The Full Court of the Federal Court dismissed an appeal concerning a claim for contribution between insurers where the second policy would only respond to the underlying claim if section 54 of the Insurance Contracts Act 1984 (Cth )(‘ICA’) was engaged.
The Full Federal Court has provided some further clarification regarding the operation of section 54 and confirmed that section 54 is available to an insurer seeking contribution from another insurer.
The appellant, Watkins Syndicate 0457 (‘Watkins’), insured a pleasure craft yacht known as Froia II pursuant to a marine policy of insurance written by Nautilus Marine Insurance Agency (‘Watkins Policy’).
The Watkins Policy included material damage and liability cover, for the period from 1 December 2012 to 1 December 2013.
In June 2013, the owner of the yacht planned to participate in a yacht race from Fremantle to Bali but was concerned that the Watkins Policy may not cover the yacht for that race.
While the Watkins Policy covered sailboat racing cover up to 100 nautical miles, the Policy included a clause which suspended cover from when the yacht cleared customs upon heading off to Bali until the yacht cleared customs upon its return to Australia.
As a precaution, the owner took out a second policy of insurance with Pantaenius Australia (‘Pantaenius’) to cover the yacht during the race (‘Pantaenius Policy’).
On 22 June 2013, the yacht ran aground of Cape Talbot in Western Australia whilst heading to Darwin on its return from Bali.
The owner claimed on the Pantaenius Policy which covered the loss. Pantaenius accepted the claim, paid out the owner and sought contribution from Watkins.
Pantaenius claimed equitable contribution from Watkins on the basis that both the Pantaenius Policy and the Watkins Policy covered the same loss.
Watkins argued that the Watkins Policy did not respond because the yacht ran aground while the Watkins Policy was suspended.
Pantaenius asserted in response that section 54 prevented Watkins from relying upon the suspension of its policy and that the principles of dual insurance required Watkins to contribute to the owner’s loss.
The primary judge, Foster J, found that section 54 was engaged. The Court found the suspension clause was in the nature of an exclusion and it therefore followed that the suspension provision was amenable to the operation of s 54 of the ICA.
The Court found there was no evidence that Watkins had suffered prejudice within the meaning of section 54 of the ICA and that Watkins would not have been able to refuse a claim made by the owner on the Watkins Policy.
Foster J upheld Pantaenius’ claim for contribution and ordered Watkins to pay 48 % of the amount which Pantaenius had paid to the owner under the Pantaenius Policy.
Watkins appealed Foster J's decision on three grounds:
- Section 54 of the Insurance Contracts Act was not engaged;
- Section 54 did not prevent Watkins from refusing to pay the claim under its policy;
- Section 54 was not available to an Insurer seeking contribution from another Insurer.
The Full Federal Court accepted Foster J’s decision in relation to each of these grounds and, accordingly, dismissed Watkins’ Appeal.
Was Section 54 Engaged?
At the heart of this ground of appeal is the application of a fundamental principle first stated by the High Court of Australia in Australian Hospital Care and subsequently explained in Prepaid Services and Highway Hauliers.
In broad terms the principle is that any claim for indemnity made under an insurance policy, is subject to that policy’s inherent restrictions and limitations. Section 54 cannot be engaged to remedy any failure by the claim for indemnity to observe those inherent restrictions or limitations.
Watkins argued before Foster J and the Full Federal Court that the inherent restriction or limitation of the Watkins Policy was that it concerned sailing in Australian waters during the period when cover was not suspended.
In this particular case, the yacht had run aground during the period of suspension. Watkins argued that the claim for indemnity therefore breached the inherent restriction or limitation of the Watkins Policy (an occurrence during the period of suspension) and that section 54 was not engaged.
Like Foster J, the Full Federal Court rejected this interpretation of the Watkins Policy.
The parties agreed that the process of determining the Watkins Policy’s inherent restrictions and limitations involved close but not necessarily blind acceptance of the Policy’s language.
But they disagreed what outcome the application of that process to the Watkins Policy yielded.
Upon adopting the relevant passages in Prepaid Services and Highway Hauliers, the Full Federal Court added this comment to the process:
“The process of understanding what are the restrictions or limitations that are inherent in the claim is one that involves the construction of the policy, not merely as to what its constituent words mean, but in a broad sense so as to characterise as a matter of substance what is the essential character of the policy. Once that essential character is decided upon, the restrictions or limitations that necessarily inhere in any claim under such a policy (to which s54 does not apply) and the restrictions or limitations that do not necessarily inhere in any claim under such a policy (to which s54 may apply) can be ascertained.”
The Full Federal Court relied upon the following aspects of the Watkins Policy to conclude that its inherent restriction or limitation was sailing within Australian waters:
- The certificate of cover spoke in terms of a broad and clear cover directed at “occurrences affecting identified property” within the 250 nautical mile limit.
- Neither the words of the policy nor any other objective evidence directly focussed on an inherent restriction or limitation expressed in the terms argued by Watkins.
- The Watkins policy was a time (as opposed to voyage specific) policy whose essential character was that the relevant occurrence takes place within the limit of 250 nautical miles off the coast of mainland Australia and Tasmania.
The suspension of the Watkins Policy was not an inherent restriction on limitation.
Since the claim for indemnity observed the inherent restrictions and limitations of the Watkins Policy, section 54 could arguably be engaged to address the claim’s failure to address any of the Policy’s other restrictions or limitations such as here, the yacht running aground during the period of suspension.
Does Section 54 Prevent the Refusal to Pay the Claim
Was there more than one reason which entitled Watkins to refuse to pay the claim? If there was, section 54 did not apply.
The Full Federal Court concluded, as had Foster J, that there was only one reason why Watkins was entitled to refuse to pay the Claim:
- The clearing of customs upon leaving Australia and the clearing of customs upon returning were related actions and to be treated as such.
- Alternatively, and consistently with the language of the ALRC Report on Insurance Contracts, the focus of the Court should be on the conduct of the Insured not on any specific action.
Section 54 therefore prevented Watkins from refusing to pay the claim.
Watkins argued before the Full Federal Court and Foster J that section 54 was only for the benefit of the Insured. Underpinning that argument was that the reference to the expression “claim” was a reference to a claim by the “Insured”.
The Full Federal Court adopted a “not too overly technical approach” to conclude that the obligations which Watkins and Pantaenius owed the insured, should be characterised in their nature, extent and function as the same.
That being the case, Pantaenius, against whom the owner had originally pressed its claims, was entitled to seek contribution from Watkins.
 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd  204 CLR 641