Australia: Insurance update from the courts

In our first column for 2016, we consider the continuing trend of Australian Courts construing insurance cover in favour of the insured, by reference to the statutory protections offered in the Insurance Contracts Act 1984 (Cth) (the Act).

The Federal Court of Australia has recently applied section 54(1) of the Act to "an act" that the insured deliberately took, which was specifically excluded under the Policy and which the insurer alleged caused a suspension of the insurance policy.  The Court declared that the insurer was liable to provide indemnity (Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds [2016] FCA 1).

This case concerned a claim for contribution between insurers as a result of the total loss of a luxury yacht, which ran aground in Australian waters while returning to Australia after competing in a yacht race from Freemantle to Bali. 

The owner of the yacht had subscribed to two policies of insurance provided by different insurers (Insurer A and Insurer B).  Insurer A, which issued the first policy, provided cover in respect of loss occurring in Australian waters.  The policy excluded liability in the event that the vessel intended to enter foreign waters, and provided that all cover under the policy would be suspended between the time when the vessel cleared Australian Customs for the purpose of leaving Australian waters and the time when it cleared Australian Customs upon its return (Suspension Clause).  The owner was specifically offered insurance by Insurer A that would have covered the yacht race, for an additional premium, but declined.  The owner instead took out coverage from Insurer B, which specifically covered the yacht race and the return voyage to Australia. 

Insurer B accepted the claim and provided indemnity for the value of the yacht and the cost of salvaging the vessel.   Insurer A denied the claim on the basis of the Suspension Clause.

Insurer B argued that section 54(1) of the Act prevented Insurer A from refusing to pay the claim on the basis that it could not deny indemnity by reason of an act of the insured which occurred after entry into the contract of insurance.

Insurer A submitted that as the loss occurred prior to the yacht clearing Australian Customs upon its re-entry to Australia, the policy of insurance had been suspended and there was no act of the insured which enlivened section 54(1).  Hence, the insurer was not liable to pay the claim.

Section 54 of the Act

In summary, section 54(1) of the Act provides that "where the effect of a contract of insurance would ... be that the insurer may refuse to pay a claim ... by reason of some act of the insured ... being an act that occurred after the contract was entered into ... the insurer may not refuse to pay the claim by reason only of that act...".   An insurer may seek to reduce their liability to pay a claim if the insurer can prove that it suffered prejudice as a result of the act enlivening section 54(1), however as a matter of practicality establishing prejudice is difficult.

Insurer A also sought to rely on section 54(2), which provides that "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 ... the insurer may refuse to pay the claim".  If enlivened, the onus would shift to the insured to prove that it did not cause or contribute to the loss.

The legislative purpose of these sections is said to strike a fair balance between the interests of the insured and the insurer in circumstances where the literal application of a clause, which seeks to minimise risk, would have the effect of denying indemnity in circumstances otherwise covered by the policy.  The controversy lies in defining the scope of policy coverage.

In this instance, the two principal questions for the Court were whether:

  1. section 54(1) of the Act was enlivened such that Insurer A would not be permitted to refuse the claim by reason of the fact that the insured had not yet cleared Australian Customs on the return voyage; and if so,
  2. the failure to clear Australian Customs could be regarded as causing or contributing to the loss claimed such that Insurer A was entitled to refuse to pay the claim.

A third question for the Court was whether Insurer B was entitled to itself rely on section 54 (as distinct from the insured) so as seek a contribution from Insurer A. 

The Court's reasoning

In construing the contract of insurance, the Court looked to the operative provisions to determine the scope of the policy and the risk that the insurer sought to avoid.  The policy was an occurrence based contract of insurance and therefore required that the event causing the loss occur within the period of cover, which it did. 

A key clause, in addition to the Suspension Clause mentioned above, provided that cover was only provided in relation to events causing loss or damage which occurred within: (a) "250 nautical miles off mainland Australia and Tasmania"; and (b) "all waters within Australia...".  The Court determined that the policy's intent was to insure loss that occurred while the insured was sailing in Australian waters, but not to provide cover in respect of all journeys (ie, voyages outside Australian waters).

In considering the application of section 54 of the Act, the Court adopted the approach taken by the High Court in the 2014 decision of Maxwell v Highway Hauliers Pty Ltd and closely analysed whether the insured had committed an "act" that enlivened section 54.    

The Court held that it was the vessel's departure and clearance of Australian Customs with the intention of leaving Australian waters (not the failure to clear customs on re-entry) that constituted the "act" upon which the insurer sought to deny the claim, and which enlivened section 54(1) of the Act.  

The Court also declined Insurer A's submission that an act of the insured caused the loss of the yacht.  The Court held that the act of passing Australian Customs with the intent of leaving Australian waters to compete in a sailboat race did not contribute to the damage and ultimate loss suffered on re-entry.  Put another way, had the yacht remained in Australian waters and not cleared Australian Customs it may still have ran aground on the same reef.  Accordingly, despite the terms of the Suspension Clause and the Insured's failure to pay the additional premium, Insurer A was prevented from denying liability and ordered to make contribution to Insurer B.

What does this mean for you?

This decision illustrates the extent to which Australian Courts are prepared to use section 54 of the Act to narrow the operation of exclusions in a policy of insurance, with a view to providing greater fairness, even where insurers are seeking contribution amongst themselves.

It is apparent that the Court will require the very act that enlivens section 54 to be the act that directly causes the loss, if the insurer is to resist indemnity; here, one could say that the boat would not have been in the waters but for participating in the race that was excluded from the policy.  However, this approach was rejected.

Accordingly, insurers should ensure that the subject-matter of their policies do not overlap with the risk sought to be excluded.  Here, the subject-matter of the policy was said to be events causing loss within Australian waters.  Realistically, insurers should ask whether the act that is sought to be excluded would cause the loss that the insurer seeks to avoid.  If not, the premium should reflect the actual risk to the insurer.

The application of section 54 of the Act continues to be a live issue and is currently before the Supreme Court of Victoria.  Watch this space... 

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.