- The High Court has unanimously confirmed that section 54 of the Insurance Contracts Act has wide application and can provide broad protection for policyholders where claims are declined by insurers.
- In the event of a claim, policyholders should carefully consider how this section could assist them to overcome coverage issues raised by an insurer.
On the 20th anniversary year of the introduction of the Insurance Contracts Act 1984 (Cth), which created broad protection for the rights of Australian policyholders, the Australian High Court has given us a timely reminder of the purpose of the Act, and a resounding endorsement of the operation one of its most important sections.
In Highway Hauliers v Maxwell the High Court has resolved residual uncertainty around the application of section 54 of the Act, which confines an insurer’s remedy for breach of a policy term to the prejudice suffered by the insurer as a result of that breach.
The relevant facts are, in essence, very simple, which makes the decision all the more powerful and less easy to distinguish in the future:
- A policyholder claimed under a motor vehicle policy in relation to both accidental damage to its own vehicle, and liability for damage to a third party’s vehicle,
- The policy provided that no indemnity was provided under the policy unless the driver of the covered vehicle had passed a specified psychological test to ascertain attitudes to safety,
- The driver involved in the accident had not taken the specified test and - although it was conceded that the absence of the test result had no role in causing the accident - the insurer denied coverage on the basis that (it argued) the absence of the test meant the circumstances were outside the scope of the indemnity covered by the policy,
- The policyholder argued that the absence of the test was merely an omission which could be forgiven by section 54 of the Act as no prejudice had been suffered by the insurer.
The key issue therefore was whether the requirement for drivers to pass the test was central to the policy coverage or merely a condition to which section 54 could apply. The insurer relied on the application by the Court of Appeal of the Supreme Court of Queensland1 of a previous decision of the High Court in which the Court stated that section 54 “does not operate to relieve the insured of restrictions or limitations that are inherent in [the] claim”2.
The High Court unanimously rejected the insurer’s argument and held in favour of the policyholder. Effectively, it decided that cover for damage to motor vehicles was central to the coverage, and that the requirement for a test was merely a condition of cover (so a breach of the condition could be forgiven where it did not cause the loss and did not result in any prejudice to the insurer). The High Court held that section 54 will assist a policyholder wherever the policy contains any provision in circumstances where:
- the provision operates by reference to an act or omission of the policyholder, including:
- a condition,
- an exclusion, or
- a limitation on the defined risk; and
- the provision is engaged (or sought to be engaged by the insurer) by reason of a relevant act or omission of the policyholder (provided of course that the act or omission did not cause the loss).
In doing so, the High Court focussed heavily on the specific objects of section 54 as set out in the Australian Law Reform Commission report which recommended its introduction3, as well as the High Court’s previous decision in Antico v Health Fielding Australia Pty Ltd4. It also made clear that:
- 'restrictions or limitations that are inherent in [a] claim' are not the same as restrictions or limitations on the scope of cover that is provided under the policy – this phrase was intended to refer to issues such as a claim under a ‘claims made’ policy occurring outside the relevant policy period, and
- the Court of Appeal of the Supreme Court of Queensland had erred in the Triple C case.
This decision represents a very positive development for policyholders, and an important reminder of how powerful an ally the Act can be in the event of a claim. What is less clear at this stage is how insurers will react. Although opportunities for insurers to protect themselves from the impact of the decision appear to be limited, possibilities include:
- attempts to amend policy wordings at the next renewal, or
- the introduction of additional requests for information as part of the underwriting process, which may increase the scope for insurers to raise non-disclosure issues in the event of a claim.
Policyholders should be very reluctant to walk away from insurance claims simply because an insurer alleges the loss is outside the terms of coverage or excluded. A policy of insurance is a contract but its interpretation is assisted by the Insurance Contracts Act, so policyholders should not be too quick to assume that wordings which may appear to oust a claim will in fact have that actual result.