High Court clarifies when section 54 of the Insurance Contracts Act 1984 (Cth) is enlivened

Case Note by Jamie Richardson and Harry Forrester

Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33

Insurance –– Exclusion of liability under insurance contract – Whether restrictions or limitations were inherent in the claim – Whether Insured’s claims outside the scope of policy – Construction of section 54(1) of the Insurance Contracts Act 1984 (Cth)

Facts

1. Highway Hauliers Pty Ltd (the Insured) owned and operated an interstate freight transport business. The Insured had entered into a contract of insurance (Insurance Contract) with certain Lloyd’s Underwriters (the Insurers), which indemnified it against specified loss, damage or liability in respect of vehicles during a specified period.

2. The Insurance Contract provided that no indemnity was provided under the policy of insurance where the vehicles were being operated by drivers who were not PAQS certified[1], having received a minimum psychological safety testing score, being a “PAQS score” or an equivalent program approved by the Insurers (the relevant certification).

3. Several of the Insured’s vehicles were damaged in separate accidents where its drivers did not have the relevant certification.  The Insurers conceded that the lack of the relevant certification neither caused nor contributed to the Insured’s losses, nor did it otherwise prejudice the Insurers’ interests.

4. However, the Insurers refused to pay a claim from the Insured on the basis that there was an absence of relevant cover by virtue of the fact that the drivers did not have the relevant certification.

Issues

5. The main issue in these proceedings was the proper analysis of s 54(1) of the Insurance Contracts Act 1984 (Cth) (the Act), and specifically, when it was enlivened.[2]

Contentions

6. The Insurers contended that the relevant certification was a condition of the cover provided by the Insurance Contract and, therefore, absent the relevant certification the Insured’s claims were outside the scope of the cover.

7. In support of their contention, the Insurers relied on a statement of the plurality in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 at [41] (FAI) that s 54(1) “does not operate to relieve the insured of restrictions or limitations which are inherent in [the] claim”.

8. The Insurers also relied on Johnson v Triple C Furniture & Electrical Pty Ltd [2012] 2 QD R 337 (Johnson) where the Court of Appeal found that a pilot’s failure to undertake a necessary airplane flight review did not constitute an ‘omission’ for the purpose of s 54(1) because the activity engaged in (flight in breach of regulations) was not an activity which the contract of insurance requires, allowed or contemplated. Thus, it was outside the scope of the policy.

9. In essence, the Insurers contended that the “claim” to which s 54(1) refers is limited to a claim for an insured risk (i.e. one falling within the scope of cover).

Appeals

10. At first instance, Corboy J found that s 54(1) had been engaged. The Insurers appealed.  The Court of Appeal of the Supreme Court of Western Australia dismissed the appeal.  The Insurers appealed to the High Court.

11. The High Court dismissed the appeal on the basis that the Insurers had misapplied the statements in FAI in equating “restrictions or limitations inherent in [the] claim” with any restriction or limitation in the scope of the cover provided under the Insurance Contract, thereby affirming the Court of Appeal’s conclusions that restrictions or limitations which are inherent in the claim are sourced in and vary according to the type of insurance contract under which the claim is made.[3]

12. The High Court thus found that the correct focus should be on the actual claim and its inherent limitations or restrictions by reference to the kind or type of policy, not the scope of the cover.

13.  Accordingly, no distinction could be made for the purposes of s 54(1) between the provisions of the Insurance Contract, which defines the scope of the cover, and those provisions which are conditions affecting an entitlement to claim.  On that basis, the High Court also rejected the Insurers’ reliance on Johnson, which it found was erroneous in its analysis of s 54(1), and should not be followed.[4]

Conclusions

14.  Whilst the High Court has clarified that the decision in Johnson was erroneous, one must look to the reasoning of McLure P in the Court of Appeal at [70]-[86] for an in-depth analysis of the inherent flaws in the Insurers’ analysis of s 54(1) and their reliance on Johnson.
Both the Court of Appeal’s and the High Court’s decisions serve as a reminder of the manner in which one should construe s 54(1), but do not advance any new jurisprudential understanding of the section.

[1] The Policy defined “PAQS” to refer to People and Quality Solutions Pty Ltd, a company which undertook psychological testing of drivers’ attitudes towards safety.

[2] Section 54(1) of the Act relevantly states that where the effect of a contract of insurance would be that an insurer may refuse to pay a claim by reason of some act of the insured occurring after the contract was entered into, the insurer may not refuse to pay the claim by reason only of that act.

[3] By way of illustration, the policy in FAI indemnified for claims made and notified in an insurance period, whereas the policy in Highway Hauliers indemnified for occurrences during the insurance period.  In the former case, s 54 did not serve to extend coverage beyond claims made and notified within the insurance period, whereas in the latter case the policy provided coverage for occurrences within the policy period, with the absence of certification being an omission within the period of cover, and thus being a relevant omission for the purposes of s 54.

[4] The temporal exclusion did not qualify the claim.