Australia: Case notes - insurance

Last Updated: 15 May 2016
Article by Ray Giblett

A hard 'act' to follow

Insurers both in Australia and those overseas have often scratched their heads trying to come to terms with section 54 of the Australian Insurance Contracts Act 1984 (Cth) (ICA). Section 54 prevents an insurer from denying a claim solely on the basis of an act (or omission) of the insured or another person which occurred after the time the contract was entered into (provided the act did not cause the loss). Recently, both the Federal Court of Australia and West Australian Court of Appeal have weighed in on what is meant by the requirement for an 'act' under section 54(1) of the ICA. The two cases draw a useful dividing line between when section 54 will come to the aid of an insured and when it will not.

Case 1: Insurer runs aground on section 54

The first case, Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds1, involved a marine insurance policy for a luxury yacht which was wrecked off Cape Talbot, Western Australia. This policy contained an exclusion clause limiting coverage under the policy to damage that was sustained by the yacht while in Australian territorial waters. Under the terms of the clause, coverage was suspended from the time the yacht cleared Australian Customs and Immigration for the purpose of leaving Australian waters until the yacht cleared Australian Customs and Immigration upon its return. While the yacht ran aground within Australian waters, at the relevant time it was returning from Indonesia and had not cleared Australian Customs and Immigration. The insurer, therefore, denied the claim, grounding its refusal on the exclusion clause.

After review of the insurance policy in light of the relevant authorities, Foster J concluded that the exclusion clause must be read in light of the underlying purpose of the policy. In his Honour's opinion, this was to only extend coverage to the yacht while it was in Australian waters. As the exclusion clause did not go to the nature of the risk covered by the policy, the question became whether there had been an 'act' as contemplated by section 54(1).

Upon considering the cases put forward by both the insurer and the insured in regard to the relevant 'act', Foster J rejected both in favour of his own interpretation. According to his Honour, the relevant 'act' of the insured was the act of departing Fremantle harbour with an intention to leave Australian waters and clearing Australian Customs and Immigration at the commencement of the voyage. His Honour based his reasoning for this decision on the fact that this act was a necessary pre-condition to the suspension of the insurance policy under the exclusion clause.

As the insured's act did not cause the loss and the insurer suffered no prejudice, given the loss occurred in Australian territorial waters, section 54 operated to prevent the insurer from refusing the claim.

Case 2: A better 'state of affairs' for insurers

The decision by the Federal Court in Pantaenius can be compared with the recent decision of the West Australian Court of Appeal in Allianz Australia Insurance Ltd v Inglis.2 This case involved a claim on a home insurance policy following injuries sustained by a ten-year-old girl, Miss Georgia Inglis, who was accidentally run over by a ride on lawnmower while playing. The persons claiming indemnity under the policy were the father and brother of the injured girl. Significantly, the home insurance policy excluded coverage for 'injury to any person who normally lives with you'. The insurer declined to indemnify the insureds based on this exclusion.

At first instance, the Western Australian District Court found that Miss Inglis was a person who normally lived with the father and brother and that this was an act for the purposes of section 54(1). The insurer, therefore, was not entitled to rely on the exclusion clause in denying indemnity.

On appeal, the court considered the District Court's interpretation of an 'act' and concluded that living with another person is not an 'act'. In the Court of Appeal's opinion, the relevant facts were more appropriately defined as a 'state of affairs' or a 'description of a relationship'. This situation was to be inferred from the conduct of all relevant persons over a prolonged period of time and did not depend on any single act of a particular person on the day that the insurable event occurred. The conduct, therefore, could not amount to an 'act' within the meaning of section 54(1) and the insurers succeeded on appeal.

Again, the court also noted that a provision in a contract of insurance is to be informed by its context and the nature or type of the insurance.

How to act

The above decisions provide some clarity in regard to the operation of section 54 in a post Maxwell v Highway Hauliers Pty Ltd3 landscape. Although, as demonstrated in Pantaenius, section 54 continues to be applied broadly by the courts, Inglis illustrates that it is not a panacea for all claims.

The cases also operate as a timely reminder that the court will determine the meaning of a policy provision, including an exclusion provision, by reference to the text, context and purpose of the provision and the policy as a whole. Insurers, therefore, should approach the task of defining the limits of a policy with extreme care.

