The lucky number for insureds is 54...
Section 54 of the Insurance Contracts Act 1984 was designed to protect insureds whose acts or omissions would, in the absence of section 54, have given an insurer the right to refuse to pay a claim. Essentially, it requires the insured to show that the breach of policy had no causal effect on the loss, or if it did, that the insurer’s liability can only be reduced to the extent of its prejudice.
The Supreme Court of Western Australia was recently asked to consider the operation of the section in a policy dispute. Justice Corboy’s decision in Highway Hauliers v Matthew Maxwell confirms that the precise scope and application of section 54 remains in doubt. It also serves as a reminder to insurers of the potential for section 54 to override what might seem to be clear provisions of the policy.
The insured, Highway Hauliers, operated a trucking business whose main source of income was transporting freight back and forth from Perth to the eastern states (“eastwest runs”). It held cover in respect of its fleet of trucks with certain underwriters at Lloyds. Two of the insured’s trucks were damaged following two separate accidents while carrying freight on eastwest runs. The insured claimed under its policy in respect of the damage sustained in both accidents.
Highway Haulier’s policy contained an endorsement that required drivers of trucks on eastwest runs to have achieved a minimum score on a driver test known as the PAQS test. However, neither of the drivers of the damaged trucks had undertaken the PAQS test and Highway Hauliers had to concede that the PAQS endorsement had not been satisfied. Underwriters declined indemnity on this basis.
The insured pointed to section 54. It contended that the relevant “act” for the purpose of section 54 was the act of the drivers driving the trucks involved in each accident without having achieved the minimum score on the PAQS test. The insured argued that underwriters were, in accordance with section 54, prevented from refusing the claim by reason only of that act. Rather, underwriters were permitted only to reduce their liability for the claim by the amount that fairly represented the extent to which the act caused or contributed to the insured’s loss. As it was, the parties had all agreed that the drivers’ failure to achieve the minimum score on the PAQS test had not caused or contributed to the losses suffered by the insured. The insured, therefore, maintained that it was entitled to a complete indemnity.
In response, underwriters contended that section 54 did not apply because (i) the failure of the drivers to have obtained the required minimum score on the PAQS test was a “state of affairs” and not an act or omission, and (ii) the PAQS endorsement went to the scope of cover (section 54 only attaches to alleged breaches of policy conditions). In other words, underwriters maintained that they had not agreed to insure vehicles on the eastwest run being driven by any driver, but had agreed only to insure particular drivers operating particular vehicles.
In this case, Justice Corboy sought to characterise the relevant act or omission by reference to the substance of the insurance contract. Given that the policy in question was a motor vehicle policy, Justice Corboy analysed the relevant act by reference to the use of the vehicles involved in the accidents, rather than by reference to the attributes of the drivers concerned. So the relevant act or omission was held to be the act of the insured operating the vehicles on the eastwest run in which each accident occurred, with drivers who did not satisfy the requirements of the policy. He concluded that underwriters were obliged to indemnify Highway Hauliers.
And there was an extra sting in the decision for underwriters. Justice Corboy concluded that as a result of underwriters' refusal to indemnify, the insured lost a weekly return freight run between Melbourne and Perth as it could not replace the prime mover and trailers involved in the accidents. He found that the insured had lost the opportunity to earn profits as a consequence of underwriters' breach of the policy and assessed the value of that lost opportunity at $145,000.
The decision stands as a warning to insurers of the potential scope of section 54’s application and a reminder to parties to think carefully about the characterisation of the section 54 “act” and its impact on the loss.
Article by Stephanie Cook, Senior Associate.