Reasonable precautions provisions are a common feature of first party insurance policies, as well as some forms of liability policy, however the circumstances in which an insurer can rely on such a clause are quite limited.
This type of provision typically requires the insured to take 'reasonable precautions' to prevent or mitigate loss or damage to insured property. However, the circumstances in which an insurer can rely on a clause like this to deny a claim are quite limited.
The key difficulty arises from the requirement for the insurer to prove that, before the loss occurred, the insured recognised the risk which subsequently caused the loss or damage.
This is a purely subjective question which focuses on the insured’s perception of the risk. What has to be proved is the actual state of mind of the actual insured at the relevant time, no matter how foolish or unreasonable it might have been. It is not enough to show that the insured reasonably could or should have recognised the danger.
Having crossed this ‘subjective knowledge’ threshold, the insurer has another difficult point to prove. It has to show that, having recognised the risk, the insured consciously and deliberately acted in a reckless manner which exposed it to the particular risk which it had recognised (often referred to as ‘courting the risk’).
The concept of ‘recklessness’ is distinct from the concept of negligence (or even ‘gross negligence’). It requires a:
a) recognition that a specific danger exists; and
b) conscious indifference as to whether or not it is averted.
The distinction between negligence and recklessness is not always easy to draw. As a result, reasonable precautions provisions are frequently the subject of dispute.
The practical difficulty - proving a subjective state of mind
Proving the existence of a particular subjective state of mind on the part of the insured is often challenging. In many cases, attempts to rely on a reasonable precautions clause fall at this first hurdle.
A recent Australian decision provides an example of this. The case involved an insured who attempted to drive a truck loaded with heavy machinery under a low clearance bridge. The driver did not check the height of his load, even though he realised that it was unusually tall and that his route took him under a low bridge. The load collided with the bridge, causing significant damage.
Despite this, the Court decided that the insured was not in breach of the reasonable precautions provision.
While the Court accepted that the collision could reasonably have been expected or foreseen, it was not satisfied that the driver in fact subjectively realised the risk he was taking. It was more likely, the Court concluded, that he either made an error in his calculations or simply did not turn his mind to the possibility of a collision.
Accordingly, the insurer was not entitled to decline the claim on the basis of the insured's failure to take reasonable precautions.
Reasonable precautions provisions are notoriously difficult to successfully rely on in Australia.
The recklessness test sets the bar high. It is inherently difficult to prove the subjective state of mind of the insured, especially where there is little or no documentary evidence.
This crucial distinction between a risk which should reasonably have been perceived and a risk which is actually perceived is often a cause of frustration for insurers.
While it sometimes produces infuriating results, there are good reasons why this standard is applied. The fundamental purpose of the insurance contract is to provide cover for an insured where it suffers accidental loss or damage. This generally includes damage suffered as a result of negligence. The commercial purpose and value of the policy would be diminished if the relevant threshold was simple negligence (even if of the most foolish and egregious sort). In other words, an insurer cannot say, ‘I will cover you for your negligence, except where you are negligent.’
The other side of the coin is that, in some cases at least, the subjective knowledge requirement arguably rewards the insured who fails or chooses not to apply its mind to the consequences of its actions.
On balance, while the high threshold is sometimes a source of frustration, these clauses play an important role in limiting the scope of cover and provide a valuable line of defence for underwriters—despite the evidentiary hurdles which they sometimes raise.