In its first decision of 2016, the Federal Court has found that section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) applied to nullify the operation of an exclusion clause.1
The Court's approach in this matter is consistent with previous case law,2 in that it held that the application of s 54 focuses on the effect of the policy wording on the claim that has been made and is not limited in its operation to apply only to indemnity claims for 'insured risks'.
The decision highlights the need for underwriters to pay close attention to the scope of the risk intended for cover, as well as the potential for s 54 to apply to policy exclusions and conditions.
In this eBulletin, we review the decision and look at what it means for you.
Mr Phillips owned a large luxury yacht, the Froia II. He insured the vessel under two policies of insurance, being:
- a policy issued by Pantaenius Australia Pty Ltd for the period 4 May 2013 to 4 May 2014; and
- a policy underwritten by Lloyds and issued by Nautilus Marine Agency Pty Ltd for the period 1 December 2012 to 1 December 2013.
Both policies provided cover for damage to the vessel while within defined geographic limits. The Nautilus Policy provided cover within Australian waters, being up to 250 nautical miles off the Australian coast. It also contained a condition that suspended cover when the vessel intended to enter foreign waters, from the time the vessel cleared Australian Customs for the purpose of leaving Australian waters, to the time it cleared Australian Customs on return.
On 22 June 2013, during the currency of both policy periods and while returning from Bali to Darwin, the vessel struck a reef near Cape Talbot (which is within 250 nautical miles of the Australian coast) and was unsalvageable. Mr Phillips claimed indemnity under both policies in respect of the incident. Pantaenius accepted liability, however Nautilus denied the claim. Pantaenius sought contribution from Lloyds underwriters on the basis of dual insurance.
The basis for Nautilus' denial was that, at the time of the incident, the vessel had not yet cleared Australian Customs on its return and therefore the cover suspension was still in effect. Both parties accepted that the vessel was within Australian waters at the time of the incident.
Why ICA applies (and not the Marine Insurance Act)
Sydney barrister, Angus Stewart SC, an insurance and maritime law specialist, has observed that it may not be obvious to the casual reader of the judgment why the ICA applied to the dispute at all rather than the Marine Insurance Act 1909 (Cth) (MIA). The ICA does not apply to insurance contracts to which the MIA applies.3
The MIA applies to ‘marine insurance,’4 and a contract of marine insurance is defined as a contract where the insurer undertakes to indemnify the assured against ‘marine losses, that is to say, the losses incident to marine adventure’.5 ‘Marine adventure’ includes circumstances where ‘any ship … [is] exposed to maritime perils’, and maritime perils means the perils ‘consequent on, or incidental to, the navigation of the sea’.6
Undoubtedly a yacht is a ‘ship’ and running aground is a peril consequent upon the navigation of the sea and is consequently a maritime peril. On the face of it, the MIA should therefore have applied to the exclusion of the ICA.
However, s 9A of the ICA excludes the MIA from applying to contracts of marine insurance made in respect of ‘pleasure craft’. A ‘pleasure craft’ is defined as a ship that is used or intended to be used 'wholly for recreational activities, sporting activities, or both, otherwise than for reward, and which is ‘legally and beneficially owned by one or more individuals’.
It is apparent from the judgment that the vessel Froia II was owned by an individual, and it is implicit from the Court’s application of the ICA that it (and presumably the parties) accepted that the yacht was otherwise a ‘pleasure craft’. Although the application of the ICA is not addressed in the judgment at all, this is presumably why the ICA and not the MIA applied. Had the MIA applied, for example if the yacht had been owned by a company, s 54 of the ICA would not have applied and, as will be seen, the case would have had a very different outcome.
Section 54 ICA- endorsement of Highway Hauliers
Pantaenius claimed contribution from Nautilus for the claim on the basis that s 54(1) of the ICA applied and therefore Nautilus could not refuse to pay the claim. Nautilus denied liability on the basis that there was no "act" of the type to which s 54(1) could apply.
Section 54 provides:
(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
(2) Subject to the succeeding provisions of this section, 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, the insurer may refuse to pay the claim.
Did s 54 of the ICA apply?
In considering whether the claim was one to which s 54 applied, Justice Foster followed the approach taken in Highway Hauliersthat the application of s 54 is not limited to a claim for an 'insured risk', but rather focuses on the effect of insurance on a claim that has been made. For s 54(1) to operate, it is sufficient that a claim for indemnity is made under a Policy, and that insurers may refuse to pay that claim by reason only of acts which occurred after the contract was entered into.
His Honour accepted Pantaenius' submission that the term suspending cover under the Nautilus Policy took effect as an exclusion clause, and that the claim under the Nautilus Policy was made within the scope of cover under the policy, subject to the operation of the suspension. Therefore, s 54 applied.
Was Nautilus entitled to refuse to pay the claim?
Justice Foster then considered whether there had been an act for the purposes of s 54(1) which entitled Nautilus to refuse to pay the claim. Again, his Honour followed Highway Hauliers, confirming that s 54(1) applies when an act or omission after the policy is entered into would excuse an insurer from paying a claim made by an insured under the policy.
Pantaenius submitted that the relevant act was the re-entry of the vessel into Australian waters without having cleared Australian Customs. Nautilus contended that there was no act or omission of the type contemplated by s 54(1) because there was no act which entitled it to deny indemnity. Rather, cover was suspended when the vessel cleared Australian Customs with the intent to leave Australian waters and, at the time of the incident, cover had not been re-activated because the vessel had not cleared Australian Customs on its return. Nautilus contended that the act submitted by Pantaenius was in effect a 'non-event' which prevented application of s 54.
Justice Foster rejected both parties' submissions, finding instead that the relevant act that would excuse Nautilus from paying the claim was that of the vessel clearing Australian Customs and leaving Freemantle Harbour with the intent to leave Australian waters. This act was one that occurred after the Nautilus Policy had been entered into and was, therefore, within the scope of s 54(1).
His Honour determined that Nautilus did not suffer any prejudice by reason of the act, as:
- the intention of the Nautilus Policy was to cover the risk of loss within Australian waters; and
- there was no evidence that the mere fact of the vessel clearing Australian Customs affected the risk intended to be covered.
Accordingly, Nautilus' interests were not prejudiced as a result of the act and the act was not one in respect of which s 54(2) could apply. Nautilus was, therefore, not justified in refusing indemnity.
Justice Foster also declined Nautilus' submission that equitable contribution should not apply between insurers in circumstances where one insurer's liability to pay a claim is established through the operation of s 54.
Accordingly, Nautilus was required to contribute 48% of the total loss indemnified by Pantaenius.
The decision highlights the need for underwriters to pay close attention to the scope of the risk intended for cover, as well as the relevant acts or omissions to which s 54 may apply to nullify the operation of policy exclusions and conditions. It also confirms that a dual insurer cannot avoid liability for contribution in circumstances where its liability is founded on the operation of s 54 of the Act.