The insured trucking business made a claim under its insurance policy in respect of two separate accidents in which trucks and trailers were damaged.  The insurers rejected the claims on the grounds that the drivers of the trucks had not complied with an endorsement on the policy requiring the drivers of the vehicles to have achieved a minimum score on a driving test known as the PAQ test. 

Section 54 of the Insurance Contracts Act prevents an insurer from refusing to pay a claim on the basis of an act or omission of the insured which breaches the terms of the policy, where that act or omission did not cause or contribute to the claimed loss.  Instead, the insurer may reduce its liability by an amount that fairly represents the prejudice suffered by it as a result of the insured’s act or omission.

The insurer argued that section 54 did not apply because the claims did not come within the scope of the cover due to the testing endorsement.  It argued that the testing endorsement was a term which defined the scope of the cover provided by the policy, not a term which governed the operation of the policy.  The insured on the other hand, argued that section 54 draws no distinction between the scope of cover and other contractual terms and, in any event, completion of the driving test was not an element of the scope of cover.

While the Western Australian Court of Appeal accepted that section 54 does not operate to modify the scope of cover provided by an insurance contract, their Honours had no difficulty finding that on a proper construction of the policy the testing endorsement did not define the scope of cover. The Court found that there was a relevant act to which section 54 applied in that the insured permitted a non-qualified driver to drive the vehicle or alternatively, there was an omission of the insured’s drivers to satisfactorily complete the test before driving the nominated vehicles. Given that section 54 applied to those acts and omissions, and given that the insurer could not prove that it suffered prejudice as a result of that conduct, it could not refuse the claim.

An additional issue was whether damages for loss of profits was payable to the insured because of the insurer’s refusal to pay the claim. The insurer argued that as the insured elected not to take out business interruption cover, it should be inferred that the parties did not intend the insurer to be responsible for loss of profits arising from a failure to indemnify the insured. However, the Court was against the insurer in relation to this issue and found that damages for loss of profits from the use of property, if indemnity is wrongfully refused, is not too remote and was payable in the circumstances.

The WA Court of Appeal rejected the approach taken by the Queensland Court of Appeal to a very similar issue (see our May 2011 edition of Insurable interest).  It decided that the operation of section 54 of the Insurance Contracts Act is not to be restricted by characterising a condition of a policy as defining the scope of the cover.

Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115