The Western Australian Court of Appeal has upheld the broad application of section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) adopted at first instance in Highway Hauliers v Maxwell
In doings so, the Court held that the insured’s use of drivers of its vehicles without a PaQS minimum score, as required under the policy, was an act or omission to which section 54 applied. The decision provides further support for the broad interpretation of section 54, in contrast with the approach adopted in Johnson v Triple C Furniture & Electrical  QCA 282.
Non-declared drivers excluded, but not the cause of loss
Highway Hauliers (Highway) was a trucking business operating routes between the East and West coasts of Australia. Highway held a policy with Maxwell (as representative of various Lloyd’s syndicates) that, among other things, provided cover with respect to damage to Highway’s vehicles and trailers. Relevantly, the policy provided (although there was some dispute over the final terms):
We will not pay if:
...If We have not received, and approved in writing, A Driver Declaration for the driver in control of Your Vehicle at the time of an occurrence.
An endorsement to the policy also provided:
B Doubles, Triples and Road Trains/A-Trains and B-Trains (ANZ 3)
No indemnity is provided under the policy when Your Vehicle/s are being operated by drivers of B Doubles, B Triples or Road Trains as deemed under the Australian National Licence Category (Multi-Combination) unless the driver…Has a PAQS driver profile score of at least 36…
Claims were made by Highway under the policy regarding two separate vehicle accidents. The amounts claimed were $12,335.00 and $287,472.09. The insurers declined to indemnify Highway in respect of the two claims as the drivers of the vehicles had not achieved the minimum PaQS test as required under the policy.
Whilst the plaintiff admitted that the drivers were ‘non-declared drivers’ and had not attained the minimum PaQS test score, it asserted that section 54(1) of the Insurance Contract Act remedied this failure and Maxwell was obliged to indemnify. The insurers contended that, given the factual similarities with Johnson v Triple C Furniture & Electrical  QCA 282 (Johnson), the court should follow the Queensland authority and find that section 54(1) was not enlivened.
In Johnson, the Queensland Court of Appeal determined that section 54(1) of the Act did not apply to remedy an insured’s breach of a requirement that a pilot must have satisfactorily completed a mandatory flight review within two years prior to a flight. The Court held that cover was accordingly never engaged and section 54(1) did not apply because the satisfactory completion of the flight review was not a mere formality, but rather required a thorough investigation of the pilot’s theoretical knowledge and practical skills, and was dependent upon the instructor’s assessment of the pilot’s performance.
Further, the Queensland Court of Appeal held that the flight review was intended to act as a 'defence against pilot error which might cause an aircraft to crash'. In this regard, the Court of Appeal also determined that the relevant omission would be an omission under section 54(2) as the pilot’s failure to undertake a flight review contributed to, if not the dominant cause, the crash and resulting loss. As a result, the insurer would have been entitled to refuse indemnity under the policy even if section 54(1) of the Act otherwise applied.
Adopting a broad approach
Despite the judgment in Johnson, at first instance Corboy J considered that the relevant act for the purpose of section 54 of the Act was that of the insured allowing the trucks to be driven by a driver who had not attained a minimum PaQS score, not the failure of the drivers to attain a minimum score. Specifically, His Honour held:
…the characterisation of the relevant act or omission will reflect the circumstances of the claim, the effect of the contract of insurance and the basis upon which the insurer refused to pay the claim… I consider that, in this instance, the relevant act is to be characterised by reference to the use of the vehicles involved in the accidents rather than the attributes of the drivers concerned. … I consider that it is more appropriate to define the relevant act as an act by Highway Hauliers as the insured under the contract of insurance rather than the act of the drivers who were not parties to the contract. That analysis of the relevant act or omission more readily corresponds with the focus of s.54(1) on the effect of the contract of insurance and the reasons why the insurers were entitled to refuse to indemnify Highway Hauliers according to the effect of that contract…
As a result, section 54 operated to remedy this failure and the insurers were obliged to indemnify. Corboy J did not consider himself bound by the findings in Johnson, stating:
... the finding that the failure of the pilot in Johnson v Triple C to have satisfactorily completed a flight review was not an act or omission within the meaning and for the purpose of s 54(1)… was a finding about the application of the section to the facts of that matter. It was not a conclusion about the proper construction of the section. What constitutes the relevant act or omission for the purpose of s 54(1) will depend on the particular circumstance of the case.
Given the factual similarities between Johnson and Highway Hauliers, distinguishing them is not an easy exercise. One important difference is that in Highway Hauliers the insurers conceded that they had not been prejudiced by the fact that the drivers had not achieved the required PaQS score (ie that the accidents had not been caused or contributed to by the drivers not achieving a minimum PaQS test score).
Further, in Johnson it was held that the insurer was not obliged to indemnify the insured because the relevant omission, being that of the pilot satisfactorily completing the flight review, was not within his power. In Highway Hauliers, the relevant act of allowing the drivers to operate the vehicles was within the insured’s control.
As a final sting in the tail for the insurers, Corboy J also considered the issue of consequential loss and, consistent with Brescia v QBE  NSWSC 598, held that the insurers were liable to Highway for commercial losses (loss of certain trucking runs) incurred from the date the insurer should have paid the claim. The insurer appealed both the finding in respect to section 54 and the consequential loss.
Section 54 survives the challenge
In upholding the decision of Corboy J, the Court of Appeal provided a guide to resolving section 54 issues. Relevantly, McLure P (with whom Pullen JA and Murphy JA agreed, albeit in separate judgments) set out the following steps when considering the application of section 54:
- Identify the relevant s 54 act or omission;
- Determine whether the act or omission is one to which s 54(2) applies. If yes, determine whether s 54(3) or s 54(4) applies. If s 54(2) does not apply determine whether s 54(1) applies;
In assessing whether s 54(1) applies:
- determine whether there are any restrictions or limitations inherent in the actual claim by reference to the type or kind of insurance in issue. If the facts of the claim are outside any inherent restrictions or limitations, it will not be a claim under the insurance contract, any relevant act or omission will not satisfy the causal requirements below and s 54(1) will not apply;
- determine whether the effect of the insurance contract is that the insurer may refuse to pay the claim in question (in whole or in part) by reason of the act or omission; and
- determine whether the insurer is refusing to pay the claim by reason only of that act or omission. If yes, the insurer may not refuse to pay the claim (but the insurer’s liability may be reduced to the extent its interests were prejudiced as a result of the act or omission).
McLure P agreed with Corboy J’s determination that the relevant omission was not that the drivers had failed to complete the PaQS test and were non-declared drivers; but rather that the vehicles were being driven by drivers who had not satisfied the requirements. McLure P noted that this interpretation was consistent with that used in Antico v Heath Fielding Australia Pty Ltd  HCA 35 and subsequently concluded that the relevant omission is one to which section 54 applied.
In addition, the Court of Appeal also upheld the first instance decision in respect of consequential loss, determining that such a finding was reasonably open to Corboy J.
How does it affect insureds and insurers
The Court of Appeal further supports a broad interpretation of section 54 of the ICA. However, the case also demonstrates the conceptual difficulties faced in determining the application of the section.
The proper characterisation of the relevant act or omission as rendering the event outside the scope of cover or something entitling the insurer to refuse a claim and therefore capable of remedy by subsection 54(1) is not always straightforward. Much will turn on the individual facts and circumstances of each case but regard should be had to the conduct of the insured and the basis upon which the insurer refuses to pay the claim.
The consequential loss award is also a stark reminder of the additional costs (potentially not subject to policy limits or reinsurance cover) arising from overturned indemnity decisions.