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Focus: When s54 can't help

8 June 2011

In brief: A recent decision of the Queensland Court of Appeal raises questions about the scope of section 54 of the Insurance Contracts Act 1984. Partner Michael Quinlan (view CV) and Law Graduate Janis Dunnicliff report.

How does it affect you?

  • The decision – in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282 – narrows the scope of section 54 to forgive the acts or omissions by an insured in complying with a policy. On the one hand, insurers will be pleased to learn that the pro-insured tide of s54 of the Insurance Contracts Act 1984 (Cth) (the ICA) may be receding. However, the decision sits a little uneasily with other authorities regarding the meaning and intent of s54.
  • The main implication of this decision is that a valid exclusion in a policy may limit the court's ability to decide questions under s54. Further, the case requires an omission to be something solely in the control of the 'omitter' – if acts of a third party are also required, such as an examiner or licensing authority, s54 may not apply.

Background

Triple C Furniture & Electrical Pty Ltd owned an aircraft, which crashed in 1999. Mrs and Mrs Johnson, both employed by the company, were on board. Mr Johnson, the pilot, died, and Mrs Johnson was seriously injured. Mrs Johnson commenced proceedings against Triple C, claiming damages for personal injury, alleging that Triple C was vicariously liable for the actions of her husband. Mr Johnson was found to have operated the aircraft negligently and Mrs Johnson was awarded damages of $846,030.

Triple C had taken out aviation insurance. The insurer declined to indemnify Triple C on the basis that the circumstances of the accident fell within one of its exclusions. The relevant exclusion provided that the policy would not operate while the aircraft was being operated in breach of the Civil Aviation Regulations 1988. Regulation 5.81 required the pilot to satisfactorily complete a mandatory flight review within two years of any proposed flight. A flight review consists of an examination by a qualified assessor of the pilot's skills and knowledge. The purpose of the review is to ensure that the pilot is competent to operate an aircraft.

Triple C sought to rely on s54. Section 54 may assist where a claim is made under a policy and the effect of the policy is that the insurer may refuse to pay that claim as a result of the act or omission of the insured or some other person. Assuming this threshold issue is satisfied, s54 will operate to forgive an insured who breaches a term of its policy unless it can be shown that either:

  • the insurer has suffered prejudice (s54(1)); or
  • the insured's act or omission has caused all or part of the loss (s54(2), (4)).

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The decision

The Queensland Court of Appeal found that the insurer was not liable to indemnify Triple C.

The court found that Mr Johnson had not undertaken the requisite flight review and, as a result, the exclusion in the policy operated to exclude cover. Triple C argued that the pilot's failure to undertake the necessary flight review constituted an omission under s54(1) and that the insurer should be prevented from denying liability. However, the court held that s54 of the Act did not apply for two reasons.

First, the court held that a failure to undergo a mandatory flight review did not constitute an 'omission' for the purposes of s54. The court considered that an 'omission' requires that the thing omitted should be within the power of the omitter. That was not the case here because whether or not Mr Johnson completed the review depended not just on his actions, but also on an instructor's assessment of his performance.1 The court concluded that the pilot's failure to complete a flight review did not constitute an omission under s54 and, therefore, there was no question to be determined under s54.

Secondly, the court held that if the claim was for indemnity not covered by the policy, s54 will not apply. The court stated that, if an act or omission is found, it cannot operate to convert a claim from a scenario where the loss was caused by the pilot who had not completed the mandatory flight review into a claim where the loss was caused by a pilot who had completed a flight review. The court held that the omission relied on by Triple C gives rise to a claim that it could otherwise not make because of the exclusion under the policy. The omission could not change the existence of the exclusion and the court held that it was not an omission of the kind with which s54 is concerned.

Finally, the court went on to consider the result if the failure to complete the flight review was considered an omission under s54. The court found that the purpose of a flight review was to act as a 'defence against pilot error which might cause an aircraft to crash'. In light of this, the court concluded that the omission should be characterised as an omission under s54(2) as the failure to undergo a flight review caused, or at least contributed to, the crash of the aircraft and the resulting loss. This would have entitled the insurer to refuse indemnity under the policy, even if s54 otherwise applied.

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Comment

On 13 May 2011, Triple C was refused special leave to have the matter appealed in the High Court.

According to this decision, in circumstances where insurers are conscious of not accepting certain classes of risk, a valid exclusion in a policy may limit the court's ability to decide questions under s54. However, this position seems at odds with the intent of s54 as being remedial legislation.

The judgment referred to the historical difficulty in the interpretation of s54. The decision ensures that this difficulty is not just a thing of the past.

Footnotes
  1. para [70].

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