Section 54 of the Insurance Contracts Act - Recent Developments
The real force of Section 54 of the Insurance Contracts Act first hit the judicial radar when the New South Wales Court of Appeal handed down its decision in East End  in 1991.
Over the next 10 years there were a number of important cases, some reaching the High Court, which explored the Section’s scope in various scenarios. The most heralded of those decisions, was the decision of the High Court of Australia in Australian Hospital Care . From then there was largely judicial silence until the Queensland Court of Appeal’s decision in Triple C Furniture  handed down in 2010 and the more recent decision of the Supreme Court of Western Australia in Highway Hauliers  handed down in 2012.
Section 54 provides as follows:
- Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, whether in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
- Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.
- Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.
- Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.
- the act was necessary to protect the safety of a person or to preserve property; or
- it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act.
- A reference in the section to an act includes a reference to:
- an omission; and
- an act or omission that has the effect of altering the state or condition of the
subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.’
What gives Section 54 its real bite is subsection 6. Section 54(6) of the Insurance Contracts Act defines an ‘act’ to include an ‘omission’. What is an omission? It is a question which is more easily asked than answered.
That the expression presented difficulties was first raised in East End where the New South Wales Court of Appeal averted to the possibility that inaction on an insured’s part might not constitute an omission. The Court of Appeal confirmed that possibility in Perry  a case which involved an insured’s failure to trigger a deeming clause during the policy period. So from that point we had a fine, and sometimes redefined dichotomy between omissions and inactions.
The High Court first challenged this dichotomy in its decision in Antico v C.E Heath Casualty & General Insurance Ltd . There the majority of the Court held that an omission under Section 54 of the Insurance Contracts Act included ‘the failure of (an insured) to exercise a right, choice or liberty which the insured enjoys under the policy’ .
Even so, efforts to limit the operation of Section 54, particularly the scope of the expression ‘omission’ continued.
In Greentree v FAI General Insurance Co Ltd , Handley JA argued that omission relevantly did not extend to a failure to act by others having no relevant relationship or connection with the insured, whose interests are averse to the insured.
In the same decision Spigelman CJ drew the distinction between an ‘omission’ and a ‘non-event’. In Permanent Trustee Australia v FAI General Insurance Co Ltd , the Court drew a distinction between someone’s omission to do something and a relevant event that did not happen.
Australian Hospital Care, which concerned the failure to trigger a deeming clause for the notification of circumstances, brought these word games to an end by rejecting these devices to control the operation of Section 54.
The dissent of Chief Justice Gleeson (who, as Chief Justice of the Supreme Court of New South Wales, started the discussion about the scope of Section 54 in East End and Perry) provides a useful summary of the difficulty which Section 54 had been presenting to the Courts and backdrop to the views which the majority judges in Australian Hospital Care expressed.
“When one is dealing with a commercial contract, there is a limit to the extent to which a preference for substance over form can justify disregarding the agreement of the parties. The respondent's argument seems to me to exceed that limit. The effect of the respondent's argument is that a policy which indemnifies against claims made, or potential claims notified, during a particular period, is transformed by s 54 into a policy which indemnifies against claims whenever made, even though the insurer is not notified of any occurrence during the period, and may never be notified until the claim materialises. The concluding words of s 54(1) provide no adequate protection, because the extent to which the insurer's interests were prejudiced may be impossible to measure. That impossibility reinforces the view that s 54 was not directed at a case such as the present.”
McHugh, Gummow and Hayne JJ responded as follows to these concerns:-
“Although the distinctions suggested in those cases are open to the criticisms we have made, the discussion reveals that there is thought to be a difficulty in reading the section literally. That difficulty stems from an intuitive rejection of a construction of s 54 which would require an insurer to pay a claim where there has been no event during the period of cover which the insured could have relied on as engaging the insurer's obligations under the contract. In the end, however, the difficulty is more apparent than real. Close attention must be given to the elements with which s 54 deals: the effect of the contract of insurance between the parties; the "claim" which the insured has made; and the reason for the insurer's refusal to pay that claim.” (My emphasis)
In a separate judgment, Justice Kirby (who, as President of the New South Wales Court of Appeal, had dissented in Perry) wrote:-
“By this Court's decision in Antico, it is established that s 54(1) of the Act "refers not to precise concepts of form but to the effect of the contract and asks whether that effect is that the insurer may refuse payment 'by reason of' the relevant act or omission". That question "does not express a limitation to the sole or unique cause of the entitlement of the insurer to refuse payment". It involves a search for the relevant act or omission on the part of the insured or of some other person which, unrelieved by remedial intervention under s 54(1) of the Act, would allow the insurer to refuse to pay the claim. As in other cases where, for legal purposes, cause must be assigned, the phrases "by reason of" and "by reason only of" in s 54(1) of the Act invoke a common sense decision . What is required is a judgment that upholds the insured's entitlement to indemnity in accordance with the policy, read with the Act, without opening the floodgates to the types of "omissions" presented above by the insurer as a spectre of horrible possibilities” (My emphasis).
