Jurisdiction - Australia
News
Australia – WA Court Upholds Broad Interpretation Of Section 54 Of The Insurance Contracts Act.

16 June, 2013

 

Highlights 

 

  • In the recent decision of Mathew Maxwell v Highway Hauliers Pty Ltd [2013], the Western Australian Court of Appeal has favoured a broad application of section 54 of the Insurance Contracts Act 1984 (Cth), arriving at a different result from that of the Queensland Court of Appeal (Johnson v Triple C Furniture & Electrical Pty Ltd [2010] 243 FLR 336).
  • his latest case emphasises the complexities associated with characterising the relevant act or omission for the purpose of section 54(1) and presents some significant challenges for insurers in framing the insurance risk under a policy. 
  • The case also serves as a reminder to insurers of the consequences of incorrectly denying indemnity to an insured given the award of consequential loss that was made in favour of the insured.

 

Section 54 of the Insurance Contracts Act 1984 (Cth) (IC Act) is once again in contention.

 

The section protects insureds whose acts or omissions would, in the absence of section 54, give an insurer the right to refuse to pay a claim. In essence, it aims to excuse certain “breaches” by an insured of a contract of insurance and, in some circumstances, forbids an insurer from refusing to pay a claim which has resulted from an insured’s act or omission. 

 

When section 54 applies, an insurer is only permitted to reduce its liability by an amount that fairly represents any prejudice it has suffered as a result of the insured’s act or omission. Unless the insured’s act or omission is a material cause of the loss, an insurer may not refuse to pay a claim. 

The recent Western Australian Court of Appeal decision (Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 delivered on 6 May 2013) confirms that the precise scope and application of section 54 remains uncertain. 

  

It also serves as a reminder to insurers of the potential for section 54 to override what might seem to be clear provisions (particularly exclusions) of a policy.

  

Summary

  

The Western Australian Court of Appeal has upheld the broad application of section 54 of the IC Act adopted at first instance (Highway Hauliers v Maxwell [2012] WASC 53), dismissing the insurers’ appeal.

 

In doing so, the Court held that a haulage company was permitted to recover from its insurer in respect of damage sustained in two road accidents, even though the policy wording provided that there was no cover in the circumstances of the claims.

 

The case concerned two grounds:

(a) did section 54 of the IC Act apply where the drivers of trucks, involved
in separate accidents on trips between the East and West Coasts of Australia, did not hold the requisite qualifications, contrary to the requirements of the relevant contracts of insurance; and 

(b) if the insurers were found to have wrongfully denied indemnity, were the insurers liable to pay the insured consequential damages.

 

Factual Backgroun

 

Highway Hauliers Pty Ltd (Insured) carried on a trucking business which operated a fleet of trucks and trailers to transport freight between the East and West Coasts of Australia, known as the “east-west run”.

  

The Insured held a policy with Maxwell (as representative of various Lloyd’s Underwriters) (Insurers). The policy covered, amongst other things, accidental damage to the Insured’s trucks and trailers nominated in the schedule of cover. Two trucks were damaged in separate accidents (in June 2004 and April 2005) and the Insured claimed for the cost of repairs.

 

The Insurers denied indemnity on the grounds that the drivers of the 
damaged vehicles:

 

(a) had not complied with an endorsement to the policy providing for drivers to have achieved a minimum score on a driver test known as the “PAQS test”; and
(b) were “non-declared” (non-approved) drivers for the purpose of an exclusion in the policy.

 

Supreme Court Judgment

 

The Supreme Court of Western Australia held that the Insurers were obliged to indemnify the Insured for the cost of repairing the damage to the trucks and trailers by reason of the application of section 54(1) of the IC Act.

 

Corboy J also stated that, by denying indemnity to the Insured, the Insurers had breached the policy and were liable for consequential loss of profits to the value of $145,000.

 

The Insurers appealed both findings.

 

Court of Appeal

 

In a unanimous decision, the Western Australian Court of Appeal dismissed the Insurers’ appeal.

 

Restrictions or limitations inherent in the claim – the type or kind of insurance in issue

 

The Insurers contended that the failure of the drivers to undertake the PAQS tests was part of the scope of cover of the insurance policy and as such, section 54(1) did not apply. The Court of Appeal rejected this. 

