The Full Court of the Federal Court has dismissed an appeal concerning the operation of section 54 of the Insurance Contracts Act and contribution between insurers, in a case which is understood to have had its genesis in the Court’s Insurance List for short matters:

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

The appeal was brought by the Watkins Syndicate 0457, which had insured a pleasure craft yacht against damage during the period 1 December 2012 to 1 December 2013. The respondents to the appeal were Pantaenius Australia Pty Ltd (and other insurers), who had issued a policy providing direct cover in relation to a Fremantle to Bali race (and return) that the yacht participated in during the Watkins policy period. The yacht ran aground on the return trip from Bali when heading for Darwin. The Pantaenius policy covered the loss and paid out the owner. Pantaenius claimed contribution from Watkins.

The Watkins policy covered sailboat racing cover up to 100 nautical miles. Cover was suspended when the yacht left Australian waters and recommenced when it cleared Australian customs on return (which the insured omitted to do). There was an exclusion for loss arising from competing in sailboat racing of more than 100 nautical miles (and no extension for extended sailboat racing cover applied).

The Court found that ‘but for’ the suspension of cover when the yacht left Australian waters and the insured’s omission to clear Australian customs on the yacht’s return, the Watkins policy would have responded to the claim. That was sufficient to engage s54. Accordingly, the primary judge was correct to find that (1) s54 was engaged (2) its operation meant that Watkins would not have been able to refuse to pay a claim made by the insured (3) Pantaenius could set up liability of Watkins to the insured as a basis for a claim for contribution.

As to contribution, the Court rejected Watkins’ argument that s54 was only for the benefit of the insured and was not available to an insurer for the purposes of contribution. Contribution is founded in equity. The Court held that the obligations of the two insurers here should be characterised in nature, extent and function as the same.

The case sets out a useful summary of the leading s54 cases. The Court refers to the ‘gradual distillation of the jurisprudence on s54 over nearly 20 years of litigation’. It adopted the analysis of Meagher JA in Prepaid Services Pty Ltd v Atradius Credit Insurance [2013] NSWCA 252 as ‘a clear analysis of what has been a difficult area for practitioners and judges’. The further clarification provided by an appellate court of this vexed area is welcome.