An Insured’s obligation to mitigate losses following an insured event: how far does it extend?
An Insured has an obligation to mitigate its loss but how far does that obligation extend? This is an issue that comes up regularly for Insureds and their advisors when dealing with insurance claims post-loss.
As a first step, Insureds should check their policy wording in relation to their mitigation of loss obligations and seek legal advice in the event of any uncertainty.
Whilst many policies impose a clear obligation in the context of any initial loss or damage to property to “take all reasonable precautions to prevent loss, destruction or damage to the property insured by this Policy” (see, for example, ISR Mark IV standard policy wording), this may not expressly impose an obligation on the Insured to mitigate its future, consequential losses following a loss.
Similarly, there are no express provisions in the Insurance Contracts Act 1984 relating to the mitigation of losses subsequent to an initial loss, although section 13 might, at a stretch, be interpreted in this vein; nor is there any statutory provision which would oblige an Insured to take anything other than reasonable steps which the Insured, subjectively, considered appropriate to avert or minimise any consequential losses insured under its policy of insurance.
Against this background, Insureds should focus on taking steps to mitigate their losses in line with the basic principles of common law.
So what is the position at common law?
In the context of tort, the emphasis is on the effected party acting reasonably to prevent losses and to take reasonable steps to remedy losses. Similarly, in the context of contract, losses that are reasonably avoidable are unlikely to be recoverable.
The Victorian Supreme Court case of Orica Australia Pty Limited v Limit (No. 2) Limited  VSC 65 offers some insight into what an Australian Court is likely to consider ‘reasonable’ in circumstances where the commercial interests of the Insured do not align with the commercial interests of their insurer. It explores the extent to which Insureds have an obligation to mitigate losses.
The duty to mitigate ongoing losses is frequently not as onerous as is often believed. This was highlighted in the Orica Australia case.
Orica Australia Pty Limited (‘Orica’) chartered a vessel to carry ammonium nitrate from Canada to Australia. The cargo shifted during the voyage, as it had been improperly stowed, causing the vessel to list and deviate from its planned course. The vessel made port at Davisville, Road Island in the United States of America. The United States coast guard ordered the vessel to remain at anchor until the cargo had either been discharged or suitably re-stowed.
The owner of the vessel claimed compensation from Orica for its losses on account of Orica’s liability arising from the manner in which the cargo was loaded and stowed. Orica paid the owner of the vessel in the vicinity of US$2.4 million which it then attempted to recover from its insurer.
Orica’s insurer paid a portion of the claim but maintained that a significant portion of the claim was not covered. It took the position that Orica had failed to, inter alia, mitigate its loss.
The Insured’s obligation to mitigate
As stated, the United States coast guard ordered the vessel to remain at anchor until the cargo had either been discharged or suitably re-stowed.
The owner of the vessel proposed completely discharging the cargo at port, as this was the more financially feasible solution as far as it was concerned. Orica did not accept the owner’s proposal, however, as this would have resulted in substantially greater financial and business losses for Orica who required the cargo immediately in Australia. Orica’s insurer argued that Orica should have accepted the owner’s proposal and not doing so equated to a failure to mitigate loss under the policy and/or severed the causal link between the insured’s losses and the incident itself, arguing that the insured’s losses were instead brought about by its commercial decision to deal with the cargo in its own way.
In reaching its judgment, the Court considered whether Orica’s obligation to mitigate required it to sacrifice its commercial interest in favour of the insurer.
The Court’s findings
In this case, the Court held that:
1. An Insured is entitled to have regard to its own commercial interests;
2. An Insured is not required to sacrifice its commercial interests in favour of the insurer;
3. The insurer was required to show that any subsequent loss was “not the peril insured against, but the failure of the Insured to take reasonable steps to protect it” and that the onus of proof at all times rests with the insurer; and
4. The insurer must “make an affirmative case that causally links what is sort against the insurer with something beyond the insured event, sufficient to break the link between loss and insured event”.
An Insured must, in upholding its obligations to mitigate losses, demonstrate that it has made reasonable attempts to minimise any losses flowing from an incident.
However, as the Orica Australia case demonstrates, the Insured is entitled to have regard to its own commercial interests in doing so and it is not required to sacrifice its commercial interests in favour of its insurer.
Director, LMI Legal