Judgment date: 21 February 2012
Highway Hauliers Pty Ltd v Matthew Maxwell (The authorised, nominated representative on behalf of various Lloyds underwriters)  WASC 53
Supreme Court of Western Australia1
- The application of s 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) requires careful consideration of the facts of each case both in construing the insurance policy and in determining the relevant facts of the particular claim.
- Wrongfully denying indemnity to an insured, even if it is only wrongful due to the operation of s 54, may leave an insurer liable to consequential damages that would not be available under the insurance policy itself.
Highway Hauliers Pty Ltd (Highway Hauliers) is a family trucking business that operated a fleet of 7 or 8 trucks and employed 14 to 16 drivers to transport freight between Western Australia and the eastern states. Highway Hauliers entered into a contract of insurance (Policy) with various Lloyds' underwriters (Insurers) in respect of certain risks associated with its business, including damage to its vehicles and trailers.
Two prime movers and the trailers that they were hauling were damaged in separate accidents during the period of insurance. Highway Hauliers claimed under the Policy for the cost of repairing or replacing the damaged vehicles.
The Insurers rejected these claims on the grounds that the drivers involved in those accidents:
- were not declared or approved drivers for the purpose of an exclusion clause in the Policy; and
- had not complied with an endorsement on the Policy which required drivers on east-west runs meet a minimum score of 36 on a driver test known as the "PAQS test".
Many of the issues which had been in contention during the course of litigation were agreed between the parties before this decision. The main issue in dispute between the parties was whether s 54 of the ICA applied to prevent the Insurers denying liability based on the reasons given above. Furthermore, agreement between the parties left only 2 arguments regarding s 54 on foot before the Court.
If s 54 was found to apply, it remained in question whether the Insurers were liable to pay loss of profits assessed at $145,000 for the interruption to Highway Hauliers' business which resulted from the denial of indemnity.
The s 54 Claim
Section 54 of the ICA prevents insurers from refusing to pay a claim either in part or in full in certain circumstances. The relevant provisions include:
- the effect of the contract of insurance is to allow the insurers to refuse payment of the claim;
- the refusal of the claim is due to an act or omission of the insured or some other person that occurs after the contract was entered into;
- if the act or omission could not reasonably be said to have caused or contributed to the loss, the insurer may only limit its liability by the extent to which its interests were prejudiced; and
- if the act or omission could reasonably be said to have caused or contributed to the loss, the insurer can only refuse to pay that portion of the claim that was caused by the act.
The Scope of the Policy
The Insurers argued that the scope of cover under the Policy was to insure only certain drivers operating certain vehicles and the effect of s 54 was not to change the insured risk as agreed between the parties.
Corboy J agreed with the Insurers that the purpose of s 54 was not to change the scope of cover agreed between parties, but was concerned with circumstances where the claim fell within the scope of cover but the insurer was otherwise entitled to refuse to pay because of some later act or omission by the insured. However, Corboy J noted that the courts will need to look to a policy in its entirety to determine whether a term establishes the scope of cover or affects an entitlement to claim. Simply considering the wording chosen by an insurer is not sufficient to determine whether a clause limits liability or establishes the scope of cover.
Corboy J accepted evidence that it was common industry practice for insurers to require drivers undergo PAQS testing if they were to be insured for east-west runs. Nonetheless, Corboy J found that the scope of a policy cannot be determined by the understanding or practice among insurers justifying the inclusion of certain terms into policies in much the same way as it cannot be determined by looking to the wording the insurer has used. Furthermore, the purpose of the requirement for PAQS tests and driver declarations was to reduce the likelihood of claims being made rather than to limit the scope of cover.
Corboy J determined that in this case the cover provided by the Policy was over Highway Hauliers' commercial vehicles and/or the use of those vehicles in its business as a whole and the various exclusions and endorsements entitled the Insurers to refuse to pay certain claims. The insurance concerned the business and the vehicles and provided some areas of cover where in the circumstances the vehicles would not be driven at all.
Thus, the PAQS test endorsement only served to condition the Insurers' obligation to meet a particular class of claim that otherwise fell within the scope of the policy. The non-declared driver exclusion was also clearly not part of the scope of the Policy, even more so as this exclusion could be rectified if the insured provided a declaration after the incident and the insurer approved and enforced an increased excess on the claim.
The Nature of the Act or Omission
The Insurers also submitted that the failure of the drivers to obtain a certain PAQS score and be declared and accepted by the Insurers were not acts or omissions, but a state of affairs and so would not attract the provisions of s 54. It was argued by Highway Hauliers that the relevant acts or omissions were the acts of the drivers driving the vehicles without them having achieved the required PAQS scores, and the failure of Highway Hauliers to submit driver declarations for each of the drivers.