Recent decisions on Section 54
There have been two recent decisions on Section 54 which reopen many of the concerns which Australian Hospital Care had allayed.
Johnson v Triple C Furniture P/L  QCA 282
The facts are relatively straight forward.
Triple C Furniture owned an aeroplane. On the morning of 20 October 1999, the plane took off from Wrotham Park, a grazing property approximately 145 miles west of Cairns. At its controls was Mr Peter Johnson, a director, shareholder and employee of Triple C. His two passengers included his wife, Mrs Johnson, who was also a director, shareholder and employee of Triple C.
The plane crashed shortly after take-off killing Mr Johnson immediately and seriously injuring his wife. There was overwhelming evidence that Mr Johnson had been grossly careless in his control of the aircraft.
Mrs Johnson brought proceedings against Triple C seeking damages for her deceased husband’s negligence. Triple C did not dispute liability, as a consequence of which Mrs Johnson was awarded $846,030.
Triple C sought indemnity under the aviation policy which it held with Rural & General Insurance Limited in respect of Mrs Johnson’s claim. Rural denied indemnity claiming that the circumstances of the crash fell within one of the policy’s exclusions, namely that there was no cover if the pilot was flying the plane without having satisfactorily completed an aeroplane flight review. Triple C denied that at the time of the crash Mr Johnson was flying the plane without having satisfactorily completed an aeroplane flight review. It further argued that in any event Section 54 of the Insurance Contracts Act applied.
At first instance, the Supreme Court of Queensland was not satisfied that the evidence established that the exclusion applied. The Court therefore did not have to consider what role, if any, Section 54 played.
The Queensland Court of Appeal unanimously upheld the appeal.
Firstly, the Court was satisfied that there was sufficient evidence to establish that Mr Johnson had not satisfactorily completed an aeroplane flight review when he took off from Wrotham Park. Secondly the Court held that for a number of reasons Section 54 had no role to play.
The first reason for finding that there was no role for Section 54 was the absence of a relevant act. The starting point for that reasoning is found in the following passage:
For the section to apply there must be some act or omission of the insured, or some other person, by reason of which the insurer may refuse to pay a claim upon it. One must therefore identify an act which would allow the appellant to refuse the respondent’s claim on it. The act identified here was an omission: Mr Johnson’s not having satisfactorily completed an aeroplane flight review within two years of the flight the subject of the claim. But for that omission, so that argument ran, the pilot would not have been in breach of regulation 5.81(1), the aircraft would not have been operated in breach of the Regulation, and the policy exclusion would not apply.
One might have thought that a more accurate proposition was that the relevant act was taking off without having satisfactorily completed the flight review. Here the Court limited itself to the failure to complete the review which is only half of the scope of the exclusion and not the entirety of what the insurer itself relied upon.
Even so this is the direction in which the Court headed. Then in an echo of times before Australian Hospital Care, the Court held that such an omission did not constitute an omission for the purposes of Section 54 because it was beyond the pilot’s ability to pass the review with out the support of his examiner. The Court concluded:
The circumstance that he had not satisfactorily completed a flight review was not an omission as the word is ordinarily understood and as it is, in my opinion, used in s 54. He may have omitted to undergo the review but what was required was that he complete the review to someone else’s satisfaction. Obtaining that satisfaction was something Mr Johnson might achieve, or fail to achieve, but it was not something he could omit.
The second reason for finding that Section 54 has no role to play in this matter revolves around the idea that Section 54 would otherwise change the way the policy worked. It would change the agreement which the parties reached.
The appeal, in my opinion, is of the second type. It is not a case in which the omission gives rise to a right in the insurer, the appellant, to refuse the claim by reason of something in the policy. It is an omission which is relied on to give rise to a claim which the insured could not otherwise make. Because Mr Johnson had not satisfactorily completed the flight review, the respondent’s claim for indemnity under the policy was excluded. The omission cannot change that, and is not of the kind with which s 54 is concerned.
