Following the decision in Highway Hauliers1 and more recently in Pantaenius v Watkins2, in this matter the Court of Appeal in Western Australia considered what constitutes an "act" for the purposes of section 54 of the Insurance Contracts Act 1984(Cth) (ICA).
The decision highlights the need for underwriters to be mindful of the distinction between "acts" and "states of affairs" when considering whether a situation lies within the scope of section 54 of the ICA.
In this eBulletin, we review the decision and what it means for you.
- Section 54 of the Insurance Contracts Act 1984 (Cth)
- An "act" or a "state of affairs"?
- When did the act occur?
- Further information
On 17 October 2004, Georgia Inglis, a ten-year-old girl, suffered serious injuries when she was run over by a ride-on lawnmower. The lawnmower was driven by a family friend, eleven-year-old Stephen Sweeney. The accident occurred at the property of Daniel and Elaine Sweeney, Stephen's parents.
The lawnmower however, was actually owned by Georgia's father, Stuart Inglis. It was alleged that the lawnmower was brought to the Sweeney property by Georgia's brother, James Inglis. Georgia and James lived with their parents, Linda and Stuart Inglis.
Georgia commenced District Court proceedings against Daniel, Elaine, and Stephen Sweeney (the Sweeneys) in respect of the personal injuries suffered. The Sweeneys cross-claimed against Stuart and James Inglis on the basis that Georgia's injuries were caused by their negligence.
Linda and Stuart Inglis (together the Insureds) held an Allianz home and contents policy which provided cover for legal liability (Policy). Clause 14 of the Policy relevantly stated:
"We will cover your legal liability for payment of compensation in respect of…bodily injury…which is caused by an accident".
The definition of "you" and "your" in the policy included the Insured's family members, including James. The Policy, however, provided that cover would not be provided for "injury to any person who normally lives with you" (the Exclusion Clause).
Citing the Exclusion Clause, Allianz declined to indemnify Stuart and James on the basis that Georgia lived with them. Stuart and James issued a cross-claim against Allianz claiming indemnity under the Policy.
At first instance, District Court Judge Wager found that Allianz was liable to indemnify Stuart and James pursuant to the Policy. Allianz appealed this decision, claiming that on the proper construction of the Exclusion Clause and section 54 of the ICA, the Policy did not apply to indemnify the Insureds.
Section 54 of the Insurance Contracts 1984 (Cth)
Section 54 provides:
"Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the Insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act (our emphasis)."
The issues for determination before the Court of Appeal were whether there was an "act" for the purposes of section 54(1); and if so, whether the "act" was outside the scope of section 54(1) because it did not occur after the contract was entered into.
On appeal Allianz claimed, amongst other things, that:
- the fact that Georgia lived with the Insured was a "state of affairs", and did not constitute an "act" for the purposes of section 54(1); and
- even if it was an "act", it occurred before the Policy was entered into.
An "act" or a "state of affairs"?
President McLure of the Court of Appeal found that the issue to be determined was whether there was an "act" within the natural meaning of the word. An "act", she continued, means "something done or being done by a person".
The Court held that an "act" was different from a "state of affairs".
The Court said that the question of whether Georgia "normally lived" with the Insureds had to be considered by reference to the conduct of Georgia and the Insureds over an extended period of time. Georgia's living situation was therefore found to constitute a "state of affairs", rather than an "act".
Accordingly, there was no "act" to which section 54 could apply in order to nullify the operation of the Exclusion Clause. On this basis, the Court upheld Allianz's appeal, setting aside the decision of the District Court.
Whe did the "act" occur?
President McLure also considered Allianz's additional ground of appeal, namely that had the Court found that Georgia living with the Insured was an "act", then such "act" would have occurred before the Policy was entered into.
President McClure found:
"If the facts after entry into the Policy support an inference that on the date of the accident Georgia Inglis was normally living with the Insured, that would be an act that occurred after the Policy was entered into for the purposes of section 54(1) of the ICA."
On this basis, President McLure dismissed this alternative ground of appeal.
Unlike in Highway Hauliers and Pantaenius v Watkins, this decision was found in favour of the insurer who was resisting the application of section 54 to nullify a policy condition or exclusion.
However, Underwriters need to be mindful that an "act" which commenced prior to the formation of an insurance contract will not preclude the operation of section 54. Further, the distinction between an "act" and a "state of affairs" may not be determinative in other circumstances and is likely to be very much based on the facts.