Section 54 of the Insurance Contracts Act 1984 offers protection to an insured whose acts or omissions could, in the absence of section 54, give an insurer the right to refuse to pay a claim. Essentially, it provides that if an insured is in breach of the policy, the insurer is permitted to reduce its liability only to the extent that the insured’s breach has caused prejudice to the insurer. In other words, an insurer will be precluded from declining indemnity for a claim if the insured’s breach was not causative of the loss.
In our Autumn 2012 edition, we reported on the Supreme Court of Western Australia’s foray into the sometimes murky waters of section 54.
To re-cap: The court had been asked to consider the operation of section 54 in a dispute between Highway Hauliers and its insurer. Highway Hauliers operated a trucking business whose main source of income was transporting freight back and forth from Perth to the eastern states (“east-west runs”). It held cover in respect of its fleet of trucks with certain underwriters at Lloyds. Two of the insured’s trucks were damaged following two separate accidents while carrying freight on east-west runs. Highway Hauliers claimed under its policy in respect of the damage sustained in both accidents.
The policy contained an endorsement that provided there would be “no cover” for drivers of trucks on east-west runs who had not achieved a minimum score on a driver test known as the PAQS test. Neither of the drivers of the damaged trucks had undertaken the PAQS test and Highway Hauliers conceded that the PAQS endorsement had not been satisfied. Underwriters declined indemnity on this basis. WA’s Supreme Court found that section 54 excused Highway Haulier’s failure to satisfy the PAQS endorsement and, because the failure had not caused or contributed to the losses suffered, Highway Hauliers was entitled to indemnity.1
A year on, in Matthew Maxwell v Highway Hauliers Pty Ltd2, Western Australia’s Court of Appeal has now voiced its support for the Supreme Court’s decision and, in doing so, has given insureds seeking to rely on section 54 another weapon for their arsenal.
In upholding the decision of the trial judge, the Court of Appeal adopted a broad interpretation of section 54 favourable to insureds. They emphasised the following:
- Section 54 was introduced by the legislature to overcome the “inequitable” operation of laws allowing termination of a contract of insurance regardless of whether or not the insurer had suffered prejudice.
- The legislature intended section 54 to focus on the substance and effect of the terms of the policy rather than its form. Accordingly, section 54 should be extended not just to terms imposing obligations on the insured but also to exclusions from cover of certain risks so that the effect of section 54 could not be avoided by simply rephrasing an obligation (“the insured warrants that the car will be kept roadworthy”) so as to become a temporal exclusion (“the insurer will not be liable while the car is in an unroadworthy condition”).
- Section 54 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent with the actual language employed and to which its words are fairly open.3
- When applying section 54, a court should not look to the precise scope or conditions of cover. Rather, consideration should be given to the “restrictions and limitations inherent in the actual claim by reference to the type or kind of insurance in issue”. The court looked at the type or kind of insurance very broadly. It categorised Highway Hauliers’ policy as a policy covering damage occurring in Australia within the period of insurance to specified vehicles. With the policy so categorised, the Court concluded that Highway Hauliers’ claim was susceptible to section 54 because it was a claim in respect of a nominated vehicle for material damage that had occurred in Australia within the period of insurance. The Court acknowledged that the policy’s requirement that drivers achieve a minimum PAQS score may have “conditioned” the scope of cover. However, it held that the PAQS requirement was “a matter of detail of the particular policy” and not an inherent limitation or restriction qualifying claims made under a policy of the type the insured held. In those circumstances, the breach of the PAQS requirement could be excused by section 54.
The Court’s decision sends a clear message that section 54 ought to be given a wide ambit in favour of an insured, particularly in circumstances where the insured’s breach of the policy is not causative of the relevant loss. On the basis of this decision, it seems that a requirement of the policy that conditions the scope of cover will be susceptible to the operation of section 54.
It is important to note, however, that the WA Court of Appeal’s decision is irreconcilable with the decision of the Queensland Court of Appeal in Johnson v Triple C4. In circumstances strikingly similar to those considered by the WA courts, the Queensland Court of Appeal held that section 54 did not excuse an insured’s failure to comply with a condition of the policy that had the effect of requiring a pilot to successfully complete a flight review within 2 years of every flight. In those circumstances, the precise scope and application of section 54 remains in doubt.