Background Facts

Highway Hauliers Pty Ltd (Insured) operated a fleet of trucks and trailers. The Insured entered into an insurance contract (policy) with certain Lloyd's Underwriters (Insurers) on 27 May 2004, which covered, inter alia, accidental damage to the Insured's nominated trucks and trailers for a specified period of time. Notably, the policy contained an endorsement to the effect that “no indemnity was provided” unless the driver of the damaged vehicle obtained a minimum score of 36 on the "PAQS test", a specified driver training program. During the relevant period of insurance, two separate accidents occurred resulting in damage to two of the Insured's vehicles. Accordingly, the Insured lodged two indemnity claims which were declined by the Insurer on the basis that both of the drivers had failed to comply with the policy, and more specifically, the endorsement to achieve minimum PAQS test scores. Proceedings were commenced by the Insured in the Supreme Court of Western Australia against the Insurers seeking indemnity under the policy and consequential damages for breach of contract and loss of profits. The Insured was successful at first instance and on appeal by the Insurers to the Court of Appeal, on the basis that the failure to have appropriately qualified drivers was remedied by s 54(1) of Insurance Contracts Act 1984 (Cth) (ICA). Special leave for an appeal was granted by the High Court to clarify the differing interpretations of s 54.

First Instance Decision

At first instance, a judgment was entered by Corby J against the Insurers in an amount of $571,710.03 for breach of the policy. The trial judge assessed the Insured's loss of profits at $145,000. The Insurers conceded that the fact that the vehicles were being operated by untested drivers could not reasonably be regarded as causing or contributing to any loss incurred by the Insured as a result of the accidents, nor could the Insurers' interests be prejudiced to any extent. The matter went on appeal as the Insurers claimed that the trial judge had erred in holding that the Insurers were obliged to indemnify the Insured in accordance with s 54.

Appeal Decision

On appeal, the Insurers contended that as the satisfactory completion of the PAQS test was a "condition of the cover" in the policy, the Insured drivers' non-compliance meant that the two claims fell outside the scope of the cover. As s 54(1) only referred to a claim for an insured risk, they argued that this could not be applied in the relevant circumstances.

Significantly, the Insurers relied on the Queensland Court of Appeal decision in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282 (Johnson) to maintain that there had been no 'act' as defined in s 54(6) of the ICA, but rather an omission by the drivers to satisfactorily complete the PAQS test. According to the Insurers, that conduct was not an omission as defined, but a "state of affairs" and as such, did not satisfy the requisite elements to enliven s 54(1).

The Court of Appeal declined to follow Johnson, arguing that while the reasoning in this case decided a question of fact, it did not decide any principle of construction of s 54.

The Court held that the proper construction of s 54(1) draws no distinction between the scope of cover and other contractual terms and that in this case, the satisfactory completion of the PAQS test was not an element of the scope of the cover, nor did it form part of the way in which the scope of the policy was defined.

"In my view, the scope of the ...Policy was defined by reference to [the Insured's] vehicles, the benefits conferred by the policy ... and the period of insurance. The scope of the policy was not defined by reference to the attributes of the driver at the time of an occurrence".

High Court Decision

The key issue facing the High Court on appeal was whether section 54(1) of the Act was engaged in the circumstances.

The Court reiterated the Insurers' claim which, relying on the reasoning in Johnson, focussed on the words of the endorsement, that “no indemnity was provided” unless the driver had the PAQS qualification. In other words, the policy only covered claims for damage to vehicles driven by those with a PAQS qualification and as such, the two claims in this instance were removed from the scope of cover.

The High Court unanimously rejected the Insurers interpretation and dismissed the reasoning applied in Johnson

In handing down its reasons, the High Court reaffirmed the proper purpose of the ICA by reference to its long title and the 1982 Australian Law Reform Commission report. Specifically, the High Court stated that one of the objects of the legislation was to strike a fair balance between the interests of an insurer and an insured in relation to contractual terms designed to protect the insurer from an increase in risk during the period of cover, irrespective of the form of the contractual term. According to the High Court (at[17]), the Insurers' argument "reduced to the proposition that the 'claim' to which s 54(1) refers is limited to a claim for an insured risk". The High Court contended that the Insurers misapplied the reasoning in Johnson by equating restrictions or limitations that are inherent in the claim with any restriction or limitation on the scope of the cover that is provided under the contract.

The High Court held that in this instance, section 54(1) was engaged as the insurer could only refuse to pay the claims by reason of acts of the insured which occurred after the policy was entered into. There was, in fact, an omission on the part of the Insured to ensure that each vehicle was operated by a PAQS certified driver after entering into the policy. The High Court expressly stated that the Queensland Court of Appeal had erred in its decision in Johnson.

Implications

The High Court's decision has served to clarify the application of s 54(1) of the ICA. In declining to follow the decision of the Queensland Court of Appeal in Johnson, the Court has essentially affirmed the proper purpose of the legislation, that is, to focus on the actual conduct of the Insured as opposed to the legal character of a provision entitling an insurer to refuse a claim.

The real issue is whether the insured's conduct is an act or omission that occurs after the contract is entered into that entitles the insurer to deny indemnity. If so, s54(1) will be engaged. In practice, the decision serves to confirm that s54(1) of the ICA will not apply to conduct of the insured which took place before the commencement of a policy, and rather, will only apply to those acts or omissions of the insured that occur after a policy is entered into. In accordance with Section 54(2), an insurer is able to refuse to pay the claim only if the act or omission could be reasonably regarded as being causally linked to the loss or damage itself.