Cases concerning s 54 of the Insurance Contracts Act rock the boat for insurers14 December 2016
Two cases handed down in November 2016 have considered in more depth the application of s 54 of the Insurance Contracts Act 1984 (Cth) to claims involving watercraft that were not subject to the Marine Insurance Act 1909 (Cth). In one of the cases the insurer was not permitted to rely upon an exclusion and in the second the insurer was not permitted to rely upon a coverage suspension, that would, but for s 54, have entitled them to refuse to pay the claim.
Watkins Syndicate 0457 v Pantaenius Australia Pty Ltd  FCAFC 150
Mr Phillips owned a yacht, which he insured with Watkins Syndicate 0457. The policy only covered loss occurring within 250 nautical miles off mainland Australia and Tasmania, and included an extension that covered the yacht for insured loss and damage incurred while competing in sailboat races within geographic limits of up to 100 nautical miles. The policy also stated that all cover would be suspended upon the yacht clearing Australian Customs for the purpose of leaving Australian waters and would not recommence until it re-cleared Customs on its return.
Mr Phillips wished to participate in a Fremantle to Bali race but was concerned the yacht may not be covered for the race under the Syndicate's policy. He therefore obtained a second policy from Pantaenius.
The yacht cleared Customs on its outward voyage then returned to Australian waters. While heading to Darwin, where the yacht was to clear Customs, it ran aground within 100 nautical miles of the Australian coast.
Pantaenius settled the insurance claim by Mr Phillips then sought a dual insurance contribution from the Syndicate.
The Court accepted that s 54 could not operate on every refusal of a claim for an act or omission of an insured, and focused on the distinction between matters that did, and did not, go to the "essential character of the policy".
The act of clearing Customs and the omission to re-clear it on return comprised the insured's conduct to which the language of s 54 was directed. The Syndicate's interests were not prejudiced, since the accident occurred within the policy's geographical limits. Therefore, the Syndicate's policy would have responded to a claim by Mr Phillips.
The Court also rejected an argument that an insured could avail itself of the benefit of s 54 whereas an insurer, making a dual insurance claim, could not.
Allianz Australia Ltd v Smeaton  ACTCA 59
Mr Smeaton took out a policy with an insurer to cover, inter alia, third party liability arising from the use of his jet ski while it was controlled by Mr Smeaton or by another person using it with his approval. However, the policy excluded liability arising from use of the jet ski by an unlicensed person when a licence was necessary.
Mr Smeaton's brother, who was licensed in NSW to operate boats but not jet skis, used the jet ski in Queensland where he asked his friend, Mr Whittington, to act as observer, sitting on the jet ski facing back toward the skier. From that position, Mr Whittington observed the skier (Mr Smeaton) fall and told Mr Smeaton's brother who turned the jet ski around. At the same time, Mr Whittington was leaning forward to retrieve the tow rope and fell off the jet ski. Mr Whittington's leg became tangled in the tow rope. He suffered serious injury leading to amputation of part of his leg. After the accident, Mr Smeaton's brother, who had significant experience operating watercraft, acted quickly to obtain a NSW licence allowing him to operate jet skis.
The insurer argued that Mr Smeaton could not rely on s 54(3)—an insurer may not refuse to pay a claim by reason only of an act, which the insured proves did not cause any part of the loss that gave rise to the claim—because he had not met the requisite standard of proof. To rely on s 54(3), Mr Smeaton needed to prove on the balance of probabilities that the accident would still have occurred if his brother had held a relevant licence.
The insurer submitted that the Court should consider what would have occurred if Mr Smeaton held a Queensland licence, which appeared to be more difficult to obtain than a NSW licence, and that the Queensland licensing process would have led Mr Smeaton's brother to behave differently on the day of the accident.
The Court found that the NSW licensing regime was the relevant one as Mr Smeaton's brother:
- regarded NSW as his place of residence and therefore the licence he would have been more likely to obtain while still allowing him to operate the jet ski in Queensland, and
- gave evidence that the NSW licensing process was a simple one that would not have drawn any of the issues that caused the accident to his attention.
Consequently, Mr Smeaton had discharged his onus under s 54(3) by proving that the accident would have still occurred if he had held a NSW licence.
Lessons to be learnt
Allianz v Smeaton was the first thorough judicial examination of s 54(3). While it confirmed that the insured bears the onus of proving their act did not cause the loss (the subject of its claim), it shows that the question may hinge upon evidence that was not available to the insurer when it first declined indemnity and/or evidence that may assume a different significance in the Court's eyes.
Both decisions highlight that exclusions and coverage suspensions may not be effective when they rely on an act or omission by an insured or a state of affairs that may have been caused by that act or omission. Insurers should have one eye on this possibility when pricing risks.
As s 54 is a tool that may be used by an insurer for dual insurance purposes, insurers and those representing them should also take care to check for other insurance policies that may cover the same loss.