AILA Victoria Seminar held at CGU, Melbourne, Thursday, 9 September 2010

EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT SECTION 54, BUT WERE AFRAID TO ASK1
Greg Pynt, Pynt & Partners, Perth

The Occupiers Liability Act, 1957 (UK) has been very beneficial. It has rid us of those two unpleasant characters, the invitee and the licensee, who haunted the courts for years, and it has replaced them by the attractive figure of a visitor, who has so far given no trouble at all.2

No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Question Section 54, why do we have it? Section 54, what is its context and what does it say? Section 54, when is it not in play? Section 54, when is it in play? If engaged, is the relief in 54(1) or is it in 54(2)? How does 54(2) operate? How does 54(1) operate on an occurrence based policy? How does 54(1) operate on a claims made and notified policy? What is the scope of 54(5)(b)? What of section 40? Conclusion

Page 2-6 7-8 9-13 14-16 17-18 19 20-23 25-31 32-33 34-39 40

INTRODUCTION In deference to the title, and with a nod to Woody Allens biblical side, this paper poses and then tries to answer 10 questions about the operation of sections 54 and 40 of the Insurance Contracts Act 1984 (Cth) ( ICA).
1

A wordplay on the film title Everything you always wanted to know about sex, but were afraid to ask, 1972: Woody Allen, director, screenwriter and actor. The film is loosely based on the best selling non-fiction book Everything you always wanted to know about sex, 1969, explained by Dr David Reuben. The film consists of 7 sketches, each supposedly based on the question asked at the beginning of each Chapter of Dr Reubens book. 2 Roles v Nathan [1963] 2 All ER 908, (Lord Denning).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

FIRST QUESTION: SECTION 54, WHY DO WE HAVE IT? ( Take the Money (premium) and Run3) The common law Insurance is a risk transfer, loss spreading, arrangement.4 The private risk transfer aspect of the arrangement involves an insured transferring to an insurer the burden of any financial loss the insured might suffer as a consequence of an event specified in the arrangement fortuitously occurring during the period of the arrangement. The public loss spreading aspect of the arrangement involves a large number of insureds with similar risk profiles each privately transferring the same class of risk to the same insurer or to the same group of insurers. By its underwriting process, an insurer tries to control some of the risk associated with carrying on an insurance business, by carefully selecting and properly rating each risk before deciding whether to accept it. It is assisted in this task by the duty of disclosure, which requires a prospective insured to make a fair presentation of the risk to the insurer5 before the insurer enters into the arrangement, in terms required by the common law, or if the arrangement is subject to the ICA, by Part IV of the ICA. An insurer will also use its underwriting process to try to control some of the risk associated with entering into a particular risk transfer arrangement, by crafting the terms of the arrangement so as to circumscribe the risk transferred to it. This may include: (a) narrowing the scope of an insuring clause or broadening the range or scope of exclusions; (b) guarding against the risk increasing during the insurance period, for example, by including a condition that requires the insured to notify the insurer of a material change in the risk and reserving to the insurer the right to decline the materially

3 4

1971: Woody Allen, director (directorial debut), screenwriter and actor. Truta v Avis Rent A Car System Inc (1987) 193 Cal App 3d 802, 811-12. 5 Iron Trades Mutual Insurance Co Ltd v Companhia de Seguros Imperio [1991] 1 Re LR 213, 224 (Hobhouse J).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

changed risk;6 (c) encouraging the insured to take steps to prevent or reduce the risk of an insured event occurring during the insurance period, for example, by including: a promise by the insured to protect insured property with an activated burglar alarm; an exclusion which suspends cover whilst the insured property is not protected by an activated burglar alarm; or a condition that requires the insured to take reasonable care to safeguard insured property; (d) requiring the insured to assist the insurer with the investigation of a claim or circumstances that might lead to a claim, for example, by including a condition that requires the insured to immediately notify the insurer of an event that has given, or might give, rise to a claim on the policy; (e) managing claims on the policy, for example, by including a condition: that prevents an insured from making an admission of liability or settling a claim with a third party without the insurers prior consent; or in a liability policy that gives the insurer the right to take over and conduct the defence of a third party claim against the insured before indemnity is granted. At common law, an insureds ability to pursue a claim for a loss that falls within the scope of an insuring clause sometimes depends on whether the insured has failed to comply with, or breached, a term of the contract, and if so, how that term is characterized. For example, in the case of a contractual term characterized as: (a) an affirmatory warranty or a condition precedent to the policy coming into existence, an insurer can avoid the policy for breach of it or non compliance with it, even if the insurer would have issued the policy if it had known beforehand of the circumstances that constitute the breach or non-compliance; (b) a promissory (continuing) warranty, an insurer can refuse to pay for any loss

