S54 of the Insurance Contracts Act 1984 (Cth) may well be the bane of all insurers as it is really a double-edged sword. In essence, it prevents an Insurer from relying on a breach of a policy condition to deny a claim because the insured has committed a particular act, error or omission (after the policy is entered into) which did not cause or contribute to the loss. However, the insurer may instead, reduce the claim to the extent of the prejudice it has suffered. If the act, error or omission caused or contributed to the loss, then the insurer can refuse to pay the claim.
There has been differing judicial opinion interstate as to the correct interpretation of S54 and in particular as to what constitutes an “act” or “omission”. In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999),which is the leading case on S54, the High Court held that an 'omission' may be a failure by the insured to exercise a right, choice or liberty which the insured enjoys under the policy, such as failing to notify in order to expand the scope of cover to future claims. That case concerned a claims made and notified policy and it was held that a failure to notify was an “omission” for the purpose of S54 and the insurer could not refuse indemnity on the basis of the failure to notify but could instead reduce the amount paid to the extent of the prejudice suffered.
In 2010, Queensland adopted a narrow approach to S54 in Johnson v Triple C Furniture and Electrical Pty Limited. In that case, the insurer (relying on a policy exclusion) denied a claim on an aviation policy because the pilot had failed to complete a flight review. The insured sought to rely on S54 and the insurer contended that S54 did not apply because the failure to complete a flight review was not an “omission” because the activity engaged in (flight in breach of regulations) was not an activity which the policy insured. The Queensland Court of Appeal held that the circumstances held that the failure of a pilot to complete a flight review were not an “omission”, but rather a “state of affairs” and therefore S54 did not apply. The Court said that the insured was claiming indemnity for a loss which the policy did not offer cover, namely, in circumstances where the aircraft was flown by a pilot who did not complete the flight review in breach of regulations.
However, in Maxwell v Highway Hauliers Pty Ltd (2013), an endorsement to the policy required drivers of the insured (a freight transport business) to obtain a satisfactory driver test score but they failed to do so. That failure in itself did not cause the accidents. The Court of Appeal (in favour of the insured) held that there was an “act” for the purposes of S54 and that relevant “act” was that the insured ‘allowed’ the vehicles to be driven by drivers who did not meet the minimum driving test score. The case went to the High Court on appeal. The insurers contended that because indemnity was denied on the basis of an endorsement (as opposed to the insuring clause), the claim was not for an insured risk and S54 did not apply. The insured contended that S54 does not envisage a distinction between a requirement in an insuring clause and a requirement in an exclusion or condition.
The High Court dismissed the Insurers’ appeal and upheld the Court of Appeal’s decision that S54 does apply because the omission was that the insured failed to ensure that the vehicles were only driven by drivers who has passed the test. The court, echoing its previous decision in Antico v Heath Fielding Australia Pty Limited (1997) said that S54 doesn’t focus on the reason upon which the insurer denies indemnity, but on the insured’s actual act or omission and whether it excuses the insurer from paying the claim. The High Court also referred to its reasoning in is FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) and reiterated that no distinction should be made between provisions in a policy defining the scope of cover and conditions. As to the Queensland decision in Johnson, the High Court said that it was incorrectly decided on the point that S54 was not engaged because the insurer relied on an exclusion to deny indemnity. The operation of an aircraft in breach of safety regulations was an “act” which occurred after the contract was entered into.
The case highlights the complex task insurers have in characterising what exactly is the act or omission and framing the risk within policies.
The focus should not be on the basis upon which the insurer refuses to pay the claim (whether that be that the claims falls outside the covered risk, within an exclusion or non-compliance with a condition) but on the insured’s actual conduct and the actual act which it does or omits to do.