In brief - Maxwell v Highway Hauliers a wake up call for underwriters
To escape the operation of section 54, underwriters should consider changing the point of enquiry, from post-contract to pre-contract, so that the scope of cover is delimited at the formation of the contract.
Maxwell v Highway Hauliers brings welcome clarity to operation of section 54
A very recent and now widely reported High Court decision has the potential to be a wake up call to underwriters. The decision of Maxwell v Highway Hauliers Pty Limited  HCA 33M is a mercifully short judgment signifying the end of a long and conflicting road for the principle decided.
As with many of the seminal decisions on section 54, the answer is elegantly simple in hindsight. The High Court held that section 54 applies to clauses which require an insured's compliance (or non-compliance) as a condition precedent to cover.
Perhaps the most crucial point to keep in mind when considering the effect of the decision is that section 54 only applies to acts or omissions which take place after the inception of the policy.
Less scope for section 54 to affect professional indemnity and financial institutions claims
In claims-made and some long tail business, this is likely to mean that for the majority of claims, section 54 will have little effect on these sorts of clauses.
For example, a policy endorsement which restricts cover for kerbside valuations under a valuer's professional indemnity policy to only kerbside valuations conducted in strict accordance with the Australian Property Institute guidelines would be unaffected by section 54 if the valuation sued upon was undertaken prior to the inception of the policy.
It would be highly unusual for the valuation and the claim to be brought within the same policy period.
Another example would be selling financial products not on an approved products list: the act of mis-selling almost always occurs prior to the policy period in which the claim is made.
In stark contrast, in occurrence policies, claims quite often arise not long after the incident or event which leads to the claim. In such a case – as in the Maxwell v Highway Hauliers proceeding – the compliance or non-compliance with particular policy conditions is far more likely to have taken place after the inception of the policy.
In short, the lag in professional indemnity and financial institutions claims means that exclusions or conditions requiring an insured to do or not do something are less likely to be affected.
What will change?
In Maxwell v Highway Hauliers, the insured owned a fleet of vehicles which were used to operate an interstate freight transport business. The insured held a commercial insurance vehicle policy with various Lloyd's underwriters, which covered the insured's fleet of vehicles for specified loss, damage or liability occurring to the vehicles.
An endorsement forming part of the insurance contract identified that indemnity was only provided where drivers of the vehicles met certain conditions, including that the drivers had obtained certain test results in a driving profile test. Two of the insured's trucks were damaged in separate accidents. Neither of the drivers had completed the driving test contemplated in the endorsement. Underwriters refused to pay each claim by virtue of the fact that the vehicle was being driven by an untested driver.
The situation described can perhaps be aptly referred to as "underwriting by condition". Rather than determining whether each prospective insured driver had met the test results before admitting them as an insured, the scrutinising was left to an after the event type assessment.
Underwriters using such clauses should be very conscious that section 54 has the potential to apply.
Not every refusal to pay a claim will result in the application of section 54
Pullen JA in the West Australian Supreme Court, Court of Appeal gave a very good explanation of how exclusions in an insurance contract can avoid the application of section 54. We repeat that part of his judgment:
The difference between the clause in Maxwell v Highway Hauliers and the example from his Honour's reasons above is that in the example, the scope of cover is delimited at the formation of the contract. In Maxwell v Highway Hauliers, the clause had the effect of admitting insureds post policy inception provided they met certain conditions.
Responses available to underwriters
We see two notable options available to underwriters.
The first which should not be lost sight of is that in Maxwell v Highway Hauliers, underwriters conceded that the fact the two drivers were not tested did not cause the loss. Without delving into the reasons for this concession – which are not apparent from the reported reasons in any event – it should be borne in mind that this concession may not have to be made in every case.
Section 54 only applies to prevent an insurer from declining cover where there is a breach of policy terms if that breach is not causative of the loss. There will be many instances where the proviso might operate, for example, where a clause requires the use of personal protective equipment by employees and the use of such equipment would have prevented injury.
Keeping this proviso in mind may lead to more focussed exclusions which may escape the operation of section 54.
Additionally, the other option is to change the point of enquiry from post-contract to pre-contract. Rather than saying "we will not cover untested drivers in the event of a claim" – using that example – the same result could be obtained by asking such questions in advance of issuing the policy.
Although a non-disclosure is subject to the same "only in the case of prejudice" type restrictions by virtue of section 28 of the ICA, a discussion with a prospective insured prior to issuing the policy would give underwriters far more control than leaving the question of whether a claim is covered to be decided by the courts.
Because of the fact that section 54 applies to acts or omissions occurring after the policy incepts, the Maxwell v Highway Hauliers case is likely to have substantially more relevance to occurrence and short tail class policies than claims made wordings.
The case very much highlights the risks of "underwriting by endorsement" and the pivotal role that underwriting guidelines can have in substantiating a position to be taken by an insurer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.