Another chapter in the ongoing battle between insurers and their insureds regarding the reach of section 54 of the Insurance Contracts Act (Cth) 1984 was recently decided by the High Court; in the insured’s favour this time.
Section 54 seeks to strike a balance between permitting insurers to include terms in an insurance policy that prevent their level of risk from increasing after the policy has commenced, versus unfairly relying on technicalities in drafting to deny the insured a valid payout.
If the effect of the insurance policy is to allow the insurer to deny coverage only by reason of some act of the insured occuring after the policy has been entered, the insurer’s right to deny indemnity is limited to a situation in which there is a causal relationship between the particular act in question and the actual loss. If there is no causal relationship, but the insurer’s interests are nevertheless prejudiced, section 54 also permits the insurer to reduce its libility to the extent such prejudice can be defined in monetary terms.
Maxwell v Highway Hauliers Pty Limited  HCA 33 was an invitation to the High Court to delineate where the line between fairly limiting risk and avoiding indemnity should lie.
Highway Hauliers was in the business of freight transport and owned a fleet of trucks. The vehicles were insured under a policy which included an endorsement that all drivers undertake and receive a particular rating in a nominated driver safety attitudinal test (ie. the policy stated that no indemnity would be provided unless this condition was satisfied).
The drivers of trucks involved in the accidents said to trigger the policy had not undertaken the requisite test and the insurer invoked the term to deny liability.
At first instance and in the WA Court of Appeal the insurer conceded that the drivers’ failure to undertake the testing was not in any way causally related to the accident. In fact, the validity of the test was never established. Therefore, relying on section 54, the insured successfully claimed that the insurer’s denial of liability was invalid becuase the omission bore no causal relationsip to the loss suffered.
Nevertheless, the insurer was granted special leave in the High Court to use the case as a vehicle to test the meaning and effect of section 54. In principal, the argument put by the insurer was reduced by the High Court to this (at 17]):
[A] ‘claim’ to which s 54(1) refers is limited to a claim that is an insured risk.
Effectively, the insurer argued that the policy endorsement was simply a means of defining the scope of coverage. Therefore, on this argumemt, the failiure to have the truck drivers tested meant that the ‘claim’ never made it within the scope of the policy in the first place. As such, section 54 had no work to do, there being no valid ‘claim’.
In the end, the Court was unattracted to this argument and therefore able to dispose of the argument quite simply and with perhaps a somewhat disappointingly (but understandably) brief analysis.
In picking up an aspect of its earlier decision in Antico v Heath Fielding Pty Limited (1997) 188 CLR 652 the Court cited with approval the following words (appearing at CLR 659 of Antico):
[n]o distinction can be made, for the purposes of the section, “between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting the entitlement to a claim”.
Not great news for insurers obviously. For example, had the decision gone the other way (ie. a finding that a ‘claim’ must be found to fall within the scope of the policy before section 54 has any work to do), it would have provided a means of limiting risk through policy drafting which more narrowly defined the scope of cover.
The effect of Highway Hauliers is to make plain the position that it doesn’t matter whether the limitation on coverage the insurer seeks to enshrine in the policy is treated as an exclusion, endorsement or forms part of identifying the insured risk, section 54 will limit the insurer’s ability to deny liability on account of the actions of an insured unless those actions are causally linked to the loss itself. It seems a fair result, but one which now further confirms the strict limits facing insurers when seeking to deny liability.