Highway Hauliers Pty Ltd v Maxwell  WASC 53
On 21 February 2012, Corboy J of the Supreme Court of Western Australia found in favour of Highway Hauliers Pty Ltd (Highway Hauliers) ruling that section 54 of the Insurance Contracts Act 1984 (Cth) precluded its insurer from denying indemnity. Corboy J characterised the operation of insured vehicles by drivers who had not complied with certain driving tests and the failure to supply declarations about each driver to the insurer as an act or omission which would trigger the operation of section 54. Significantly, the Court found that by reason of the insurer's wrongful declinature of cover, it was also liable to compensate Highway Hauliers for consequential loss, thus extending the compensable damages beyond the policy's indemnity limit.
Highway Hauliers operates a transport business hauling cargo between Perth and the Eastern capitals of Australia. Two trucks were damaged in separate accidents on 16 June 2004 and 2 May 2005, the cost of repairs to which Highway Hauliers claimed under its commercial vehicle insurance policy. Maxwell, as the authorised and nominated representative of various Lloyds underwriters (Insurer), rejected indemnity in reliance on a failure by Highway Hauliers to ensure compliance with express stipulations of an endorsement to the insurance policy.
The relevant policy contained an endorsement proscribing that cover did not extend to drivers embarking on the east-west/west-east cartage who did not achieve a People and Quality Solutions driver profile score of at least 36 (PAQS endorsement). Further reliance was placed on an exclusion dealing with the circumstance where the driver of a lost or damaged vehicle was non-declared (that is, non-approved) to the insurer.
It was common that the drivers of the damaged vehicles were non-declared drivers and that they had not undertaken the PAQS test rendering the PAQS endorsement unsatisfied.
The issue in the action was whether the Insurer was entitled to decline indemnity to Highway Hauliers or whether the exclusions were characterised as "acts or omissions" contemplated by section 54.
Highway Hauliers contended that the act of allowing drivers who had not obtained a PAQS score of at least 36 to operate the insured vehicle and the omission of failing to submit driver declarations for each of the drivers constituted "acts or omissions" for the purposes of section 54. On this basis, it was argued that the Insurer could not escape liability under the policy.
The Insurer asserted that the driver's failure to obtain the required score on the PAQS test was not an "act or omission" within the meaning of section 54, but rather it was a "state of affairs". It was further contended that the "insured risk" should be interpreted narrowly so that the policy was limited to providing cover for Highway Hauliers' vehicles when operated by drivers who had complied with the PAQS endorsement.
In an effort to gain judicial support, the Insurer cited Johnson v Triple C Furniture & Electrical Pty Ltd  QCA 282 (Johnson) as authority for the proposition that section 54 had no application, and sought to draw an analogy to the facts of the current matter. In Johnson, the owner of an aeroplane was refused indemnity because the aircraft was being flown by a pilot who had not "satisfactorily completed flight review in the two years prior to the crash". In that case, the Court also found that the exclusion clause limited the scope of cover afforded by the policy to aeroplanes flown by pilots who had completed a flight review. Because of the relevant exclusion, the claim fell outside the scope of cover afforded by the policy and section 54 was found to have no application.
The principle underlying section 54 is well-known, but essentially includes relief by which an insurer can reduce its exposure by an amount that fairly represents the extent to which the insurer's interests were actually prejudiced as a result of the act or omission. Pivotal in this matter was the Insurer's admission that the fact that the drivers involved in the accidents were non-declared drivers and had not undertaken a PAQS test did not cause or contribute to any losses incurred by Highway Hauliers as a result of the accidents i.e. the drivers' competence was not causative of the accidents (as opposed to the pilot in Johnson whose actions directly caused the accident). As such, it was argued that the Insurer did not suffer any prejudice by reason of either of those matters and, accordingly, it could not rely on section 54 (2) to reduce its liability.
The Court agreed with Highway Hauliers' characterisation of the acts and rejected the Insurer's proposition that the exclusions altered the "state of affairs" or the scope of cover.
In considering the matter, Corboy J departed from the reasoning in Johnson by applying section 54 in favour of Highway Hauliers. His Honour distinguished Johnson because the pilot's failure to undertake a flight review might have substantiated an act or omission for the purposes of section 54. However, it was the requirement to complete the flight review to an external standard of "satisfactory completion" (within the exclusion) that allowed it to rest outside the ambit of section 54 and so indemnity could be refused in that case.
In contrast, the Court characterised the relevant act or omission as Highway Hauliers' operation of the trucks by allowing them to be driven by drivers who did not meet the terms and conditions of the policy. This was a breach which was able to be cured by section 54.
His Honour's reasoning was that:
- the crux of the cover provided was Highway Hauliers' commercial vehicles and the use of those vehicles in its business; and
- the PAQS endorsement was directed to reducing the risk of an occurrence happening rather than to defining the scope of cover provided for an occurrence that had occurred.
The Court ultimately held that section 54 applied to respond to the breaches relied on by the Insurer in refusing to indemnify. In addition, Corboy J accepted Highway Hauliers' claim for consequential loss to award damages in the form of lost profit amounting to $145,000 arising from its inability to conduct business as a result of the declinature of cover, and the Insurer's breach of the policy.
This judgement departs from the reasons in Johnson, and demonstrates an example of proactive remediation in favour of the insured receiving the salvation offered by section 54. It further serves to underpin the importance of the characterisation of extensions and exclusions to a policy in relation to relevant acts or omissions within the meaning contemplated by section 54. It also reinforces the need for insurers to remain alive to the risks of denying indemnity in matters without properly analysing the nature of the matter sought to be indemnified. The importance of this is compounded by a somewhat nasty surprise that damages may exceed anticipated reserves by having to also accommodate consequential losses.
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