External evidence presented in the context of Wellington Motions in Quebec

Quebec law on motions to compel an Insurer to defend its insured under a liability policy, also known as 'Wellington Motions,' has evolved over the years. The Quebec Court of Appeal recently added to this body of law by rendering a judgment that overturned a Quebec Superior Court decision allowing the introduction of external evidence to support a liability Insurer's denial of coverage.4 The Court of Appeal, in this case, shed more light on how Wellington Motions should be viewed.

The facts

The plaintiffs, the Quebec Government and a school board, were claiming from a series of defendants damages from a fire allegedly caused by welding operations on the roof of a school. One of the defendants, Technologies CII Inc. (CII), was the contractor in charge of installing heating and ventilation components for the school. CII's work involved some welding operations on the roof, and a fire broke out while CII's employees were working at the school. The fire caused approximately C$16 million in damages.

Northbridge Financial Corporation (the Insurer) was also named as a co-defendant as CII's Insurer. In the context of the proceedings, the Insurer filed its plea stating that there was no coverage for CII for this loss because CII's employees had breached one of the warranties included in the policy by neglecting to use fireproof screens or blankets during the welding operation. In support of its plea, the Insurer had filed a copy of its statutory examination of CII's president, who admitted that CII's employees did in fact breach this warranty.

Shortly after the Insurer filed its plea, CII filed a Wellington Motion to compel the Insurer to defend the claim.

Quebec Superior Court decision

The first question addressed by the Superior Court was whether the Insurer was allowed to submit 'external' evidence to support its denial of coverage based on the breach of warranties. As an example, the Insurer wanted to show, using CII's president's statutory examination, that CII's employees failed to use any fireproof shielding.

The court determined that, in the context of this hearing, the Insurer could provide the court with such external evidence to support its decision to refuse to defend CII. However, the court added, this should be done in a strict and summary procedural context, which must not become a 'trial within a trial.' The court therefore concluded that it should look to the evidence already submitted by plaintiffs and the Insurer, including the statutory examination of CII's president. Moreover, the court held that it should consider as true all the facts that flow from this external evidence.

After a lengthy debate as to whether the warranties included in the Insurer's policies were indeed known by the insured, the court determined that the Insurer was successfully able to show that its insured had indeed breached one of the warranties in the policy. The court based its finding largely on the statements of CII's president during his statutory examination. As a result, the court found that the Insurer had no duty to defend the claim made by plaintiffs against CII seeing as, at the stage of the proceedings, it had not been shown that the policy applied to the loss.

Court of Appeal decision5

On appeal, the Court of Appeal unanimously overturned the trial judge's decision. In a very short judgment, the panel found that the first judge should not have concluded, based on the external evidence provided by the Insurer, that the fire that damaged the building was necessarily caused by the welding operations that were the focus of the warranties in the Insurer's policy.

Moreover, the court found it was not clear from that evidence that CII's employees were actually conducting welding operations on the building shortly before the fire. More importantly, the Court of Appeal noted its 'surprise' at the first judge's decision to allow external evidence (i.e., most likely referring to CII's president's admissions in his statutory examination) to be considered in the context of the Wellington Motion. The court reiterated that only a minimal amount of evidence should be heard at that stage, since the insured is not afforded the right to respond to the evidence put forward by the Insurer. The Court of Appeal therefore struck down the first judgment and ordered the Insurer to defend the claim against CII.

Further defining the scope of the Texas Prompt Payment Act

In Health Care Service Corporation v Methodist hospitals of Dallas, no. 15- 101546, the Fifth Circuit grappled with whether the Texas Prompt Payment Act ('TPPA') applies to third-party administrators of self-funded ERISA (i.e. Certain employer-provided health benefit) plans.

The Texas Prompt Payment act

The TPPA requires insurers to pay unproblematic, or 'clean' claims submitted by preferred providers within 45 days for non electronically filed claims or 30 days for electronically-filed claims. The TPPA applies to 'each preferred provider benefit plan in which an insurer provides, through the insurer's health insurance policy, for the payment of a level of coverage ...'. It further defines 'insurer' as 'a life, health, and accident insurance company, health and accident insurance company, health insurance company, or other company operating under Chapter 841, 842, 884, 885, 982, or 1501 [of the Texas Insurance Code], that is authorised to issue, deliver, or issue for delivery in this state health insurance policies.'

