A recent High Court decision highlights the substantial scope of s54(1) of the Insurance Contracts Act 1984 (Cth) to prevent an insurer from denying cover following an insured's non-compliance with certain terms of an insurance policy. The court confirmed that, in certain circumstances, the section can relieve an insured from the consequences of an act or omission which triggers coverage exclusions and limitations. Partner Andrew Maher, Senior Associate Jonathan Light and Lawyer Brydon Wang report.
How does it affect you?
- Where an insured event falls within the terms of an insurance policy, terms in that policy purporting to exclude or limit liability consequent upon a particular act or omission occurring after the policy commenced, may be of no effect if the only basis for denying coverage is that act or omission. This is subject to the important provisos that if the act or omission:
- causes or contributes to the loss complained of, the insurer can still refuse to pay the claim; and
- prejudices the insurer, it can reduce its liability to the extent of that prejudice.
- As the High Court did not disturb the original WA Court of Appeal findings, insurers are reminded that a wrongful denial of indemnity can result in insureds recovering potentially substantial consequential losses from insurers.
Highway Hauliers Pty Ltd (the Insured) carried on a trucking business. It was insured by various Lloyd's Underwriters (the Insurers). During the period of insurance, two trucks belonging to the Insured were damaged in separate accidents. The Insured claimed under its policy for the damage to the trucks.
The Insurers denied indemnity on the grounds that the drivers of the damaged trucks had not been 'PAQS' certified – as the policy purported not to cover loss where the drivers were not certified. It was, however, conceded by the Insurers that the failure of the drivers to be PAQS certified did not cause or contribute to the losses the subject of the claims, and did not cause any prejudice to the Insurers.
The trial judge held that the Insurers were obliged to indemnify the Insured for the cost of repairing the trucks by reason of section 54(1) of the Insurance Contracts Act 1984 (Cth) (the ICA). Further, the trial judge held that by denying indemnity to the Insured, the Insurers were liable for consequential loss of profits suffered by the Insured. The Insurers appealed. The Court of Appeal unanimously dismissed the appeal.
The Insurers appealed to the High Court.1 In doing so, they sought to rely on the Queensland Court of Appeal judgement in Johnson v Triple C2. In that case, the insured's policy of aviation insurance contained an exclusion which provided that the policy would not operate while the aircraft was being operated in breach of certain Civil Aviation Regulations, one of which required the pilot to satisfactorily complete a mandatory flight review within two years of any proposed flight. In Johnson, the Court of Appeal found that the failure of a pilot to undertake a necessary flight review did not constitute an 'omission' for the purpose of s 54(1). As such, the 'omission' relied on by the Insured gave rise to a claim that the Insured could not otherwise make and was therefore outside the scope of the cover afforded by the policy. The court in Johnson held that s54 could not be applied to circumvent the policy exclusion.3
In Maxwell v Highway Hauliers, the High Court observed that the objects of s54 included 'striking a fair balance between the interests of an insurer and an insured with respect to a contractual term designed to protect the insurer from an increase in risk during the period of insurance cover'. Importantly, the court also observed that, in striking that balance, 'no difference was to be drawn between a term framed:
- as an obligation of the insured (eg "the insured is under an obligation to keep the motor vehicle in a roadworthy condition");
- as a continuing warranty of the insured (eg "the insured warrants that he will keep the motor vehicle in a roadworthy condition");
- as a temporal exclusion from cover (eg "this cover will not apply while the motor vehicle is unroadworthy"); or
- as a limitation on the defined risk (eg "this contract provides cover for the motor vehicle while it is roadworthy")'.4
The court found that Insurers had misapplied the statement of the court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (FAI)5 that s54 'does not operate to relieve the insured of restrictions or limitations that are inherent in [the] claim'. The insurers had equated 'restrictions or limitations that are inherent in a claim' with any restriction or limitation on the scope of the cover that is provided under the contract.
The High Court said that a restriction or limitation that is 'inherent in the claim' is a restriction or limitation that must be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made. For example, a policy that provides 'claims made' cover necessarily acknowledges that indemnity can only be sought in relation to a claim made against the insured by a third party during the period of cover. Section 54 does not operate in that case to permit indemnity for a claim made against the insured outside of the period of cover. Similarly, policies that provide 'occurrence based' cover (as in the present decision) necessarily acknowledge that indemnity is only provided for events that occur during the period of the policy.
However, where a 'claim' is made and where s54(1) applies, there can be no distinction 'between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim'6.
Consequently, the High Court found that the fact that each vehicle was operated at the time of the accident by an untested driver was properly characterised as an 'act' that occurred after the contract of insurance was entered into.7 There was also an omission of the Insured to ensure that each vehicle was operated by a driver who had undertaken a PAQS test or an equivalent program approved by the Insurers. That omission occurred during the Period of Insurance and, as such, s54(1) applied.
The High Court's decision resolves a difference of view between two Australian appellate courts concerning the operation of s54(1) by adopting a construction of that provision that highlights the broad scope of the relief that it can provide to an insured that does not comply with its policy terms. Consequently, an insurer cannot deny or reduce its liability simply because the insured has committed an act or omission during the policy period which triggers a policy exclusion or limitation. That act or omission must have caused or contributed to the claimed loss or otherwise have prejudiced the insurer before the insurer can exclude or reduce, as the case may be, its liability to the insured.
Insurers are also reminded of their potential liability for consequential loss suffered by an insured if they are found to have wrongfully denied indemnity. The consequence in this case was that the Insurers were liable to pay $145,000 more than they otherwise would have if indemnity had been granted. However, consequential losses could easily be much higher depending on the nature of the insured's business and the impact of the denial on that business.
- Maxwell v Highway Hauliers Pty Ltd  HCA 33.
- Johnson v Triple C Furniture & Electrical Pty Ltd  2 Qd R 337.
- Johnson v Triple C Furniture & Electrical Pty Ltd  2 Qd R 337, 352-3 -.
- Maxwell v Highway Hauliers Pty Ltd  HCA 33 , quoting from Australian Law Reform Commission, Insurance Contracts, Report No 20, (1982) at 140, -.
- FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641.
- FAI (2001) 204 CLR 641, 656 .
- Maxwell v Highway Hauliers Pty Ltd  HCA 33 .