Section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) provides an insurer may not decline indemnity because of an act of a party after the policy of insurance has been entered unless that act caused or contributed to the loss/damage.
This issue was under consideration in the Western Australian decision of Allianz Australia Insurance Ltd v Inglis  WASCA 25. In particular, the court had to determine if residing at a particular residence could be considered an “act” for the purpose of s 54 of the ICA.
Georgia Inglis (the Plaintiff) was injured when run over by a lawnmower at a neighbour’s property on 17 October 2004. The lawnmower was owned by her parents and being driven by her brother (also a minor).
The Plaintiff commenced proceedings against the neighbours. The neighbours brought Third Party Proceedings against the Plaintiff’s father and her brother.
The Inglis’ had a policy of insurance with Allianz Insurance, which provided coverage for incidents occurring outside the borders of the Inglis’ property. An exception to the legal liability section of the policy was in the following terms:
“What you are not covered for:
1. We will not cover your legal liability for:
b. Injury to any person who normally lives with you, or damage to their property”
It was not in dispute that the Plaintiff normally lived with the Inglis’, and that these living arrangements were in place at the time the policy of insurance was taken out.
It was also not in dispute that the policy would provide coverage to the Inglis’ as owners of the mower, and the Plaintiff’s brother as driver of the ride-on mower.
Allianz denied indemnity in respect of the claim, relying on the above exclusion. They maintained as the Plaintiff normally lived with the Inglis’, the claim was excluded.
The Inglis’ alleged Allianz were prevented from denying indemnity under s 54 of the ICA, which provides:
“Insurer may not refuse to pay claims in certain circumstances
- 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 insurer 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.
- 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.
b. it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act.”
At first instance in the Western Australian District Court it was found:
- For the purposes of s 54 the relevant “act” was the Plaintiff residing at the Inglis’ property;
- The Plaintiff residing at the property did not cause or contribute to the incident;
- Allianz were prevented from denying indemnity under s 54 of the ICA.
The issues in dispute during the appeal were:
- Could residing at a property be considered an “act” for the purposes of s 54 of the ICA;
- If it did constitute an “act”, did the “act” occur after or before the contract of insurance was entered;
- Did residing at the property cause or contribute to the incident;
- Was the class of persons residing at the premises an inherent limitation in this type of policy;
- Could the exclusion apply where the Plaintiff was also an insured for the purposes of the policy;
- Does the exclusion apply to contribution claims (as distinct from claims where the insured is a Defendant to the principal claim);
- Did s 54(5)(b) of the ICA apply in that it was not reasonably possible for the Plaintiff to not reside at the premises.
The focus of the Court of Appeal decision was what constitutes an “act” for the purposes of s 54 of the ICA. In particular, the court had to determine what an “act” is. Allianz argued the Plaintiff residing at the premises was a “state of affairs” and not an“act.” The Court of Appeal agreed. McLure P (who delivered the lead judgment) found:
“ … Where the ultimate fact (did the claimant normally live with the insured at the relevant time) depends on the drawing of an inference from the conduct of all relevant persons over an extended period and does not depend on there being any act on the relevant day, the ultimate fact is not an “act of the insured or of some other person”; it is properly characterized as a state of affairs or description of a relationship.
 I am mindful that s 54 is remedial in character. However, I am satisfied that the fact that a person normally lives with an insured does not constitute an “act” within the meaning of s 54(1).”
Buss JA and Mitchell J agreed with the above findings. In giving effect to the exclusion within the policy, Mitchell J further commented:
“ … The effect of the Policy was that Allianz could refuse to pay the claim by reason of the character of Georgina Inglis’ relationship with Stuart and James Inglis at the time of the accident, rather than by reason of anything in particular Georgina Inglis did. Georgina Inglis’ status at the time of the accident as a person who normally lived with Stuart and James Inglis is not an “act” of Georgina Inglis.”
The Plaintiff residing at her parents’ property was not considered an “act”. In those circumstances, it was found s 54 did not prevent Allianz from denying indemnity.
In relation to the remaining issues listed above, it was found:
- If the Plaintiff residing at her parents’ property could be considered an “act”, it was an act that occurred both before and after the policy of insurance was entered into;
- Where the Plaintiff resided was not causally relevant to the subject incident. In these circumstances s 54(2) was not evoked, and the insurer could not rely on that provision in denying indemnity (had the Plaintiff living with her parents being considered an “act”);
- The incident fell within the insuring clause of the policy, and therefore the operation of s 54 was evoked;
- The insured under the Allianz policy for the purposes of the Claim were the Plaintiff’s father and brother. It did not matter the Plaintiff could also potentially be an insured under the policy for other events;
- The exclusion under the policy could apply where the insured was either a Defendant or Third Party to the claim;
- Where the residence of the Plaintiff had no causal connection to the subject incident, s 54(5) could have no application to the claim for indemnity.
It is not enough for an insurer to rely on the terms of the policy when denying indemnity. The provisions in the ICA must also be considered. Although an insured seeking indemnity under a policy may not have raised any arguments in relation to s 54 of the ICA prior to a decision being made on indemnity, it is something that an insurer should turn their mind to.
In terms of the findings in relation to an “act”, the decision is appropriate. There is no doubt s 54 of the ICA has a wide application and is a remedial provision for insureds. However, had the argument put forward by the Applicant been accepted, underwriters of domestic policies of insurance everywhere would be left scratching their heads wondering how to restrict the application of their policies on the basis of other qualifications similar to those considered in this case.