The assessment of risk is now that much harder for underwriters after the High Court on 10 September 2014 unanimously dismissed an appeal from a decision of the Court of Appeal of the Supreme Court of Western Australia. If underwriters assess risk thinking that endorsements in a policy, for example as to age or qualifications or assess risk thinking an exclusion from cover relating to non-compliance with safety standards, will operate to limit the scope of cover, then their risk assessment is unlikely to be accurate.

In Highway Hauliers the High Court found that an endorsement forming part of the contract of insurance (that the driver had to have a PAQS driver profile score of at least 36) did not exclude the claim from cover even though the driver, who was involved in an accident,  had not undertaken a PAQS test or an equivalent test.

In this matter s54(2)  did not engage  as it was uncontested that the drivers’ non compliance with the endorsement could not reasonably be regarded as causing or contributing to the loss so on the facts.

Underwriters, who had previously lost in both the Supreme Court of Western Australia and its Court of Appeal, argued  the word ‘claim’ used in s54(1) Insurance Contracts Act1984 (Cth) is limited to a claim for an insured risk.  That is, if the act done by the Insured (allowing their vehicles to be driven by untested drivers) was not an insured risk, then s54(1) was not engaged and the Insurer could deny indemnity. 

With reference to Antico v Heath Fielding Australia Pty Ltdthe High Court unanimously rejected this argument noting that Brennan CJ in Antico said s54(1):

“focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim – falling outside a covered risk, coming within an exclusion or non-compliance with a condition – but on the actual conduct of the insured, that is, on some act which the insured does or omits to do. ... It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured.”

Applying this, the High Court held that section 54(1) applied because the operation of a vehicle by an untested driver was properly characterised as having been by reason of an “act” that occurred after entry into the contract of insurance.  It was irrelevant that the endorsement in the contract required drivers to have a PAQS of at least 36.

Consistent with this approach the High Court disapproved of the finding in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282.  The High Court considered it mattered not, in that case, that the aircraft was operated in breach of air safety regulations notwithstanding an exclusion in the policy which provided  that “this policy does not apply whilst the aircraft …is operated in breach of [air safety regulations]” because the operation of the aircraft in breach of  safety regulations was an “act” which occurred after the contract was entered into and therefore s54(1) applied.

Clearly the High Court’s ruling favours insureds as it extends cover in circumstances where one might consider an endorsement or an exclusion ought to engage. That cover can only now be:

  1. reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act; or
  2. refused where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract

so underwriters and brokers need to be aware of this when assessing risk and if a claim is made whether the claim may be reduced or refused as above.