Insurers beware: High Court widens the application of section 54(1) ICA

On 10 September 2014, the High Court of Australia delivered its decision in Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33, dismissing an appeal against the decision of the Western Australian Court of Appeal, overturning the decision in Johnson v Triple C Furniture & Electrical [2010] QCA 282 and widening the ambit of section 54(1) of the Insurance Contracts Act 1984 (Cth) (‘the Act’).

By way of background, Highway Hauliers (‘HH’) owned a fleet of vehicles, which it used to operate an interstate transport business. HH entered into a contract of insurance with Lloyd’s Underwriters (‘the insurers’). Under the contract, the insurers indemnified HH against specified loss, damage or liability occurring to or in respect of the vehicles during the specified period.

The insurance contract explicitly stated it would be subject to the terms and conditions of a specific policy (‘the Policy’), which stated that indemnity would only be provided to the drivers of HH B double trucks if the relevant driver had an appropriate PAQS profile score or equivalent.

HH later made two claims under the insurance contract in relation to damage sustained to two of its B double trucks. At the time of both incidents, both trucks were being driven by drivers who were not qualified under a PAQS program or equivalent.

The insurers rejected the claims, relying on the fact that HH’s drivers were not qualified.

Section 54(1) of the Act provides that an insurer may not refuse to pay a claim, on the basis of an act of the insured that did not cause any part of the loss claimed, even if the contract of insurance expressly provides for cover to be declined as a result of the act. For section 54(1) to apply, the act must have occurred during the period of insurance.

The Western Australian Court of Appeal upheld the trial judge’s findings that section 54 of the Act required the insurer to indemnify HH, notwithstanding their drivers were not qualified. It had been established that the drivers’ lack of qualifications had not caused the loss claimed.

The insurer appealed, arguing that section 54(1) of the Act only applied to clauses that created exceptions to coverage under the policy, not to qualifications to the scope of cover itself. This had widely been understood to be the position (at least in Queensland) following the Queensland Court of Appeal’s decision in Johnson.

The High Court reiterated that section 54 focuses on the acts or omissions of the insured, not the legal character or reason that might entitle the insurer to refuse to pay the claim. It was noted that HH’s omission of failing to ensure driver qualification occurred during the period of insurance, therefore engaging section 54(1). The High Court unanimously found the insurer’s refusal to indemnify HH was a breach of contract.

This decision overrules the decision of Johnson, which narrowed the scope of section 54 and allowed valid exclusions in the policy to operate and exclude cover.