The broadening shadow of section 54

The High Court of Australia has dismissed the appeal of various Lloyd’s underwriters (the “Insurers”). The High Court’s reasoning presents a reading of section 54 that produces a literal and commercial outcome, which many insurers will find disappointing. (Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33, 10 September 2014)

The key issue for the appeal was whether the court below had impermissibly extended the operation of sub-section 54(1) of the Insurance Contracts Act 1984 (Cth) (the “Act”) by characterising Highway Hauliers’ failure to comply with an endorsement to an insurance policy as an “act or omission”, rather than as manifesting an inherent restriction or limitation upon the scope of cover provided by the policy.

Furthermore, in concluding that Highway Hauliers must be indemnified, did the WA Court of Appeal erroneously consider the approach taken to the interpretation of sub-section 54(1) of the Act by the unanimous Queensland Court of Appeal decision in Johnson v Triple C Furniture & Electrical Pty Ltd [2012] 2 Qd R 337 (Johnson v Triple C). The WA court had declined to follow or apply Johnson v Triple C in the present case, resulting in irreconcilable conflict between the two courts as to the construction of the statutory provision.

Facts

Highway Hauliers owned a transportation business, which operated long-haul B-Double prime movers between Perth and the eastern states.

In the period between 29 April 2004 and 29 April 2005 Highway Hauliers insured its fleet of trucks and trailers with the Insurers. The policy provided “No cover under the policy for drivers doing east–west/west–east cartage who do not have a PAQS profile score of at least 36”.

During the period of insurance, two prime movers owned by Highway Hauliers were involved in accidents while operating on the east–west run. They were damaged to such an extent that the trucks and trailers could not be used until repaired. Highway Hauliers claimed indemnity, which the Insurers denied. Indemnity was denied as each driver had not undertaken the required testing, had not attained a driver profile score of at least 36 and therefore not fulfilled the pre-requisites to cover under the policy.

Highway Hauliers sued the Insurers for indemnity against the repair costs of the trucks and trailers involved. Highway Hauliers also claimed damages for breach of the insurance contract, arising from the Insurers’ refusal to indemnify it.

Submissions

In their appeal to the High Court, the Insurers contended:

  • The actual terms and the context of the agreement are critical in ascertaining the “type” or “kind” of cover provided by the insurance contract (see: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) HCA 38).
  • The characteristics of vehicles’ drivers are integral to the description of the risk covered.
  • The claims for indemnity in this matter were for damages to vehicles whose drivers had a characteristic that removed the accidents from the scope of cover (see: Johnson v Triple C).
  • However the “act” or “omission” is framed, a proper application of section 54 prevents a change to the nature of the claim. The claim cannot be changed so as to make the facts different from those upon which it is actually based so as to avoid the restrictions or limitations inherent in it (see: FAI v Hospital Care; and Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR).

Highway Hauliers contended:

  • The relevant act (or alternatively omission) was the operation of the insured vehicles by drivers who did not have the proper qualifications, and that act was the reason for the claim’s rejection of the claim.
  • The policy being an occurrence based policy, and the event giving rise to the claim having occurred during the term of the policy, any restriction or limitation inherent in the claim was satisfied.
  • Section 54 directs attention to the effect of the contract of insurance and not to whether the reason for refusing to pay a claim arises from the scope of cover or an exclusion or the like.
  • The reasoning of the Queensland Court of Appeal in Triple C is wrong.

Decision

The High Court distilled the arguments to only the issue of whether section 54(1) would be engaged. Finding for Highway Hauliers, the Court agreed that the operation of the prime mover by the untested driver was the “act” and Highway Hauliers’ failure to ensure any driver operating the vehicle was properly tested was an “omission”, both of which occurred within the policy period. Having made a claim seeking indemnity in relation to accidents which occurred during the policy period, the Court was satisfied it was sufficient to engage section 54(1) of the Act.

In respect to Johnson v Triple C, the Court applied the same reasoning to determine that the decision was incorrect and should not be followed.

Implications

The reasoning in the High Court presents a reading of section 54 that produces a literal and commercial outcome, which many insurers will find disappointing. It gives section 54 broad application to ‘forgive’ non-compliance by an insured with the terms of the contract of insurance, limiting underwriters’ ability to control the scope of the risk they agree to write.

The interpretation removes from consideration the significance of the dealings between the parties to a decision by underwriters as to whether to write a risk at all, and if so, on what terms. The decision gives dominance in disputed claims to “prejudice” arguments in section 54, which may create a “quasi-damages” approach in such circumstances.

The High Court has effectively enshrined the primacy of section 54 and the existence of prejudice to insurers as the defining factor when seeking to dispute cover and severely limited the insurers’ ability to rely on “scope of cover” arguments. To deal with this, insurers must be able to prove prejudice and will need to devote sufficient resources to setting guidelines for risks that will be written or declined, the differences in policy terms that would be offered when restrictions are placed on risks to be written (such as the extra premium that would be paid if an insured wishes to insure a risk without the proposed exception) and record keeping that can show adherence to those guidelines by references to past risks written or declined.

Cheat Sheet

When a claim within a policy period is made underwriters will need to ask:

  1. Has there been non-compliance with any terms of the contract of insurance?
  2. If yes is there any prejudice resulting from the insured’s non-compliance?

a. If yes:

i. what is the specific nature, extent and result of the prejudice suffered from the non-compliance?

ii. do our underwriting guidelines clearly detail the way risks of this nature are to be dealt with?

iii. are we able to show consistent adherence to these guidelines?

b. If no, the claim cannot be resisted and should be paid.

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