Court grounds ruling on s54
By Kate Tilley, Editor, Resolve
The Federal Court has reinforced the wide application of s54 of the Insurance Contracts Act in its first judgement for 2016.
The judgment also emphasises the challenges faced by pleasure craft and other insurers in Australia when relying on express warranties and conditions.
Lander & Rogers special counsel Colleen Palmkvist and lawyer Claire Campbell, in case notes, said the decision highlighted the need for underwriters to pay close attention to the scope of the risk intended for cover, and to relevant acts or omissions to which s54 may apply to nullify the operation of policy exclusions and conditions.
“It also confirms that a dual insurer cannot avoid liability for contribution in circumstances where its liability is founded on the operation of s54 of the Act,” they said.
Arthur Phillips owned a large luxury yacht, the Froia II. He insured the vessel under two policies:
• one issued by Pantaenius Australia Pty Ltd for 4 May 2013 to 4 May 2014; and
• one underwritten by Lloyd’s and issued by Nautilus Marine Agency Pty Ltd for 1 December 2012 to 1 December 2013.
Both covered damage to the vessel while within defined geographic limits. The Nautilus policy provided cover up to 250 nautical miles off the Australian coast. It suspended cover when the vessel intended to enter foreign waters, from the time the vessel cleared Australian Customs for the purpose of leaving Australian waters, to the time it cleared Australian Customs on return.
On 22 June 2013, during the currency of both policies and while returning from Bali to Darwin, after a race from Fremantle to Bali, the vessel struck a reef near Cape Talbot, in the Timor Sea, which is within 250 nautical miles of the Australian coast, and was unsalvageable.
Mr Phillips claimed indemnity under both policies. Pantaenius accepted liability, however Nautilus denied the claim. Pantaenius paid $341,180 and sought contribution from Lloyd’s underwriters on the basis of dual insurance.
Nautilus said the vessel had not yet cleared Australian Customs on its return and therefore the cover suspension was still in effect. Both parties accepted the vessel was within Australian waters when the incident occurred.
Why IC Act applies, not the Marine Insurance Act
Lander & Rogers case notes said the IC Act applied to the dispute rather than the Marine Insurance Act 1909 (Cth) because s9A of the IC Act excluded the MI Act from applying to marine insurance contracts for pleasure craft. Froia II was owned by Mr Phillips and the court’s application of the IC Act showed it (and presumably the parties) accepted the yacht was a ‘pleasure craft’.
S54 - endorsement of Highway Hauliers
Pantaenius claimed contribution from Nautilus on the basis s54(1) of the IC Act applied and therefore Nautilus could not refuse to pay the claim. Nautilus denied liability, arguing there was no "act" of the type to which s54(1) could apply.
Justice Lindsay Foster followed the approach taken in Highway Hauliers (see Resolve issue x), that the application of s54 was not limited to a claim for an 'insured risk', but focused on the effect of insurance on a claim that has been made. For s54(1) to operate, it is sufficient that a claim for indemnity is made under a policy, and insurers may refuse to pay that claim by reason only of acts which occurred after the contract was entered into.
Justice Foster accepted Pantaenius's submission the claim was within the scope of cover under the Nautilus policy, subject to the operation of the exclusion clause, so s54 applied.
Was Nautilus entitled to refuse to pay the claim?
Justice Foster then considered whether there had been an act that entitled Nautilus to refuse to pay the claim. Again, he followed Highway Hauliers, confirming s54(1) applied when an act or omission after the policy was entered into would excuse an insurer from paying a claim.
Pantaenius submitted the relevant act was the vessel’s re-entry into Australian waters without having cleared Australian Customs. Nautilus contended there was no act or omission of the type contemplated by 54(1) because there was no act that entitled it to deny indemnity. Rather, cover was suspended when the vessel cleared Australian Customs with the intent to leave Australian waters and, when Froia II grounded, cover had not been re-activated because the vessel had not cleared Australian Customs on its return. Nautilus contended the act submitted by Pantaenius was a 'non-event', which prevented s54 applying.
Justice Foster rejected both parties' submissions, finding instead the relevant act that would excuse Nautilus from paying the claim was the vessel clearing Australian Customs and leaving Freemantle Harbour with the intent to leave Australian waters. That act occurred after the Nautilus policy had been entered into and was, therefore, within the scope of s54(1).
Justice Foster found Nautilus suffered no prejudice by reason of the act, as:
• the Nautilus policy intended to cover the risk of loss within Australian waters; and
• there was no evidence the mere fact of the vessel clearing Australian Customs affected the risk intended to be covered.
Nautilus's interests were not prejudiced because of the act and the act was not one to which s54(2) could apply. Nautilus therefore was not justified in refusing indemnity.
Justice Foster declined Nautilus's submission that equitable contribution should not apply between insurers in circumstances where one insurer's liability to pay a claim was established through the operation of s54.
Nautilus was required to contribute 48% of the total loss indemnified by Pantaenius.
Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds  FCA 1
Click here for Curwoods case notes.
Click here for HWL Ebsworth case notes.
Click here for Lander & Rogers case notes.