in its third paragraph, which I have set out above. Further, as I have said, the repeated references to maximum or full measure of indemnity, coupled with the nature of the instructions given to Mr Meredith on 18 October 2007, make it clear that the agreement was one for the resolution of the claim for the cost of repairs.

38 Thus, I think, the preliminary question is to be answered in favour of Mr Forgacs. As the parties have accepted would be appropriate if I were to reach that conclusion, I make the following orders:

(1) Declare that in the events that have happened the defendant agreed to indemnify the plaintiff for a sum equal to the cost of repairs for the damage to the plaintiff’s residence arising from the events of April and June 2007 as assessed and fully costed by Mr John Meredith of Rider Levett Buchnall in accordance with the letter of instructions to Mr Meredith dated 18 October 2007.
(2) Reserve liberty to apply both in relation to the rights declared by order one and in relation to the further conduct of these proceedings.
(3) Order the defendant to pay the plaintiff’s costs of the resolution of the preliminary question.
(4) The exhibits are to remain with the papers for the time being.

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