The recent case of Matthew Maxwell -v- Highway Hauliers Pty Ltd  WASCA 115 raised the interesting, and as yet unresolved, issue as to the extent to which an insurer can define the scope of an insurance policy to remove certain matters from scrutiny under section 54 of the Insurance Contracts Act (Cth) 1984, thus allowing it to deny a claim without being required to prove prejudice or a causal connection to the loss.
A court must ask itself:
- Does the insurer’s reason for refusing to pay a claim trigger section 54?
- Is the matter raised within the “substance, effect, core or essence” of the policy, therefore avoiding the application of section 54? (See FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001))
- To what extent can an insurer draft the policy so as to include matters within the ‘scope’ of the policy rather than have them classified as conditions/exclusions?
Highway Hauliers (the insured) carried on a trucking business transporting freight to and from the Eastern States. Their fleet insurance contract covered accidental damage to their trucks and trailers, two of which were damaged in separate accidents in 2004 and 2005.
The insurers rejected claims for the cost of repairing or replacing the damaged vehicles on the basis that the drivers had not complied with the policy requirement to have achieved a minimum score on a driver test known as the ‘PAQS test’ and were not ‘declared’ drivers.
Neither of these failings was in fact relevant to the losses suffered as a result of the accidents and the insurer was not prejudiced by them.
The clauses were framed in the following manner: “we will not pay if” and “no indemnity is provided under the policy when …”
The insurer argued that it was entitled to deny the claim. They argued that section 54(1) did not apply because the insurance cover did not extend to damage suffered by the insured while its trucks were driven on the east-west run by drivers who had not attained the necessary PAQS score.
The insurer, having lost its argument before Judge Corboy, appealed to the Supreme Court.
The Appeal Decision
The Court of Appeal upheld the trial judge’s decision that:
- The insurers were obliged to indemnify the insured for the cost of repairs under s 54(1) of the Act; and
- The denial of indemnity was a breach of the insurance contract and the insurers were liable for consequential loss of profits assessed at $145,000.
The Court found that the ‘omission’ of the insured indeed fell within s 54(1) and the claims were payable, as the insurer could not establish prejudice.
The trial judge rejected the insurer’s arguments on the basis that the scope of the policy was defined by reference to the insured’s vehicles (which were identified in the schedule to the policy documents), the benefits conferred in sections 1 to 3 of the policy, and the period of insurance. Its scope was not defined by reference to the attributes of the driver at the time of an occurrence.
The insurer’s appeal was dismissed and McLure P (at ) made the following reference to the issue of those parts of the policy not capable of attracting the operation of s54:
“It is important to recognise that s 54(1) has no application to provisions of an insurance contract that are fixed from commencement, in the sense that they are unaffected by a subsequent act or omission of the insured or another person. That will often be the case in relation to the property the subject of an event based policy.”
This case contrasts with the decision of Johnson v Triple C Furniture & Electrical Pty Ltd (2010) in which it was held that the breach of an exclusion clause (framed as: “this policy does not apply whilst … “) as a result of an apparent omission of the insured, did not attract the application of section 54.
The extent to which an insurer can draft the policy so as to limit the potential application of section 54 therefore remains uncertain and will no doubt be the subject of further case law.
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.