High Court clarifies operation of s54

Insurance update - 10 September 2014

The High Court today dismissed the insurer's appeal in Maxwell v Highway Hauliers Pty Ltd. The case concerned the application of s54 of the Insurance Contracts Act 1984 (Cth) to an occurrence-based policy covering damage to the insured's vehicles. The insurer contended that since the relevant qualification to cover operated on the scope of cover per se, it was not an act or omission to which s54 could apply.

In dismissing the appeal, the High Court has confirmed the very broad reach of s54. For s54 to operate, it is sufficient that the basis for the insurer's denial of indemnity is an act or omission of the insured or some other person after the contract of insurance was entered into. Precisely how the policy is structured to produce that end does not matter.

In arriving at its decision, the High Court disapproved of the Queensland Court of Appeal's interpretation in Johnson v Triple C Furniture & Electrical Pty Ltd, that a temporal exclusion was an inherent restriction on the scope of cover, and that s54 did not apply. This aspect of the decision was wrong and should not be followed.

The Court made it clear that its decision does not affect "claims made and notified" policies so as to characterise an omission by a third party to make a claim on the insured during the period of cover as an omission which can be remedied by s54. This is a type of inherent restriction on cover to which s54 does not apply. On the other hand, a failure by the insured to then notify the insurer of the claim, would be subject to s54.

Insurers can still rely on conditions of cover or exclusions to restrict the scope of cover, but only if they are able to satisfy the requirements of s54. That is, if they can establish that the act or omission which is the subject of the condition/exclusion could reasonably be regarded as being capable of causing or contributing to the loss, or their interests have been prejudiced (in terms of financial loss) as a result of the act or omission concerned.

The High Court's brief summary is available here and the decision itself here.

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