An Australian case dealt with a pay-to-be-paid wording according to which the insurer would indemnify the insured “in respect of all sums which the insured shall become legally liable to pay, and shall pay, as compensatory damages.” The court held that the words “and shall pay” did not mean that the insurers did not owe an indemnity until the insured actually paid the third party’s claim. The words “shall pay” were construed as meaning that all that is required is proof of liability to pay.
The clause did not require prepayment but required only the establishment and quantification of the insured’s loss.
The court said it would be surprising if the insured had to meet a significant claim from its own resources before being able to recover from its insurers. That would create a risk that the insured could not afford to do so and would become insolvent. This is inherently inimical to the concept of insurance and therefore it would require the clearest language to require an insured to disburse the money before being entitled to claim policy benefits.
It is surprising to think that an insurer will not be liable if it happens to have an insured who cannot actually pay the claim or find bridging finance with which to do so. The simple device of ceding the proceeds of the policy in payment of the third party claim should solve the problem. The wording is intended to prevent an insured benefiting from the indemnity payment by not paying the proceeds over to the third party to whom it is liable. That obstacle can be easily overcome by arranging to pay the third party rather than putting the insured into liquidation.
The matter is Lambert Leasing Inc v QBE Insurance Ltd (No 2) [2015] NSWSC 1996.
