Section 54 has concerned insurers ever since the enactment of the Insurance Contracts Act 1984 (Cth) and the first pronouncement of its interpretation by the High Court of Australia in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38.

Section 54 states: “Where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either 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.”

Several court decisions have brought the topic of s54 to the forefront, emphasising the far-reaching application of s54(1) to exclusions and conditions within contracts of insurance. The s54(1) decisions reiterate the focus of s54 on the type of policy, as opposed to its form. For example, with occurrence/event-based policies, like motor vehicle insurance contracts, the only inherent restriction or limitation that would not attract the application of s54 is if the event occurred outside the period of cover. The Western Australia Appeal Court decision of Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 highlights this point.

The Mathew Maxwell decision

In Matthew Maxwell, the WA Supreme Court of Appeal was asked to determine the proper construction of s54 in the context of an event-based policy that covered specific vehicles operated by Highway Hauliers (the insured).

Highway Hauliers operated a fleet of trucks and trailers in Western Australia, transporting freight to and from the eastern states. The company had an insurance contract with Mathew Maxwell (the insurer) which covered accidental damage to the trucks and trailers. The policy contained a clause that no indemnity would be provided if certain types of vehicle were operated by drivers who had not undertaken a driving test known as a PAQ test or had undertaken the PAQ test and scored less than 36.

In separate incidents in June 2004 and April 2005, vehicles the subject of the insurance contract suffered damage. Highway Hauliers made two claims under the policy for the cost of repairing or replacing the damaged vehicles. Maxwell rejected the claims on the grounds that, at the time of each incident, the vehicles were operated by drivers who had not been PAQ tested.

Highway Hailers launched proceedings against that decision and argued the insurer, in refusing indemnity, breached the contract of insurance. The insurer, on the other hand, argued s54 did not apply because the policy excluded indemnity in circumstances where drivers had not been PAQ tested.

The court found s54 applied even if on the proper construction of the insurance contact the PAQ test was a condition of cover. The court’s approach highlights the significance attached to the type or kind of policy and its effect, as opposed to the details or form of the policy. The court specifically referred to the insurer’s ability to resort to s54(2) and reduce the amount it indemnified the insured by any act or omission of the insured that prejudiced the insurer’s interests.

The WA court’s approach to s54 in Matthew Maxwell has subsequently been approved by the NSW Court of Appeal in Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV [2013] NSWCA 252.

Practical tips

Navigated sensibly, insurers should be able to mitigate the impact of s54 on claims. Although it is difficult to provide a checklist on how to effectively deal with s54 in handling and assessing claims, the main points insurers should take from these cases are:

1. claims staff should receive training on s54 of the Act and be aware of its application to conditions and exclusions within policies;
   
2. if an insurer is challenged on a decision (following a claim by an insured) and s54 is raised, an insurer should consider the prejudice of the insured’s act and/or omission and attempt to assess or quantify the insured’s act or omission with the view of reducing any amount paid to the insured accordingly; and
3. insurers should seek timely legal advice and/or technical advice (on quantifying the cost to the insurer’s interest by the insured’s act or omission) to avoid breaching its contract by denying indemnity.

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