The High Court's decision today in Maxwell v Highway Hauliers Pty Ltd  HCA 33 reinforces that insurers will not be permitted to rely upon drafting devices to refuse cover where a failure to comply with a policy term had nothing to do with the loss and did not prejudice the insurer's interests.
The decision is a victory for commerciality and policyholders alike. However, policyholders must remain alert to the limits of the decision which are noted below.
What does section 54 do?
Section 54 of the Insurance Contracts Act 1984 (Cth) has been a frequent battleground of policyholders and their insurers. The section was designed to safeguard against insurance cover being frustrated by drafting devices used by insurers to deny liability even in circumstances where a breach of a policy term had nothing to do with the loss and did not prejudice the insurer's interests.
The difficulty for courts has been striking a balance between that aim and not allowing section 54 to be used to enlarge the scope of coverage of the policy. Highway Hauliers demonstrated this tension perfectly, and provided an excellent vehicle for demarcation of the section 54 boundaries.
The failure to comply that triggered the section 54 issue
Highway Hauliers Pty Ltd (HH) operated a fleet of trucks and trailers which hauled cargo on the east-west run between Western Australia and the Eastern States. HH submitted a proposal to Lloyd's underwriters to insure the fleet on that run, known in the industry to be a high-risk passage.
The underwriters, acknowledging HH's extensive claims history, required that all of HH's drivers undertake a "PAQS test" and obtain a minimum score of 36. Further, the policy which was entered into:
- provided that there was no cover for drivers on the east-west run who did not have a PAQS score of at least 36; and
- excluded claims involving drivers in respect of whom the underwriters had not received a driver's declaration at the time of an occurrence (unless the underwriters subsequently chose to accept one).
Two of HH's trucks, and the trailers they were hauling, were damaged in separate accidents on the east-west run during the period of insurance. Neither driver had undertaken a PAQS test or been declared. The underwriters refused indemnity on those grounds.
The issues for determination centered upon the application of section 54 because:
- HH accepted that it had not complied with the terms of the policy and that if section 54 did not apply, it could not claim; and
- the underwriters conceded that the drivers' status did not cause the accidents and that if section 54 did apply, the underwriters had suffered no prejudice.
The High Court decision and guidance
The High Court found that:
- the fact that each vehicle was being operated at the time of the accident by an untested driver was an act that occurred after the contract of insurance was entered into;
- the fact that HH did not make certain each vehicle was operated by a tested driver was an omission that also occurred during the period of insurance; and
- HH having claimed under the policy for accidents that occurred during the period of insurance, it was sufficient to engage section 54(1) that the effect of the policy was that the underwriters might refuse to pay the claims, by reason only of acts which occurred after the policy was entered into.
The underwriters were liable both to indemnify HH and pay damages for breach of the policy, in the form of HH's lost opportunity to earn profits as a consequence of the policy breach, in accordance with the earlier judgments of the W.A. Supreme Court and Court of Appeal.
The High Court also noted that the objects of section 54 required that no difference be drawn between a policy term framed as:
- an obligation of the insured (eg. "the insured is under an obligation to keep the motor vehicle in a roadworthy condition");
- a continuing warranty of the insured (eg. "the insured warrants he will keep the motor vehicle in a roadworthy condition");
- a limitation on the defined risk (eg. "this contract provides cover for the motor vehicle while it is roadworthy"); or
- a temporal exclusion from cover (eg. "this cover will not apply while the motor vehicle is unroadworthy").
In that regard, the High Court expressly stated that the finding of the Court of Appeal of the Supreme Court of Queensland in Johnson v Triple C Furniture & Electrical Pty Ltd  2 Qd R 337 that section 54(1) was not engaged in circumstances where the insurer, relying on a temporal exclusion, refused to pay a claim, was erroneous and should not be followed.
Although the outcome is favourable for policyholders, they must be mindful that:
- section 54(1) applies only to acts or omissions that occur after the policy is entered into - it will not apply to conduct of the insured or anyone else which took place before the policy commenced, with the result that a subsequent claim is not covered; and
- section 54(1) allows the insurer to reduce its liability to the extent to which its interests were prejudiced, further section 54(2) provides that the insurer may refuse to pay the claim if the act or omission could reasonably be regarded as being capable of causing or contributing to the loss. The result in Highway Hauliers would have been different had the drivers caused the losses. Further, although Johnson was erroneously decided, on the evidence of that case the failure (operation of an aircraft in breach of air safety regulations) may well have, on the application of section 54(2), led to the same outcome in favour of the insurer.