Australia: The Long Haul: High Court endorses broad application of s54 of the Insurance Contracts Act

Introduction

The High Court has handed down its much anticipated decision in Highway Hauliers v Maxwell,¹ unanimously dismissing the various insurers' appeal and endorsing the broad application of section 54 of the Insurance Contracts Act 1984 (Cth) (ICA).

In a refreshingly concise joint judgment, the High Court has resolved the tension between the decisions of the Western Australian Court of Appeal in Highway Hauliers v Maxwell² and the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd,³ determining the Queensland Court erred in its decision.

The decision also implicitly endorses the New South Wales Court of Appeal decision in Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV,⁴ in which Justice Meagher stated:

Johnson v Triple C Furniture & Electrical Pty Ltd proceeded other than in accordance with the principles and approach stated in Australian Hospital Care and applied in Maxwell v Highway Hauliers.⁵

Get your s54 engines started

Highway Hauliers (Highway) was a trucking business operating routes between the East and West coasts of Australia. Highway held a policy with Maxwell (as representative of various Lloyd's syndicates) that, among other things, provided cover with respect to damage to Highway's vehicles and trailers. Relevantly, the policy provided (although there was some dispute over the final terms):

We will not pay if:

...If We have not received, and approved in writing, A Driver Declaration for the driver in control of Your Vehicle at the time of an occurrence.

An endorsement to the policy also provided:

B Doubles, Triples and Road Trains/A-Trains and B-Trains (ANZ 3)

No indemnity is provided under the policy when Your Vehicle/s are being operated by drivers of B Doubles, B Triples or Road Trains as deemed under the Australian National Licence Category (Multi-Combination) unless the driver...Has a PaQS driver profile score of at least 36...

Claims were made by Highway under the policy regarding two separate vehicle accidents. The amounts claimed were $12,335.00 and $287,472.09. The insurers declined to indemnify Highway in respect of the two claims as the drivers of the vehicles had not achieved the minimum PaQS test as required under the policy.

Claims were made by Highway under the policy regarding two separate vehicle accidents. The amounts claimed were $12,335.00 and $287,472.09. The insurers declined to indemnify Highway in respect of the two claims as the drivers of the vehicles had not achieved the minimum PaQS test as required under the policy.

Whilst the plaintiff admitted that the drivers were 'non-declared drivers' and had not attained the minimum PaQS test score, it asserted that section 54(1) of the Insurance Contract Act remedied this failure and Maxwell was obliged to indemnify. The insurers contended that, given the factual similarities with Johnson v Triple C Furniture & Electrical, the court should follow the Queensland authority and find that section 54(1) was not enlivened.

In Johnson, the Queensland Court of Appeal determined that section 54(1) of the Act did not apply to remedy an insured's breach of a requirement that a pilot must have satisfactorily completed a mandatory flight review within two years prior to a flight. The Court held that cover was accordingly never engaged and section 54(1) did not apply because the satisfactory completion of the flight review was not a mere formality, but rather required a thorough investigation of the pilot's theoretical knowledge and practical skills, and was dependent upon the instructor's assessment of the pilot's performance.

Further, the Queensland Court of Appeal held that the flight review was intended to act as a 'defence against pilot error which might cause an aircraft to crash'. In this regard, the Court of Appeal also determined that the relevant omission would be an omission under section 54(2) as the pilot's failure to undertake a flight review contributed to, if not the dominant cause, the crash and resulting loss. As a result, the insurer would have been entitled to refuse indemnity under the policy even if section 54(1) of the Act otherwise applied.

Section 54 trucking along nicely

Despite the judgment in Johnson, at first instance Corboy J considered that the relevant act for the purpose of section 54 of the Act was that of the insured allowing the trucks to be driven by a driver who had not attained a minimum PaQS score, not the failure of the drivers to attain a minimum score. Specifically, His Honour held:

...the characterisation of the relevant act or omission will reflect the circumstances of the claim, the effect of the contract of insurance and the basis upon which the insurer refused to pay the claim... I consider that, in this instance, the relevant act is to be characterised by reference to the use of the vehicles involved in the accidents rather than the attributes of the drivers concerned. ... I consider that it is more appropriate to define the relevant act as an act by Highway Hauliers as the insured under the contract of insurance rather than the act of the drivers who were not parties to the contract.⁶

As a result, section 54 operated to remedy this failure and the insurers were obliged to indemnify.

