Does the deliberate act of an insured affect the rights of an interested party (such as a lender) under the policy? The leading case in Victoria says no, but a recent Federal Court case says yes.

A couple took out a householders policy over their home. They had the mortgagee noted on the policy as an interested party. The male owner deliberately set fire to the house. Much later the mortgagee became aware of the fire damage and made a claim under the policy. The mortgagee would have expected to succeed, because in VL Credits v Switzerland General Insurance (VL Credits) (a 1990 Supreme Court of Victoria decision) a lender in the same circumstances won against the insurer.

But in this case the Federal Court judge reached a different conclusion, based on a difference between the policy wordings. In VL Credits the policy contained a condition that if any fraudulent means be used 'by the insured' 'or any damage be occasioned by the wilful act of the insured', the insurer was entitled to refuse to pay. In this case, the policy had an exclusion in respect of damage as a result of fire started with the intention of causing damage 'by you or someone who lives in your home or who has entered your home with your consent or the consent of a person who lives in your home'.

The judge thought these clauses were quite different. He thought the former one focused on the person claiming under the policy, whereas the latter one was simply concerned with how the fire came about. So the former one said we won't pay your claim if you set the fire yourself, whereas the latter one said the policy does not cover damage caused by (among other things) someone entering the home with the consent of a person living in the home.

The male insured entered the home with the consent of the female insured, so the exclusion applied. As a result, the damage itself was excluded from the cover, and not just any claim made by the insured.

The judge explained that his decision was based on the particular wording of the exclusion clause, and that each case must be decided according to what the policy actually says. It appears he was prepared to apply the exclusion somewhat broadly in order to defeat the claim.

Interestingly, there was no discussion about section 48(3) of the Insurance Contracts Act (which gives to an insurer the same defences to a claim by an interested party as it would have to a claim by the insured who took out the policy).

Secure Funding Pty Ltd v Insurance Australia

VL Credits v Switzerland General Insurance, regarded by many as an unsatisfactory decision, has been distinguished by a senior judge based on a different policy wording. Property insurers are advised to consider their policy wordings in light of the Secure Funding decision.