The dispute and its resolution

In anticipation of Methodist filing suit for purported violations of the TPPA, Health Care Service Corporation d/b/a Blue Cross Blue Shield Texas (BCBSTX), filed suit requesting a declaration that: (1) the TPPA does not apply to thirdparty administrators of self-funded ERISA plans; and (2) ERISA pre-empts the TPPA such that the third-party administrators of self-funded ERISA plans cannot be held liable for TPPA violations. Methodist counterclaimed for over US$31 million in penalties, interest, and attorneys' fees. The trial court sided with BCBSTX.

On appeal, Methodist argued that the TPPA applied to BCBSTX because it was an 'insurer' subject to the TPPA. BCBSTX argued that while it does act as an insurer, the actions complained about by Methodist were undertaken by BCBSTX in its role as a third-party administrator under Chapter 4151 of the Texas Insurance Code, not in its role as an insurer under other chapters of the Texas Insurance Code.

Methodist argued further that the word 'provides' in the TPPA was broad enough to encompass not only the entity with the ultimate financial burden of payment, but to the thirdparty administrator who facilitates that payment. Moreover, Methodist contended, BCBSTX maintains a 'health insurance policy' by maintaining administrator agreements and preferred provider network agreements.

The fifth circuit disagreed with Methodist. The court held that, even if BCBSTX were an 'insurer,' it did not 'provide[ ] ... For ... Payment.' The court focused on the fact that when discussing third-party administrators, the TPPA describes their function as 'process[ing] or pay[ing] claims,' which the court said suggests that the 'provides ... For ... Payment' phrase does not encompass payments by others that are facilitated or distributed by a third-party administrator.

Perhaps more importantly, the court found that even if BCBSTX 'provide[d] ... For ... Payment,' it did not do so through its 'health insurance policy.' The TPPA defines 'health insurance policy' as 'a group or individual insurance policy, certificate, or contract providing benefits for medical or surgical expenses incurred as a result of an accident or sickness.' The court noted that, 'any benefits [BCBSTX] furnished to beneficiaries derive[d] from the plans of others, wholly independent of any contractual relationship with BCBSTX' and held that 'BCBSTX, as an administrator, [did] not confer any benefits for medical expenses on beneficiaries and therefore does not provide for payment through its 'health insurance policy.''

The court also rejected the argument that the TPPA applied to BCBSTX by way of a provision extending the TPPA's application to 'a person ... With whom an insurer contracts to' perform certain administrative services. The court highlighted the fact that in order for the TPPA to apply to BCBSTX by way of this provision, it would have to contract with an insurer. The court opined that self-funded health benefit plans and state government-sponsored health benefit plans did not fall within the aforementioned definition of 'insurer' because: (1) those plans do not operate under any of the insurance code chapters mentioned in that definition; and (2) the plans are not authorised to 'issue, deliver, or issue for delivery' health insurance policies in Texas. In other words, while self-funded and state government-sponsored benefit plans do provide health benefits to employees, they are not technically 'insurance.'

The broader context: the ongoing controversy over the TPPA's scope

This case is yet another chapter in the book of controversies over the breadth of the TPPA's scope. Plaintiffs' lawyers regularly test the boundaries of its scope, in large part thanks to the windfalls they can secure in the form of statutory penalties and the shifting of attorneys' fees to a losing defendant.

A major success for the plaintiffs' bar in this regard was Lamar Homes, Inc. v Mid-Continent Casualty Company, 242 s.w.3d 1 (Tex. 2007). There, the dispute focused on a different portion of the TPPA, which applies to 'first-party claim[s],' and is not limited to claims submitted by preferred providers in the health insurance context. The Texas Supreme Court held that this provision of the TPPA applied to defence costs an insured incurred in defending a lawsuit and for which the insurer was later found to have wrongfully denied coverage.

The court explained that its past decisions distinguished between a first-party claim, which 'is stated when "an insured seeks recovery for the insured's own loss,"' and a thirdparty claim, which 'is stated when "an insured seeks coverage for injuries to a third party"' ... 'based upon that distinction,' the court held, 'a defense claim is a first-party claim because it relates solely to the insured's own loss.' Accordingly, the court held that a wrongful denial of a defense can lead to penalties under the TPPA.

