The Full Court of the Federal Court has applied the reasoning of the High Court in Highway Hauliers regarding the operation of section 54 of the Insurance Contracts Act 1984.

Factual background

Mr Phillips held two policies of insurance against damage to his luxury yacht – one with Pantaenius Australia Pty Ltd (Pantaenius) and one with Watkins. Both policies covered the yacht while it was within Australian waters, but the Watkins policy included a term suspending cover from when the yacht cleared Australian Customs (for the purpose of leaving Australian waters) until it cleared Australian Customs upon its return to Australian waters.

After returning from a race from Freemantle to Bali the yacht struck a reef north off of the Australian mainland near Cape Talbot (which is within Australian waters). It had not cleared Australian Customs upon re-entering Australian waters.

Mr Phillips made a claim under both policies. Pantaneius accepted liability and paid out a total of $341,179.51 in respect of the claim. Watkins denied indemnity on the basis that cover was suspended because the yacht had not cleared Customs after returning to Australian waters.

Pantaneius then sought a dual insurance contribution from Watkins, which Watkins refused by relying on the same grounds. The trial judge rejected Watkins argument. Watkins appealed.

The decision

As established by the High Court in Highway Hauliers, section 54 will be engaged if the policy allows the insurer to refuse a claim by reason only of an act or omission of the insured which occurred after the policy was entered into. The Full Court found that the act of clearing Australian Customs for the purpose of leaving Australian waters and the omission to clear Australian Customs on the yacht’s return can each be seen as an act or omission of the insured that occurred after the inception of the policy and which entitled Watkins to refuse to pay the claim. Section 54 was therefore engaged. Because neither act/omission caused or contributed to the loss, Watkins was not entitled to refuse the claim.

The Full Court noted the correct approach to such questions is to determine whether the relevant clause is part of the ‘essential character of the policy’ in which case it is not subject to the operation of section 54. It was held that the suspension of cover clause was not part of the essential character of the policy.

By contrast, the limitation of cover to Australian waters went to the essential character of the policy. Therefore, section 54 would not have come to the insured’s assistance if the yacht had run aground outside Australian waters.

Interestingly, the Full Court suggested that if an insurer wished to offer a policy that provided only for domestic voyages, that intention ought to be clearly expressed in the policy wording. However, even then section 54 might still be engaged unless the insurer could demonstrate that such an essential limitation of cover broadly conforms to a recognisable body of underwriting. In other words, the insurer would probably still need to prove that ‘domestic voyages’ cover is an established line of business.

The Full Court also (predictably) rejected Watkins’ argument that section 54 was solely for the benefit of an insured and not available to an insurer pursuing a dual insurance contribution. Contribution between insurers is underpinned by principles of natural justice and equity and an overly technical approach should not be taken when considering whether both policies respond to the same occurrence.

This decision provides yet more support for a liberal application of section 54 consistent with its remedial purpose. The considerable challenge for underwriters is to express terms limiting cover so as to clearly reflect their status as part of the ‘essential character of the policy’. Even then, courts will tend to look past the words and focus on the substance in considering whether section 54 is engaged.

Watkins Syndicate 0457 v Pantaenius Australia Pty Ltd [2016] FCAFC 150