Following on from the 2014 High Court decision in Maxwell v Highway Hauliers Pty Ltd, the Federal Court has recently applied s.54 of theInsurance Contracts Act 1984 (Cth) (ICA) to circumvent a suspension of cover clause in a policy.
The decision confirms that Australian Courts are utilising s.54 to strike down underwriters’ attempts to limit cover in a range of circumstances. If in any doubt it may be prudent for underwriters to run their latest policy wordings past their insurance lawyers.
Mr Phillips owned and operated a large luxury yacht (vessel). He held two policies of insurance against damage; one with Pantaenius Australia Pty Ltd (Pantaenius), on risk from 4 May 2013 to 4 May 2014 and one with Watkins Syndicate 0457 via Nautilus Marine Agency Pty Ltd (Nautilus), on risk from 1 December 2012 to 1 December 2013. Both policies covered the vessel whilst it was within Geographic Limits being Australian Waters and subject to endorsements, policy limits, exclusions and terms and conditions generally.
On 22 June 2013 when both the Pantaenius and Nautilus policies were on foot, the vessel was returning to Australia after competing in the Freemantle to Bali race when it struck a reef north of the Australian mainland near Cape Talbot (which is within Australian waters). It proved to be unsalvageable.
Mr Phillips made a claim under both policies. Pantaenius accepted liability and paid out a total of $341,179.51 in respect of the claim. Nautilus, however, denied indemnity.
Basis for denial
Nautilus relied upon a clause in its policy to the effect that cover would be suspended from when the vessel cleared Australian customs for the purpose of leaving Australian waters until it cleared Australian customs on its return. Whilst the vessel had returned to Australian waters, Nautilus nevertheless argued that when the vessel was damaged, coverage under its policy remained suspended as the vessel had not cleared Australian customs.
The principal issue – was s.54 of the ICA engaged?
It was agreed by the parties that the vessel had returned within Australian waters but had not been cleared by Australian customs thus falling within the meaning of intended suspension of cover. The consequence of this was that if s.54 was not enlivened then Nautilus was entitled to maintain the denial.
The principal issue thus was whether section 54 was engaged.
By way of quick re-cap s.54 of the ICA provides relevantly as follows:
- 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 whole or in part, by reason of some act of the insured or of some other person…but not being an act in respect of which section 54(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 that claim is reduced by the amount that failure represents the extent to which the insurer’s interests were prejudiced as a result of that act.
- 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.
S.54(1) and s.54(2) operate in the alternative. S.54(2) deals with acts or omissions that are capable of contributing to a loss. S.54(1) deals with all other acts and omissions that might provide a basis for an insurer to deny cover.
In reviewing Highway Hauliers and the case law referred therein and otherwise relevant, the judge confirmed that he had to determine whether or not the relevant clause legitimately went to the scope of cover inherent in the nature of the risk insured by the policy. This determined whether or not s.54 was attracted.
As a matter of fact, the judge concluded that the scope of the cover inherent in the coverage provided by the policy had two key limiting features – that the insured be covered whilst the insurer was on risk and whilst the vessel was in ‘Australian waters’.
The judge found that the provision suspending cover when the insured vessel cleared Australian customs for the purpose of leaving Australian waters was more in the nature of an exclusion. His Honour found that in practice the suspending provision was almost always going to come into effect well before the vessel actually left Australian waters and thus did not operate as a contractually prescribed geographical limit on the scope of cover itself.
For these reasons His Honour found that the suspension provision in the Nautilus policy was of a kind caught by the operation of s.54 of the ICA.
Nautilus also argued that as Mr Phillips had no opportunity to pass through Australian customs before running aground, there was no positive act or omission for the purposes of s.54. His Honour did not disagree with this interpretation. However, he considered that the relevant act was the vessel passing through Australian customs for the purpose of leaving Australian waters which led to the suspension of cover. This positive act enlivened s.54.
Whether Nautilus was entitled to reduce its liability pursuant to the operation of s.54
The judge found that Nautilus had failed to establish that the acts of Mr Phillips had caused it any prejudice within the meaning of s.54(1).
His Honour explored the relevant facts for the purposes of s.54(2). Nautilus submitted that the mere fact of leaving the jurisdiction and returning via Cape Talbot was enough to be a ‘cause’ of the loss. His Honour rejected this, making the point that Nautilus must demonstrate the act ‘increased the risk that the vessel would run aground in Australian waters off Cape Talbot.’
His Honour found that there was no evidence put before him which would support the proposition that clearing Australian customs (or for that matter returning) added to the risk that the vessel would run aground off Cape Talbot. The position may have been different had the vessel sunk in Indonesian waters or whilst sailing on the high seas.