The state of affairs with s54
February 16, 2016
In two recent decisions, the Western Australia Court of Appeal and the Federal Court of Australia have considered what amounts to an ‘act’ as contemplated by s54(1) of the Insurance Contracts Act 1984 (Cth) (ICA) to prevent an insurer from refusing to pay a claim by reason only of an act (or omission) of the insured (or some other person), which occurred after entering into the insurance contract, as distinct from ‘general circumstances’ which do not trigger the protection available to insureds under the section.
Allianz Australia Insurance Ltd v Inglis  WASCA 25
The plaintiff (Georgia Inglis) was playing a game with her brother and an 11 year old neighbour (the defendant). During the game, the defendant drove a ride-on lawnmower which was owned by the plaintiff’s father. The defendant ran over the plaintiff causing her serious injuries. The plaintiff sued the defendant and his parents claiming damages for negligently causing personal injury. The defendant sought indemnity or contribution from the father and the brother of the plaintiff pursuant to the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA). Allianz (the insurer) insured the plaintiff’s father and brother under a homeowners policy. The insurer declined to indemnify them in respect of the defendant’s claim. The father and brother issued proceedings against the insurer claiming indemnity under the policy.
The insuring clause of the homeowners policy provided:
‘We will cover your legal liability for payment of compensation in respect of … bodily injury’
An exclusion provided:
‘We will not cover your legal liability for injury to any person who normally lives with you …’
On appeal from the District Court, the WA Court of Appeal (McLure P with Buss JA and Mitchell J agreeing) held that:
- On the proper construction of the policy, the exclusion operated to exclude cover for the liability of the father and the brother to the plaintiff unless s54(1) ICA applied
- s54(1) ICA did not assist the father and brother to overcome the effect of the exclusion because ‘normally living with’ someone was not an act for the purposes of s54.
The father and brother contended that the words ‘legal liability for injury’ in the exclusion did not extend to a contribution claim. They relied on the decision in Allianz Australia Ltd v Wentworthville Real Estate Pty Ltd  NSWCA 100 in which it was held that, in an exclusion clause, the words ‘for any alleged or actual bodily injury’ did not cover a contribution claim. The WA Court of Appeal did not follow Wentworthville. The Court found that the essence of the cover was legal liability for payment of compensation in respect of bodily injury and compensation and that included both legal liability for damages and payment of an indemnity or contribution. Therefore, the exclusion applied subject to s54 ICA.
The insurer argued that the primary judge erred in finding that the plaintiff normally living with her father and brother was an act for the purposes of s54(1) ICA and said it was rather a state of affairs or characteristic of her life as a 10 year old. That argument was accepted by the Court. McLure P concluded that where a fact depends on drawing an inference from conduct of all relevant persons over an extended period and does not depend on there being any act on the relevant day, that fact does not constitute an act for the purposes of s54(1). For example, the exclusion did not require the plaintiff to actually be living with her father and brother on the day of the accident; it would have applied even had she been away on holiday. On that basis, the Court held that ‘normally living with’ was a state of affairs or character of a relationship. Therefore s54(1) ICA did not apply to the exclusion. The insurer was entitled to decline to indemnify in respect of the defendant’s contribution claim.
While McLure P noted the decisions of the WA Court of Appeal and High Court in Maxwell v Highway Hauliers, in which s54 was given broad application, Her Honour said they were of no direct assistance.
Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds  FCA 1
Pantaenius involved a claim for contribution between two insurers, Pantaenius and Nautilus, arising from the total loss of a luxury yacht. The yacht had taken place in a yacht rally from Fremantle to Bali. It had cleared customs at Fremantle and left Australian waters. On its return, it re-entered Australian waters but had not cleared Australian customs when it ran aground.
The owner and operator of the yacht, Mr Phillips, had insurance policies with Pantaenius and Nautilus. He made a claim under the Pantaenius policy. Pantaenius accepted liability and paid in respect of the claim. He also lodged a claim with Nautilus. Nautilus declined indemnity. Pantaenius then claimed a contribution from Nautilus, arguing that s54(1) ICA was engaged.
The Nautilus policy provided cover for loss:
‘…within the geographic limits specified on your Certificate of Insurance. All cover provided by the policy will be automatically suspended when your boat clears Australian Customs and Immigration for the purpose of leaving Australian waters and will recommence when it clears Australian Customs and Immigration on return’.
The Certificate of Insurance provided that the geographic limits were 250 nautical miles off mainland Australia and Tasmania.
In deciding whether s54(1) ICA applied to Nautilus’ decision to decline indemnity, Foster J of the Federal Court of Australia applied Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590. His Honour found that the Nautilus policy was an occurrence based policy such that the restriction or limitation inherent in the claim was that indemnity could only be sought in relation to an event which occurred during the period of cover. That was clearly the case.
Nautilus submitted that the geographic limits of the Nautilus policy, including specific terms governing the circumstance where the insured vessel intended to leave Australian waters, was a limitation on the cover provided by the policy and not susceptible to relief under s54. Pantaenius argued the yacht was within the geographic limits and the automatic suspension was, in effect, an exclusion rather than a limitation on the scope of cover. Therefore s54(1) ICA should be held to apply to the automatic suspension.
Foster J held that s54(1) ICA applied to the automatic suspension provision and Nautilus was not entitled to refuse Mr Phillips’ claim. The automatic suspension was not one of the contractually prescribed elements of the geographic limits on the scope of cover. His Honour accepted the arguments advanced by Pantaenius that the automatic suspension operated as an exclusion, noting that the suspension was almost always going to come into effect before the insured vessel actually left Australian waters.
Foster J then approached the inquiry of whether there was an act within the meaning of s54(1) ICA by asking what act or omission led to the automatic suspension of cover. His Honour found that the relevant act (or omission) for the purposes of s54(1) ICA was Mr Phillips causing the yacht to depart from Fremantle Harbour for the purpose of leaving Australian waters and clearing Australian Customs. The act of Mr Phillips caused the automatic suspension to activate.
Foster J distinguished that act from the ‘circumstance’ that the yacht was ‘sailing within Australian waters but had not yet cleared Australian Customs on the return journey’. Foster J considered that not to be an act under s54(1) ICA when taken in isolation because it did not provide a basis for Nautilus to deny indemnity. The automatic suspension had already activated when the yacht returned into Australian waters, not having yet cleared Australian Customs.
Nautilus also attempted to rely on s54(2) ICA to reduce its liability, arguing that had the yacht not entered on the sea journey which it undertook, it would not have run aground. Foster J rejected the argument. His Honour agreed with Pantaenius that a ‘but for’ test was not appropriate and that the nature of the risk would have remained the same whether or not the yacht cleared Australian Customs.
Foster J also held that there was no reason to deny an insurer the benefit of s54(1) ICA in a contribution claim against another insurer where the correct application of s54(1) would benefit the insurer’s insured.
From the two decisions, it is evident that the courts have set a high bar for exclusions in a policy to escape the operation of s54 ICA. In Pantaenius the Court demonstrated a marked preparedness to find that there was an act under s54(1) and, further, was prepared to read words which appeared in an insuring clause to have effect as an exclusion, thereby enlivening the operation of s54. The effect of the decisions is that if an exclusion is activated by an identifiable act (or omission) that occurs after the contract is entered into then s54(1) ICA applies. For s54(1) not to apply, an exclusion must be activated by a state of affairs or circumstance which does not depend on the doing of any particular act (or omission) at a particular point in time.
Authored by Andrew Toogood, Partner and Stephanie Lee, Lawyer, Sydney.
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