This argument was based on a previous Queensland Court of Appeal Decision 2 which had very similar facts in that:
- the insurance policy was between insurers and a business and provided aviation insurance for an aeroplane owned by the company;
- the insurers refused indemnity based on an exclusion clause that required the pilot to obey any "communications" released by a relevant authority and one such communication was a requirement that pilots pass a review every 2 years;
- the pilot at the relevant time had not sat for nor completed the review in the 2 years prior to the time of the crash; and
- the business sought to enforce the policy using s 54.
In that matter, Chesterman J found that the use of the terms "act" and "omission" in s 54 imply that the actor is capable of performing the required task. Chesterman J found that the failure to complete the flight review included both the omission of not attending and the further factor that required that someone else be satisfied with his performance, making this issue a "state of affairs" rather than an act or omission.
Corboy J found that the relevant act in this matter was that of Highway Hauliers allowing drivers who were non-declared and who had not obtained the necessary PAQS score to operate the vehicles. The state of affairs regarding the untested and undeclared drivers only occurred as a result of this act. This was as a consequence of the nature of the cover as established above and draws the focus to the fact that Highway Hauliers was the insured, rather than the drivers, and the act or omission ought to be determined accordingly.
Corboy J justified not following the Queensland case on the basis that whilst leave to appeal to the High Court had been refused in that matter, it had been refused on the basis that a further finding of fact would need to be made for the appeal to succeed beyond the question of law raised regarding the interpretation of s 54. This suggests that further clarification will be required at the highest levels regarding these principles under s 54.
The Claim for Consequential Damages
Highway Hauliers claimed that it was entitled to consequential damages based on the loss of profits that the business suffered as a result of the Insurers refusing to indemnify Highway Hauliers. Without these insurance funds, Highway Hauliers could not afford to replace the vehicles and allegedly lost consistent business because of this. In particular, this consequential loss was pleaded as recoverable on the grounds that it resulted from a breach of contract by the Insurers in circumstances where it was contemplated by the parties that financial loss would be a likely consequence of the breach.
The Insurers contended that any loss of profits fell outside the coverage of the Policy and if the Court were to grant such damages it would convert the Policy into a policy that provided for business interruption. The Insurers also claimed that the loss was too remote to be compensated on account of there being another concurrent cause, which was Highway Hauliers' inability to afford replacement vehicles.
Corboy J found that Highway Hauliers were entitled to claim consequential damages despite the argument by the Insurers. Firstly, Corboy J noted that if profits are to be the subject matter of an insurance policy, then they must be well described as forming a part of the policy. However, Highway Hauliers were not seeking to enforce the indemnity provision of the Policy but were seeking damages for a breach of the insurance contract. As such, the damages that they could recover were not limited to what the Policy provided for, but were determined according to ordinary contractual principles so as to put Highway Hauliers in the position that they would have been in had the contract been performed.
The Insurers' argument regarding remoteness relied on the fact that Highway Hauliers' loss of profits resulted from their own impecuniosity, which rendered them unable to replace the damaged vehicles. The Insurers argued that this was a separate and concurrent cause of the loss of profits which the Insurers ought not to pay for. Corboy J, however, found that the test for remoteness relevant to this matter was whether it was reasonably contemplated by the parties at the time of entering the insurance contract that if the Insurers wrongfully refused to pay the insured value to Highway Hauliers then they may lose profitable business. Corboy J found that this was reasonably foreseeable on the facts of this matter, and further noted that for any contract of insurance, so long as the insurer is aware of the item insured and the purpose for which it is insured, it is reasonably foreseeable that if payment is not made under the policy the insured will lose the benefit of using that item in the intended manner and will be thus entitled to compensation.
This case makes it clear that application of s 54 requires a complex analysis of both the facts and the policy wording. The substance of the policy will be looked at rather than the form.
Should a claim be wrongfully denied, either in consequence of the application of s 54 or on any other grounds, an insurer may be liable for damages for breach of contract rather than for any entitlement under the contract of insurance. This means that a wrongful denial of indemnity can result in more significant losses than would otherwise be possible under the policy.
All insurers will need to consider the impact that this case may have, noting that very careful drafting of a policy wording will be required to establish that a requirement on an insured forms part of the scope of the policy rather than a term or condition of the policy to which s 54 will apply.
Insurers of commercial motor vehicles may need to review their policies because an insured which allows employees that lack qualifications required under an insurance contract to operate vehicles will always constitute an act or omission occurring after the insurance contract was formed and thus s 54 is likely to operate.
1 Corboy J
2 Johnson v Triple C Furniture & Electrical Pty Ltd (2010) FLR 336
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