The Wrong Trousers: German Supreme Court rules that brokers may not settle claims on behalf of insurers

In a recent decision delivered on January 14, 2016 (case reference I ZR 107/14), the German Supreme Court ruled that a broker may not be authorised by the insurer to handle third-party claims on behalf of the insurer.

The facts of the case are as follows:

  • A chain of dry cleaners had placed their third-party-liability insurance via a broker. The broker's commission included a lump sum for the ongoing review of the insured value and the claims handling on behalf of insurers. For this purpose the broker had a general power of attorney from the insurer.
  • The dispute was sparked by a claim from a customer who claimed compensation for a pair of trousers that was lost by the dry cleaner. The customer claimed compensation not just for the lost trousers but also the costs of the dry cleaning, expenses for the cost of telephone calls and the bus fare for his futile attempt to collect his trousers. The broker answered the claimant with a letter on behalf of the insurer and explained that given that the claimant could not present any proof for the value of the trousers, the broker had instead estimated that value and deducted a lump sum for the fact that the trousers were used and also the costs of the dry cleaning since obviously the trousers were stained when the customer handed them to the dry cleaner. The broker then explained that for legal reasons, there would be no compensation for costs such as telephone or bus fare covering the futile attempt to collect the garment.
  • The letter somehow came to the attention of the local Bar association. The Bar association filed an action for injunction and asked to prohibit the broker from handling legal matters such as the customer's claim. The first instance court and the court of appeal rejected that action, but the German Supreme Court overruled these decisions and held that the broker rendered illicit legal services and thus, had to abstain from further action.

The legal point that was determined

The legal problem behind the case can be found in the German law on legal services. In Germany, only lawyers who are duly qualified and registered with the Bar association may render legal services. Legal services is defined in a very broad way as 'any service for somebody else's business that requires a legal assessment of the particular circumstances'. The reasoning behind that law is to protect the general public from unqualified legal advice and to ensure that only duly qualified lawyers with professional indemnity insurance in place are allowed to practice the law.

The law provides for an exception to the general prohibition to render legal services, if the legal services are supplementary to another task that requires legal knowledge.

The first and second instance courts discussed the question whether the task of checking different heads of damages in relation to the loss of a pair of trousers really requires a legal assessment of the particular circumstances or whether this is a more trivial task that does not even qualify as legal services in the sense of the law. In consequence, they left this question undecided and relied on the exception that supplementary services to an allowed service do not require a full legal qualification as a lawyer. In this respect, it was decided that claims handling is a typical supplement to the business of a broker and that a broker has the relevant legal qualification to handle these questions.

In its decision of January 14, 2016, the German Supreme Court overruled the lower instances and focused more on the conflict of interest. It held that the interests of the insurer and the insured are not necessarily aligned and thus, the broker cannot act for the insurer and insured at the same time. As well, the Supreme Court held that the main obligation of the broker is to place insurance on behalf of the insured so the obligation to handle claims on behalf of the insurer cannot be 'supplementary' to this obligation, for the simple fact that the claims handling is undertaken for another principal.

The full text of the Supreme Court decision will only be published in a few months' time, but the brokers' associations who support the respondent broker in this matter have already announced to take this case to the European Court and possibly the German Constitutional Court as this decision restricts the freedom of services for foreign brokers in Germany and discriminates German brokers with regard to foreign brokers abroad who are not restricted in a similar way.

Nevertheless, the decision is final and insurers and brokers will have to review their arrangements carefully to ensure compliance with the position of the Supreme Court. A violation of the statute on legal services may be prosecuted by the Bar associations with actions for injunctions as in the case described above. In addition, the fact that a broker acting as claims handler for the insurer violates the law, renders the whole agreement between broker and insurer and the power of attorney null and void.


1[2016] FCA 1.

2[2016] WASCA 25.

3[2014] HCA 33.

4Technologies CII Inc. v Société d'assurances générales Northbridge, 2016 QCCA 41 (Que. C.A.).

5Québec (Procureure générale) v Services énergitiques Ecosystem inc., 2015 QCCS 1988 (Que Sup Ct).

65th cir. Feb. 10, 2016.

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

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

Ray Giblett
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”

Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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