In upholding the decision of Corboy J, the Western Australian Court of Appeal provided a guide to resolving section 54 issues. Relevantly, McLure P (with whom Pullen JA and Murphy JA agreed, albeit in separate judgments) set out the following steps when considering the application of section 54:

1. Identify the relevant s 54 act or omission;
2. Determine whether the act or omission is one to which s 54(2) applies. If yes, determine whether s 54(3) or s 54(4) applies. If s 54(2) does not apply determine whether s 54(1) applies;
3. In assessing whether s 54(1) applies:
4. 1. determine whether there are any restrictions or limitations inherent in the actual claim by reference to the type or kind of insurance in issue. If the facts of the claim are outside any inherent restrictions or limitations, it will not be a claim under the insurance contract, any relevant act or omission will not satisfy the causal requirements below and s 54(1) will not apply;
   2. determine whether the effect of the insurance contract is that the insurer may refuse to pay the claim in question (in whole or in part) by reason of the act or omission; and
   3. determine whether the insurer is refusing to pay the claim by reason only of that act or omission. If yes, the insurer may not refuse to pay the claim (but the insurer's liability may be reduced to the extent its interests were prejudiced as a result of the act or omission).

McLure P agreed with Corboy J's determination that the relevant omission was not that the drivers had failed to complete the PaQS test and were non-declared drivers; but rather that the vehicles were being driven by drivers who had not satisfied the requirements. McLure P noted that this interpretation was consistent with that used in Antico v Heath Fielding Australia Pty Ltd⁷ and subsequently concluded that the relevant omission is one to which section 54 applied.

The long haul to the High Court

Given the ongoing tension between Highway Hauliers and Johnson, it was little surprise that the insurer was granted leave to appeal to the High Court with the only issue of contention being whether section 54(1) was engaged. Effectively, the insurer contended that 'a claim' pursuant to section 54 must be in respect of an 'insured risk' and the fact the vehicles were operated by non-qualified drivers caused the loss to fall outside the scope of the policy (ie the loss was not an 'insured risk').

In a joint judgement, the High Court unanimously rejected this contention and upheld the broad interpretation of section 54 adopted at first instance and at the Court of Appeal. Specifically, it followed the reasoning set out in the previous decisions of Antico v Heath Fielding Australia Pty Ltd and FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd.⁸ In particular, with reference to Antico, the High Court held:

Antico v Heath Fielding Australia Pty Ltd established... that s 54 takes as its starting point nothing more than the existence of a claim and of a contract the effect of which is that the insurer may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the contract was entered into; it does not postulate a liability of the insurer to pay the claim that has been made. In terms consistent with the reasoning of the majority, Brennan CJ there said that s 54(1):⁹

focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim – falling outside a covered risk, coming within an exclusion or non-compliance with a condition – but on the actual conduct of the insured, that is, on some act which the insured does or omits to do... It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured.¹⁰

Further, the Court found this position was endorsed by FAI in that no distinction "between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim".¹¹

In summary, the High Court concluded:

The Insured having made claims seeking indemnity under the Policy in relation to accidents which occurred during the Period of Insurance, it is sufficient to engage s 54(1) that the effect of the Policy is that the Insurers may refuse to pay those claims by reason only of acts which occurred after the contract was entered into. Precisely how the Policy produced that effect is not to the point. The conclusion of the Court of Appeal in the present case was correct.¹²

Finally, in resolving the tension between Highway Hauliers and Johnson, the High Court was direct in asserting the Court of Appeal in Johnson had erred. Specifically, the High Court held:

The Court of Appeal of the Supreme Court of Queensland accepted an argument that s 54(1) was not engaged in circumstances where the insurer, relying on the temporal exclusion, refused to pay a claim in fact made by the insured by reason of the operation of the aircraft in breach of air safety regulations. To that extent it erred, and its decision on this point should not be followed. The operation of the aircraft in breach of air safety regulations was an "act" which occurred after the contract was entered into. The temporal exclusion did not qualify the "claim" that was made.¹³

How it affects insureds and insurers

The High Court decision further supports a broad interpretation of section 54 of the ICA.In resolving the tension between Highway Hauliers and Johnson, the decision goes some way to ameliorating the conceptual difficulties faced in determining the application of the section.

The proper characterisation of the relevant act or omission as rendering the event outside the scope of cover or something entitling the insurer to refuse a claim and therefore capable of remedy by subsection 54(1) is not always straightforward. Much will turn on the individual facts and circumstances of each case but regard should be had to the conduct of the insured and the basis upon which the insurer refuses to pay the claim.

The decision will be welcomed by insureds as it confirms the ongoing relevance of section 54 as an important weapon in resisting an insurer's rejection of a claim. Insurers on the other hand may be left wondering what must be done to effectively exclude certain claims.

Footnotes

¹[2014] HCA 33
²[2013] WASCA 115
³[2012] 2 Qd R 337
⁴[2013] NSWCA 252
⁵Ibid at [140]
⁶Highway Hauliers Pty Ltd v Maxwell (2012) 17 ANZ Ins Cas 61-925
⁷[1997] HCA 35
⁸[2001] HCA 38
⁹[2014] HCA 33 at [21]
¹⁰[1997] HCA at [660-661]
¹¹[1997] HCA at [660-661]
¹²[2014] HCA 33 at [27]
¹³[2014] HCA 33 at [28