Again this appears to raise the sort of concerns which the High Court attempted to allay in Australian Hospital Care.
The final reason for finding that Section 54 had no role to play was that the omission was causative of the loss in respect of which indemnity was sought. As such it attracted Section 54(2) of the Insurance Contracts Act. The Court regarded the omission to complete satisfactorily a flight review as causative of the loss and noted that the Insured did not seek to prove otherwise.
In that regard it is interesting to observe the following was one of the examples which the Government used to illustrate how Section 54 would work :
- ‘A motor vehicle policy contains a term by which the insured warrants that the vehicle will be maintained in a roadworthy condition. As a result of a brake failure, the vehicle, while being driven by the insured, collides with another vehicle. The driver of the other vehicle was 50% to blame for the accident. The insured’s conduct in allowing the vehicle to become unroadworthy could reasonably be supposed to cause or contribute to a loss, hence subcl (2) applies. The insured is able to prove that he was, at most, 50% to blame for the accident. Hence the insurer is entitled to deduct only 50% of the claim subcl (3).
- If the vehicle was damaged while parked, the insured could recover the full amount of his loss subcl (1).
- A’s motor vehicle policy contains a term which excludes the insurer’s liability if the driver of the vehicle is unlicensed. While driving the car, A is involved in an accident. He is unlicensed at the time, having forgotten to renew his licence, which expired two weeks previously. A’s conduct could not reasonably be supposed to be of a type which could contribute to an accident so subcl (1) only applies. Since the insurer could not have been prejudiced by A’s driving the car without a licence, it is liable for the full amount of the claim.’
The circumstances of this example are not dissimilar to those in Triple C Furniture or the subsequent decision of the Supreme Court of Western Australia in Highway Hauliers.
Highway Hauliers Pty Ltd v Maxwell  WASC 53 (21 February 2012)
In very brief terms, this case concerned a trucking company. Two of its prime movers and their trailers were damaged in separate accidents. The trucking company held a policy to protect it in the event that, amongst other things, its prime movers and trailers were damaged in accidents.
The Insurers denied indemnity because the drivers of these vehicles at the time of the accidents had not achieved a minimum score in a prescribed driver’s test and were “non declared drivers” for the purposes of an exclusion under the policy.
The Insured responded by relying upon the operation of Section 54 of the Insurance Contracts Act and sought damages (i.e. more than what it was entitled to by way of an indemnity under the policy) from the Insurers for breach of contract.
The Court upheld the Insured’s reliance on Section 54 and its claim for damages.
The Section 54 debate focused upon the fact that the drivers of the trucks had not obtained the minimum score in a prescribed driver’s test. The Insurers said that that was not an act or an omission. It was just a state of affairs. But that, the Court held, was not the relevant act to which the Section applied. The relevant act was the Insured permitting its vehicles to be driven at the time of the accidents by drivers who were not suitably qualified, and that was the act to which the Section applied.
There are a couple of things to note here.
Firstly it had been accepted that the act itself did not cause the loss in respect of which indemnity was sought nor had any prejudice been suffered.
Secondly, the Court recognised that this was a different conclusion from which the Queensland Court of Appeal reached in Johnson v Triple C Furniture & Electrical Pty Ltd(2010) 243 FLR 336. According to the Court, much depended upon the identity of the relevant act or omission.
There is an appeal pending in this matter.
Triple C Furniture steered the analysis of Section 54 back to the days before Australian Hospital Care. The Supreme Court of Western Australia recognised that by reaching a different conclusion. Hopefully the appeal to the Supreme Court of Western Australia will be, on these grounds at least, dismissed.
 East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400
 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641
 Johnson v Triple C Furniture & Electrical Pty Ltd (2010) QCA 282
 Highway Hauliers Pty Ltd v Maxwell (the authorised, nominated representative on behalf of Various Lloyds Underwriters)  WASC 53
 FAI General Insurance Co v Perry (1993) 30 NSWLR 89
 (1997) 188 CLR 652
 (1997) 188 CLR 652 at 669
 (1998) 44 NSWLR 706
 (1998) 44 NSWLR 186
 notes to the Draft Insurance Contracts Bill 1982 (Cth)
Mark Sheller, Partner