Australia: Section 54 revisited - insurers hauled before the High Court to "pay up"

The much anticipated decision of Maxwell v Highway Hauliers Pty Ltd was delivered by the High Court on 10 September 2014. In dismissing the appeal of the Supreme Court of Western Australia's decision and thereby granting an indemnity under the relevant policy (including ordering consequential loss), the Court favoured a broad interpretation of s 54(1) of the Insurance Contracts Act 1984 (Cth) (ICA).

Maxwell serves as a timely reminder to insurers of the importance of ensuring meticulous policy drafting.

Background

Highway Hauliers Pty Ltd (Insured) owned a fleet of trucks and trailers transporting freight between the eastern states and Western Australia. The Insured entered into a general liability policy of insurance with Maxwell (as representatives of certain Lloyd's Underwriters) (Insurers). Relevantly, the policy was endorsed to exclude coverage unless all drivers met certain conditions, including getting a PAQS driver test score (PAQS Test) of 36 or more.

In two separate incidents during 2004 and 2005, two of the Insured's vehicles were damaged while being operated by drivers who were found not to have satisfactorily completed the PAQS Test. Two separate claims were lodged, but both were declined by reason of the Insured's failure to meet the PAQS Test condition.

The Insured commenced proceedings against the Insurers, seeking indemnity under the policy and consequential damages for breach of contract.

The findings

At first instance, the Supreme Court of Western Australia relied on the applicability of s 54(1) of the ICA to find in favour of the Insured. In addition to indemnity, consequential loss of profits suffered by the Insured was ordered in the sum of $145,000.

On appeal, the Insurers argued that s 54(1) of the ICA was not applicable as coverage was conditional on the drivers' satisfactory completion of the PAQS Test, and as s 54(1) only referred to a claim for an insured risk, it could not be enlivened in the relevant circumstances.

Relying on Johnson v Triple C Furniture and Electrical Pty Ltd (2010), the Insurers submitted that non-compliance with the PAQS Test requirement was a "state of affairs" as opposed to an "act" and as such, did not satisfy the requirements necessary to enliven s 54(1). In applying FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd, the Court favoured a consideration of the actual claim itself (including its inherent restrictions or limitations), which is to be determined by reference to the type or kind of insurance in issue, as opposed to the scope of cover under the policy (FAI Principle).

As such, their Honours stated that the requirement for drivers to complete a PAQS Test was an exclusion rather than a condition of cover.

The High Court decision

In denying the applicability of s 54(1) of the ICA, the Insurers also said that the failure of the drivers to complete the PAQS test was an inherent breach of the policy's scope of cover. This argument was unanimously rejected.

The Court highlighted the purpose behind the ICA as striking a fair balance "between the interests of insurers, insured's and other members of the public so that the provisions included in such contracts, and the practices of insurers operate fairly". Also, the Court remarked on ALRC's recommendation as to the specific object behind s 54(1) being:

"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".

Relevantly, the Court emphasised that the said balance should be achieved regardless of the form of a contractual term and that it was not necessary to draw a distinction between a term framed as an obligation to the insured, as opposed to a continuing warranty of an insured, an exclusion from cover, or as a limitation on the defined risk.

The Court endorsed a requirement that s 54(1) focus on the actual conduct of the Insured as opposed to the legal character of a reason that entitled an insurer to refuse to pay the claim (e.g. due to an exclusion or non-compliance with a condition).

The FAI Principle was again accepted and therefore focus should be directed towards the context of the claim by reference to the type of the policy in issue.

Their Honours considered that the Johnson decision had incorrectly interpreted s 54(1) and accordingly, should be rejected in its entirety.

The Court ultimately considered that as each vehicle was operated by an untested driver at the time of the incidents and after the policy was entered into, an "act" had occurred, which satisfied s 54(1). Further, the Court also noted that because of the Insured's failure to ensure the drivers had undertaken the PAQS Test, an omission (defined as an "act" under s 54(6)) had occurred after the contract was entered into and during the period of insurance. As such, s 54(1) was applicable in the relevant circumstances.

In light of the above, the Court held that the Insurers could not deny coverage to the Insured, as but for the "acts", coverage would have otherwise been confirmed under the policy.

Impact on insurers

In confirming that a broad interpretation should be given to s 54(1) in favour of an insured, the High Court's decision finally sheds some light on the proper construction of s 54 of the ICA.

Further, the decision reconciles some of the ambiguities surrounding the interpretation of s 54(1), which arose following the Court's narrow interpretation of s54(1) in the Johnson decision.

Moving forward, underwriters should ensure they are well informed of the applicability of s 54 and that extra care is taken in the drafting of policy wording, as it's clear that the broad interpretation of s 54 reduces an insurer's ability to limit the scope of risk that they agree to underwrite.

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