UK: Section 54 Is In For The Long Haul

Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 is an appeal from a decision by the Supreme Court of Western Australia which held that relief under section 54 of the Insurance Contracts Act 1984 (Cth) was available to the Insured and that the Insurers were not entitled to refuse indemnity in circumstances where the Insurers had argued that the scope of cover meant the claim was excluded rather than any policy exclusion.

The appeal is significant for its discussion on the interpretation of s 54 and its support for a broad interpretation of s 54, in contrast to the decision by the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336.  Partner Chris Harris, Associate Isaac Gibbs and Law Graduate Yicheng Chen discuss this decision and its implications with respect to the interpretation of s 54.

What was the story?

Highway Hauliers Pty Ltd (Insured) operated a fleet of trucks and trailers to transport freight between the eastern states and Western Australia (the east-west run).  The Insured held a policy with Maxwell (as representative of various Lloyd's syndicates) (Insurers).  The policy covered, amongst other things, accidental damage to the Insured's trucks and trailers nominated in the schedule of cover.  Two trucks were damaged in separate accidents and the Insured claimed the cost of repairs.

The Insurers declined indemnity on the grounds that the drivers of the damaged vehicles:

  1. had not complied with the endorsement in the policy providing for drivers to have achieved a minimum score on a driver test know as the 'PAQS test'; and
  2. were non-declared (non-approved) drivers for the purpose of an exclusion in the policy.

At first instance Corboy J held that:

  1. the Insurers were obliged to indemnify the Insured for the cost of repairing the damage to the trucks and trailers by reason of the application of s 54(1) of the Insurance Contracts Act 1984 (Cth) (ICA); and
  2. by denying indemnity to the Insured, the Insurers had breached the policy and were liable for consequential loss of profits.

The Insurers appealed to the Supreme Court of Western Australia Court of Appeal (Court of Appeal) claiming that the trial judged erred in law on both findings.  On 6 May 2013, the Court of Appeal dismissed the Insurers' appeal.

Section 54 grounds

As to the first issue on appeal, the Insurers accepted that, the fact that the drivers were non-declared drivers and had not undertaken the PAQS test, could not reasonably be regarded as being capable of causing or contributing to any losses incurred by the Insured. That is, the Insurers did not rely on s 54(2) to avoid the operation of s 54(1).

As many of you will be aware, s 54 was designed to protect an insured whose acts or omissions would otherwise have given an insurer the right to refuse indemnity.

In their first issue on appeal, the Insurers contended that s 54(1) had no application because in their view, the policy did not extend to cover the damage suffered by the Insured while its trucks were driven by drivers who had not attained a driver profile score of 36 in PAQS. 

In particular, the Insurers argued that:

  1. if a matter defines the scope of the cover (that it, it is a necessary element or condition thereof) in the policy, it is not caught by s 54(1);
  2. the scope of the cover was the operation of road trains on the east-west runs by drivers who had satisfactorily completed a PAQS test.  In other words, non-satisfaction of the PAQS test had the result that the claims were outside the scope of the cover under the policy; and
  3. there was no 'act' as defined in s 54(6).  In this respect, the Insurers relied upon the decision of the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336 (Johnson) to contend that the only relevant conduct was an omission by the drivers of the road trains to satisfactorily complete a PAQS test and that that conduct was not an omission.

McLure P (with whom Pullen JA and Murphy JA agreed) discussed the legislative history of s 54 and the relevant High Court cases which have considered its application.  After reviewing these cases, McLure P set out the following steps which, in her Honour's view, should be used when considering the application of s 54:

  1. identify the relevant s 54 act or omission;
  2. determine whether the act or omission is one to which s 54(2) applies. If yes, determine whether s 54(3) or s 54(4) applies.  If s 54(2) does not apply, determine whether s 54(1) applies;
  3. in assessing whether s 54(1) applies:
  • determine whether there are any restrictions or limitations inherent in the actual claim by reference to the type or kind of insurance in issue.  If facts of the claim are outside any inherent restrictions or limitations, it will not be a claim under the insurance contract, any relevant act or omission will not satisfy the causal requirements below and s 54(1) will not apply;
  • determine whether the effect of the insurance contract is that the insurer may refuse to pay the claim (in whole or in part) in question by reason of the act or omission; and
  • determine whether the insurer is refusing to pay the claim by reason only of that act or omission.  If yes, the insurer may not refuse to pay the claim (but the insurer's liability may be reduced to the extent its interests were prejudiced as a result of the act or omission).

In applying these steps, McLure P held that for the purposes of s 54(1) there was an omission.  McLure P held that the omission was the failure of the Insured's drivers to satisfactorily complete the PAQS test before driving the Insured's nominated vehicles on an east-west run.  McLure P distinguished Johnson on the basis that each case turned on its own facts. In Johnson, the insurer of a plane had refused to indemnify the insured following a plane crash due to the fact that the plane was being flown by a pilot who had not satisfactorily completed a flight review within the two years prior to the crash (a circumstance which was excluded under the policy).  The Court upheld the exclusion, finding that the insurers were entitled to deny indemnity and that the pilot's failure to have satisfactorily completed a flight review was characterised as something which did not constitute an act or omission for the purposes of s 54. 

McLure P also held that it was not an inherent restriction of the Insured's claim that drivers of the damaged vehicles on the specified routes must have satisfactorily completed the PAQS test.  In this respect, McLure P relied upon the decision of the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 to reason that the only restriction or limitation inherent in a claim under an occurrence or event based insurance policy (which was the applicable type of policy in this case) is that the event must have occurred within the period of insurance. In coming to this conclusion, McLure P reasoned that the correct focus was on the actual claim and its inherent restrictions or limitations by reference to the type or kind of policy, not the scope of the cover. 

In response to the Insurers' arguments, McClure P further held (agreeing with Corboy J at first instance) that the PAQS endorsement did not define the scope of the cover and that the scope of the cover was defined by reference to vehicles and not by reference to the attributes of the driver.

The Court of Appeal therefore dismissed the first ground of the Insurers' appeal and held that the omission was one to which s 54(1) applied with the consequence that the Insurers were not entitled to refuse to indemnify the Insured.

Loss of profits

The second issue on appeal concerned whether the Insurers were liable to the Insured for consequential loss of profits by reason of breach of contract.  In this respect, the Court of Appeal (agreeing with Corboy J at first instance) held that by denying indemnity to the Insured, the Insurers had breached the policy and were liable for consequential loss of profits following the Insured's loss of opportunity to service the Melbourne to Perth run as part of its business.  The Court of Appeal agreed with Corboy J at first instance, in holding that the Insured's claim for loss of profits was not too remote and was therefore recoverable.  The trial judge assessed the profit lost by the Insured at $145,000.

Consequences for your business

This case emphasises the difficulties associated with assessing whether the relevant act or omission is one which is outside cover, to which s 54(1) has no application, or is one which entitles the Insurer to refuse a claim and is therefore capable of remedy by s 54(1).  The contrasting decisions of Johnson and this case highlight that much will turn on the particular facts and circumstances of each case.

The case also serves as a reminder to insurers of the consequences of incorrectly denying indemnity to an insured given the award of consequential loss that was made to the Insured.

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.

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