Court rules s54 protects all

The Full Federal Court has ruled s54 of the Insurance Contracts Act applies equally to co-insurer contributions as to insureds' claims.

Watkins Syndicate 0457 at Lloyd's appeal against a Federal Court decision it was partly liable for the loss of fibreglass racing yacht Froia II on 22 June 2013 argued s54 should not have been used to find it partly liable. It said s54 was exclusively to benefit insureds and not available to insurers seeking contribution.   

On 5 January 2016, the Federal Court had found Watkins could not refuse liability and had to pay Pantaenius Australia Pty Ltd and other co-insurers $163,766 towards a $341,180 payout.

The Watkins policy, written through Nautilus Marine Insurance Agency Pty Ltd, was issued on 20 November 2012 and provided cover from 4pm on 1 December 2012 to 4pm on 1 December 2013. The sum insured was $250,000 with various excess levels, none more than $2,000.

The cover included damage to or loss of hull, mast, spars, rigging, sails, equipment, accessories, tender and motor; legal liability to $10 million; and personal accident cover to $50,000. The total premium was $1,664.32.

On 22 June 2013, the yacht ran aground off Cape Talbot in Western Australia while returning to Australia from participating in a race from Fremantle to Bali.

Just before the race, Froia II's owner Arthur Phillips appeared to recognise that the Watkins policy may not cover the yacht for the race. After obtaining a quote from Nautilus on Watkins's behalf for an extension, Mr Phillips approached other insurers (the Pantaenius parties) for a second policy that directly covered the race.

The Pantaenius policy claim was paid and the Pantaenius parties then claimed contribution from Watkins.

The Watkins policy said cover was "automatically suspended when your boat clears Australian Customs & Immigration for the purpose of leaving Australian waters and will recommence when it clears Australian Customs & Immigration on return". It also noted the boat was not covered while competing in a sailboat race of more than 100 nautical miles, unless an optional benefit for extended sailboat racing had been selected.

The Pantaenius policy, covering from 4pm on 4 May 2013 to 4pm on 4 May 2014, was for hull and property insurance over the yacht, including inventory, equipment, engine and tenders to a value of $275,000 with various deductibles; personal liability; and personal accident cover.

The navigational limits were described as central Asian waters between 90ºE up to 160ºE and 20ºN up to 15ºS, excluding the South China Sea and the Strait of Malacca; and Australian coastal waters up to 200 nm off the coast, including the Tasman Sea. Indonesian and Papua New Guinea territorial waters were excluded.

 Mr Phillips also bought optional cover for "participation in the Fremantle, WA, to Bali race or rally and the return voyage from Bali to WA, and includes pre-arranged and notified cruising in convoy to return to Australian waters". All boats were to return to Australian territorial waters by 30 June 2013. The net premium was $5,162.21.

Federal Court Justice Lindsay Foster disagreed with Watkins's reliance on an exclusion clause because the yacht had not been inspected by Customs in Darwin.

He said the policy's intent was to insure the yacht for losses within Australian waters and s54 nullified the Customs inspection requirement.

Watkins appealed to the Full Bench on the grounds s54 should not have been considered; if it was relevant, it did not nullify the exclusion clause; and s54 was to protect only insureds and could not be used in disputes between insurers.

In an 8 November joint ruling, Chief Justice James Allsop and Justices Steven Rares and Anthony Besanko found Justice Foster had correctly considered and applied s54.

They said Justice Foster had followed the High Court's direction that the "essential character of the policy" took precedence. The Watkins policy's "essential character" was it covered incidents within 250 nautical miles of Australia's coastline.

They said Froia II was within that limit when it struck the reef and Watkins would have accepted liability, but for the exclusion. That was sufficient to apply s54 and nullify the exemption.

"The process of characterisation or construction in the broad sense will, to a significant degree, be influenced by the expression of the parties of the terms of the insurance. Thus, if the underwriter of the Nautilus policy wished to propound and price a policy that provided only for voyages that were domestic in character that could be expressed with some essential clarity," the judges said.

"Perhaps assuming such a wish conformed with a recognisable body of risk, practically or conceptually distinct from coverage that included international voyages, such clarity of expression may suffice to impose a restriction inherent in a claim under such a policy that the voyage be domestic and not international.

"The process of characterisation and the judgement as to what is the essential character of the policy in a given case will be influenced, but not dictated, by the drafting of the policy wording and will involve identification of the nature and limits of the risks that are intended to be accepted, paid for, and covered."

The judges said the parties disagreed on the characterisation of the Nautilus policy.

The provision on page 11 of the PDS about suspending cover until a Customs clearance was obtained was "a temporal or suspensory limitation" and "more easily seen to be a qualification on the essential cover, as collateral to the policy's essential character, than the geographic limits as stated in the certificate of insurance. The latter delineates the essential geographic risk; the former qualifies cover in certain circumstances".

The judges said: "But for the operation of the suspension of cover after the insured's act of causing the yacht to clear Australian Customs for the purpose of leaving Australian waters and the insured's omission to clear Australian Customs after the yacht had re-entered the geographic limits on the return voyage, the Nautilus policy would have responded to the casualty."

The insured's act of clearing Customs and omission (as yet at the time of the casualty) on the yacht's return to clear Customs, can each be seen to be an act or omission of the insured that occurred after inception of the Nautilus policy, during its period of cover and within its geographic limits.

That was sufficient to engage s 54(1) because the effect of the suspension of cover in those circumstances entitled Nautilus to refuse to pay the insured's claim.

The judges said the insured's claim necessarily incorporated a physical dimension that was part of the policy's essential character – that the yacht was within 250 nautical miles of Australia. The insurance contract only applied if that were the case. "That was the restriction or limitation that must inhere in the claim."

The judges also rejected Watkins's argument s54 was limited to insureds' relief. They said contribution between insurers was founded on equitable principle and co-ordinate liabilities.

"The obligations of the two insurers should be characterised in nature, extent and function as the same," they said. The insured could lodge a claim with one insurer, which had the right to claim contribution against the other. "Natural justice and equality underpin that right."

Watkins Syndicate 0457 at Lloyd's v Pantaenius Australia Pty Ltd [2016], FCAFC 150, 08/11/2016