High Court resolves section 54 controversy

In a landmark decision handed down this morning, the High Court has taken an expansive approach to the scope of section 54 of the Insurance Contracts Act.

The insured trucking business made a claim under its motor fleet policy in respect of two separate accidents in which trucks and trailers were damaged.  The insurer rejected the claims on the grounds that the drivers of the trucks had not complied with an endorsement on the policy requiring the insured’s truck drivers to have achieved a minimum score on a psychological test of drivers’ attitudes towards safety.

Section 54 prevents an insurer from refusing to pay a claim on the basis of an act or omission of the insured which breaches the terms of the policy, where that act or omission did not cause or contribute to the claimed loss.  Instead, the insurer may reduce its liability by an amount that fairly represents the prejudice suffered by it as a result of the insured’s act or omission.

It was accepted by the insurer that a failure to have the drivers submit to the psychological testing did not cause or contribute to the claimed loss. However, the insurer argued that section 54 did not apply because the claims did not come within the scope of the cover due to the testing endorsement. It argued that the testing endorsement was a term which defined the scope of the cover provided by the policy, not a term which governed the operation of the policy.

The High Court unanimously rejected this argument and held that the testing endorsement did not define the scope of cover.  The Court found that there was a relevant act or omission to which section 54 applied, being the failure of the insured to ensure that each vehicle was operated by a driver who had undertaken the relevant psychological testing. This omission occurred during the period of insurance. Given that this omission did not cause or contribute to the claimed loss the insurer was not entitled to deny the claim.

This unanimous decision of the High Court is a clear rejection of the approach taken by the Queensland Court of Appeal to a very similar issue (reported on in our May 2011 edition of Insurable Interest). The operation of section 54 of the Insurance Contracts Act is not to be restricted by characterising a condition or an exclusion of a policy as defining the scope of the cover.

..it is sufficient to engage section 54(1) that the effect of the Policy is that the Insurers may refuse to pay [the claim] by reason only of acts [or omissions] which occurred after the [Policy] was entered into.

Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33