 

McLure and Murphy JA, influenced by the decision in FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd4, stated that the correct focus was the actual claim and its inherent restrictions or limitations by reference to the type or kind of insurance in issue, and not the scope of the particular cover.

 

The Court of Appeal found that the failure of the drivers to complete PAQS tests was not an inherent restriction or limitation of cover. It was a matter of detail within the particular insurance policy rather than a restriction or limitation that was inherent in that type or kind of policy. (Ibid, [76].)

 

According to Murphy JA, the type or kind of insurance provided for by the contract of insurance was characterised as “an Australia-wide material damage/third party liability indemnity insurance in respect of events occurring within the period of insurance relating to certain nominated vehicles.” (Ibid, [143]) With this in mind, the Court concluded that the PAQS endorsement was properly 
characterised as an exclusion rather than a condition of the scope of cover, and that the objectively determined importance of the PAQS endorsement to the parties did not justify its elevation to a condition of cover nor provide a policy justification for the non-application of section 54(1). (Ibid, [79].)

 

In other words, on the proper construction of the policy, it was not an inherent limitation or restriction qualifying any claim under such insurance.

 

Interestingly, and as a warning to insurers, McLure P noted that the only restriction or limitation inherent in a claim under an occurrence/event based insurance policy is that the event must have occurred within the period of cover and be of a type contemplated by the policy (ie, in this case, property damage to an insured vehicle).

  

Act or omission

 

 

The Court of Appeal then considered the meaning of “act” as defined in 
section 54(1) (Which includes an “omission”, pursuant to section 54(6)(a)). The Insurers relied on the decision of the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd ([2010] 243 FLR 336), to assert that the failure by the drivers to complete PAQS tests, was “a state of affairs” and not a relevant act for the purposes of section 54(1). In Johnson, the Queensland Court of Appeal held, in relation to an aviation policy, that section 54(1) did not apply to the failure of a pilot to complete a flight review. 

 

McLure P disagreed with the Insurers’ contention. In distinguishing the present case from Johnson, McLure P held that the structure of the PAQS requirement was more analogous to the provision requiring an insurer’s consent before incurring legal costs as considered in Antico v Heath Fielding Australia Pty Ltd ( [1997] 188 CLR 652), to which the High Court held section 54(1) applied.

 

On this basis, the Court of Appeal rejected the approach taken in Johnson by the Queensland Court of Appeal and held that the act or omission was one to which section 54(1) applied. The Insurers were not entitled to refuse to indemnify the Insured.

  

The claim for consequential damages 

 

The second issue on appeal was whether the Insurers were liable for consequential loss of profits by reason of their breach of contract (in failing to indemnify the Insured). The Court of Appeal (agreeing with Corboy J at first instance) held that the Insured’s claim for loss of profits following the loss of opportunity to service the East West route was not too remote and was, therefore, recoverable from the Insurers. 

  

Significance of Decision

 

This decision is significant because it supports a broad and purposive 
interpretation of section 54, in contrast to the approach taken by the 
Queensland Court of Appeal (Johnson v Triple C Furniture & Electrical Pty Ltd [2012] QCA 282). It remains to be seen how this inconsistency 
will be resolved.

 

The case emphasises the complexities associated with characterising 
whether the relevant act or omission is one which is outside the scope of 
cover, to which section 54(1) has no application, or is one which entitles the insurer to refuse a claim and is, therefore, capable of remedy by section 54(1). Of concern is the suggestion that scope of cover is to be viewed as something “inherent” in a particular type of insurance, rather than a term on which the parties themselves can agree.

 

The case also serves as a reminder to insurers of the consequences of 
incorrectly denying indemnity to an insured given the award of consequential loss that was made.

 

Conclusion

 

All insurers will need to consider the impact that this case may have, noting that very careful drafting of a policy wording will be required to establish that a particular wording forms part of the scope of the policy, rather than a term or condition of the policy to which section 54 will apply.

 

 

For further information, please contact:

 

Rebecca Whittle, Partner, Henry Davis York

rebecca_whittle@hdy.com.au
 

Comments are closed.