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Australia – Section 54 Keeps On Trucking.

14 September, 2014  

 

Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33 (10 September 2014)

 

    WHAT YOU NEED TO KNOW

     

    • The High Court has provided long-awaited confirmation of the correct interpretation of section 54 of the Insurance Contracts Act 1984 (Cth). In doing so, it has overruled the decision of the Queensland Court of Appeal in Johnson v Triple C Furniture.
    • In re-establishing the broad reach of section 54, insureds will now find it easier to make successful claims for indemnity if policy terms are breached after their contract is entered into.
    • Insurers will no longer be able to deny claims by asserting that a claim is not an insured risk – and that section 54 cannot apply – as a result of post-contractual conduct.
    • In this situation, insurers will only be able to avoid section 54 where they are able to show that claims have been made outside of the relevant periods of cover under “claims-made”, “discovery” or ”occurrence-based” policies.

     

      WHAT YOU NEED TO DO

       

      • Parties (and third parties) to insurance contracts will want to review the basis of any claims where an insurer’s response has relied on the now-overruled characterisation of section 54 in the Triple C case.

       

      Introduction

       

        Section 54 of the Insurance Contracts Act 1984 (Cth) is one of the best known provisions in Australian insurance law.
        It was introduced to mitigate the harshness of the common law and to strike a fair balance between the interests of insurers and insureds.

         

          In essence, section 54 restricts the ability of an insurer to reduce or deny its liability to pay a claim where an insured (or some other person) has failed to comply with a contractual policy term.
          An insurer may only reduce its liability to the extent that it has been prejudiced by the insured’s conduct (a notoriously difficult matter to prove) and may only refuse a claim where the insured’s conduct has caused or contributed to the loss that has occurred (a relatively uncommon event).

           

            Background

             

              Insurers have in recent years sought novel ways to circumvent section 54, and this has raised doubt about the correct interpretation of section 54 that was given by the leading authority, the decision of the High Court in FAI v Australian Hospital Care in 2001. Specifically, the High Court in FAI accepted that a limit should be placed on how far section 54 may go in relieving insureds of the consequences of their conduct. It held that section 54([2001] HCA 38.) did not operate to relieve the insured of any restrictions or limitations that are inherent in its claim. (See the judgment of Justices McHugh, Gummow and Hayne in FAI at [2001] HCA 38 at [41].)

               

                In 2010, the Queensland Court of Appeal in Johnson v Triple C Furniture ([2010] QCA 282.) interpreted this limitation as meaning that an insurer could avoid section 54 by demonstrating that a claim that had been made was not for an insured risk – in that case, where an exclusion clause was triggered by the failure of a pilot of a plane that crashed to have completed a required periodic flight review test.

                 

                  Triple C was therefore recognised as having the potential to radically reduce the availability of section 54 for insureds. Contrary to the expectation of
                  many insureds, post-contractual conduct could now be relied on by insurers to deny claims where previously section 54 had prevented this occurring.

                   

                    While subsequent decisions of the New South Wales and Western Australian Courts of Appeal (Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2012] NSWCA 252; Maxwell v Highway Hauliers [2013] WACA 115.)  did not follow Triple C’s characterisation of this limitation on section 54, the law remained in some doubt.

                     

                    The High Court has now resolved this uncertainty by providing clarity around how section 54 is intended to operate.

                     

                    The Issue In Dispute

                     

                      In this case, a trucking business sought to recover under its insurance policy for the cost of repairing and replacing two trucks that were involved in accidents in 2004 and 2005.
                      Its insurers denied the claim. They did so by relying on Triple C and characterising the post-contractual failure of the insured’s truck drivers to achieve minimum scores on a driving test and to be preapproved as drivers – each of which triggered an exclusion clause in the policy – as an inherent limitation in the claim which section 54 could not remedy.

                       

                        At first instance, the Supreme Court of Western Australia distinguished Triple C on its facts and held that section 54 did apply to excuse the insured’s omissions (it being accepted that the insurers were not prejudiced and that the loss was not caused by
                        them).

                         

                          This result was confirmed unanimously by the Western Australian Court of Appeal.
                          The insurers were granted special leave to appeal to the High Court in order to resolve the competing characterisations of section 54 in FAI.

                           

                            The Decision Of The High Court

                             

                            In a short and unanimous judgment, the High Court dismissed the insurers’ appeal and held that Triple C should not be followed.
                            Importantly, it has provided the following guidance on the correct interpretation of the operation of section 54(1):

                             

                            • The reference in FAI to section 54(1) being unable to remedy an inherent restriction or limitation in the insured’s claim is intended to refer to how a claim is made having regard to the type of insurance contract involved.
                            • The relevant restriction or limitation will arise where:
                              • under a “claims-made and notified” policy, a claim is made outside of the period of cover;
                              • under a “discovery” or a “claims-made and circumstances notified” policy, a claim is made in respect of an circumstance that the insured was not aware during the period of cover; and
                              • under an “occurrence-based” policy, where indemnity is sought for an event that occurred outside of the period of cover.
                            • So long as an insured can demonstrate that there is no such restriction on its claim, any act or omission that takes place after the insurance contract is entered into, and which would otherwise give the insurer a contractual right to deny indemnity, will be subject to section 54.
                            • The type of contractual term that an insurer relies on to deny indemnity will not be relevant in determining whether section 54 applies. As a result, insurers will no longer be able to draft policy wordings to potentially avoid the application of section 54 – for example, by using qualified insuring clauses.

                             

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                            For further information, please contact:

                             

                            Rehana Box, Partner, Ashurst
                            rehana.box@ashurst.com

                             

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