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  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:
- 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,
- 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...
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