- Section 54 of the Insurance Contracts Act 1984 (Cth) (the Act) requires a court to look not just at the constituent words of a policy to determine whether a restriction or limitation is inherent in a claim, but also to look more broadly at the policy to characterise its essential character.
- The acts of an insured in a related set of circumstances will be viewed as one act.
- Section 54 of the Act is available in claims for contribution between insurers, not just in claims by insureds.
This appeal to the Full Federal Court of Australia (Full Court) concerned the operation of s 54 of the Act on a claim for contribution between insurers.
Two insurers, Watkins Syndicate 0457 at Lloyds (Watkins) and Pantaenius Australia Pty Ltd (Pantaenius), provided cover for a fibreglass yacht that ran aground off Cape Talbot in Western Australia in 2013 on its return to Australia after participating in a race from Fremantle to Bali. Although both insurers covered the same yacht, the scope of cover differed.
The first policy taken out for the boat was with Watkins. It was subject to a geographic limit of 250 nautical miles off mainland Australia and Tasmania. Importantly, it contained a clause that cover would be automatically suspended if the boat cleared Australian Customs and Immigration (Customs) on leaving Australian waters and would recommence when it cleared Customs on return. In this case, the yacht cleared Customs on its departure but had not cleared Customs on its return before it ran aground.
The Pantaenius policy was taken out specifically with this race in mind, had much broader navigational limits and unquestionably responded to the claim. A claim was made on Pantaenius which it paid and then sought contribution from Watkins.
At first instance, the Federal Court of Australia found in Pantaenius’ favour (see our previous Case Note on this decision), following which Watkins appealed to the Full Court.
The Full Court dismissed the appeal after dealing with three fundamental issues:
- Was s 54 of the Act engaged?
- If it was, could Watkins have refused to pay a claim if it had been made by the insured?
- Could Pantaenius argue that theoretical liability of Watkins to the insured as a basis for its contribution claim?
Did s 54 apply?
Section 54(1) of the Act relevantly says an insurer may not refuse to pay a claim by reason only of an act or omission of an insured occurring after the insurance contract was entered into.
The Full Court said the act that occurred after the policy incepted was the act of clearing Customs on departure from Australia and possibly also the omission to clear Customs on return. If neither of those things had occurred, the suspension in the Watkins policy would not have operated.
There had previously been some judicial divergence on the importance of policy restrictions going to the scope of cover and restrictions brought about by exclusions. The Full Court said the difficulty of using such a distinction to decide on whether s 54 operates or not was that it would place the operation of a key protection for the insured in the hands of policy drafters.
Rather, the Full Court said that the process of determining whether a restriction or limitation is inherent in a claim requires you to look not just at what its constituent words mean, but also to look more broadly at the policy to characterise, as a matter of substance, its essential character.
Once that essential character is found, the restrictions or limitations that necessarily exist in a claim under such a policy (to which s 54 does not apply) and the restrictions or limitations that do not necessarily exist (to which s 54 may apply) can be ascertained.
The Full Court here said if Watkins wished to offer a policy that only provided cover for domestic voyages, it could have expressed that very clearly.
The Full Court said the Watkins policy provided broad and clear cover for occurrences within the 250 nautical mile limit, subject to suspension in the circumstances outlined above. The Full Court said a temporal limitation such as this is more easily categorised as collateral to the essential character of the policy than the geographic limits. The geographic limits delineated the essential risk whilst the suspension only qualified cover in certain circumstances.
The Full Court concluded that the act of clearing Customs on departure and the omission to clear Customs on return could each be seen as an act or omission of the insured that occurred after the inception of the Watkins 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 entitled Watkins to refuse to pay the claim.
Does s 54 prevent refusal in paying the claim?
Watkins argued that s 54(1) did not prevent it from declining to pay the claim because the section refers to circumstances in which “the insurer may not refuse to pay the claim by reason only of that act”. Watkins said the use of the word “only” allowed it to decline as there were two acts (clearing Customs on leaving, and not clearing on returning), not only one.
Unsurprisingly given the approach of courts generally in construing the operation of s 54 in broad terms, this semantic submission was not viewed favourably. The Full Court said the word “only” is used in the section because there may be an independent basis for refusal to pay, unrelated to the excluded act. Here, the acts were related and should not be treated separately.
Watkins’ third argument was that s 54 only operated for the benefit of an insured and was not available to an insurer in the context of a claim for dual insurance.
The Full Court found that although s 54(1) refers to a claim by an insured, that did not prevent Pantaenius from relying on it.
The Full Court noted that contribution between insurers was founded in equitable principle arising as the result of coordinate liabilities of two insurers. Natural justice and equality underpin the right of one insurer to make a claim against another so no overly technical approach should be taken if the separate obligations have different sources, as was the case here, where one insurer’s liability arose under contract and the other’s liability arose under contract modified by operation of the Act.
The Full Court said that here the obligations of the two insurers should be characterised in nature, extent and function as the same.
This case confirms the consistent approach of Australian courts in determining s 54 of the Act in a non-technical way to give effect to its purpose. Importantly, it also confirmed that s 54 is available to an insurer seeking contribution from another insurer if it could have been relied upon by their joint insured.
- Allsop CJ, Rares and Besanko JJ.