This type of condition is discussed in Ferrcom Pty Ltd v Commercial Union Assurance Company of Australia Ltd [1993] HCA 5; (1993) 176 CLR 332.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

that happens after it has been breached,7 even if: (i) the breach was remedied before the loss; (ii) the breach was trivial; (iii) the breach did not cause or contribute to the loss; or (iv) the insurer has not been prejudiced by the breach; (c) a condition precedent to liability to pay a claim, an insurer can refuse to pay for a loss if it was not complied with, even if: (i) the non-compliance was trivial; (ii) the non-compliance did not cause or contribute to the loss; or (iii) the insurer has not been prejudiced by the non-compliance; (d) a term descriptive of the risk or a temporal exclusion, an insurer: (i) can refuse to pay for a loss which arose from circumstances that occurred whilst cover was suspended even if there was no causal connection between the loss and the reason for the suspension of cover; (ii) cannot refuse to pay for a loss just because cover was suspended for a period that ended before the occurrence of circumstances that gave rise to the claim (compare that with the consequences of a breach of a promissory warranty described in (b)(i) above). In other words, with terms descriptive of the risk and temporal exclusions, an insured can bob in and out of cover depending on the prevailing circumstances; (e) a suspensive condition, an insurer can refuse to pay for a loss for as long as the condition is not complied with; (f) a condition subsequent, an insurer can refuse to pay for a loss because it was not complied with, even if: (i) the non-compliance was trivial; (ii) the non-compliance did not cause or contribute to the loss; or (iii) the insurer has not been prejudiced by the non-compliance;
7

Depending on the wording of the warranty, the insurer might also be able to avoid the policy from the date of the breach.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

(g) a condition that is not a suspensive condition or a condition precedent or subsequent, an insurer cannot refuse to pay for a loss because it was breached, although it may be able to claim damages for the breach. The Australian Law Reform Commission Report No. 20, Insurance Contracts (1982) Not surprisingly, the ability of an insurer to refuse to pay for a loss because of a trivial or non-causative breach of, or non-compliance with, a contractual term attracted the attention of the Australian Law Reform Commission (ALRC ) in its Report No. 20, Insurance Contracts (1982) ( ALRC Report No. 20, Insurance Contracts). Clause 54 of the proposed Insurance Contracts Bill appended to the Report8 sought to strike a fairer balance between the interests of the insurer and the insured in these circumstances. The ALRC explained (Chapter 8, [224]) that the parties rights in the event of a breach of, or non-compliance with, a contractual term should depend on matters of substance, not on whether a term is characterized as a warranty or a condition, or on the difference in effect between a breach of warranty and an occurrence caught by a temporal exclusion. The Explanatory Memorandum that accompanied the Insurance Contracts Bill in its passage through Parliament delivered the same message: 182 Rationale The existing law is unsatisfactory in that the parties' rights are determined by the form in which the contract is drafted rather than by reference to the harm caused. The present law can also operate inequitably in that breach of the term may lead to termination of the contract regardless of whether or not the insurer suffered any prejudice as a result of the insured's breach. The proposed law will concentrate on the substance and effect of the term and ensure that a more equitable result is achieved between the insurer and the insured

It is identical in substance, but marginally different in form, to section 54 of the ICA.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

The ICA The ICA came into effect on 1 January 1986. It is remedial legislation. As explained in the Long Title, it was enacted to: reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts operate fairly Two of the ICAs most significant reforms preclude an insurer, in a wide range of circumstances, from refusing to pay a claim because of an insureds: non-disclosure or misrepresentation in the pre-contractual period (Part IV of the ICA); non-compliance with, or breach of, a contractual term, or failure to exercise a right, choice or liberty available under the insurance contract (Part V of the ICA, section 54). This paper is predominantly concerned with that part of the reform of insurance law effected by section 54, which, consistently with the Long Title to the ICA, is to be construed according to the breadth of its language, its remedial purpose, its application to substance rather than form and the inadmissibility of adopting a narrow approach by reference to pre-existing law or supposed assumptions inherent in the insurance contract between the parties.9

FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [50] (Kirby J) (citations omitted).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

SECOND QUESTION: SECTION 54, WHAT DOES IT SAY AND WHAT IS ITS CONTEXT? ( Whatever Works10) Section 54 is only concerned with acts or omissions that happen during the postcontractual period, that is the period that follows the making of the insurance contract.11 It appears in the ICA Part V (The contract) Division 3 (Remedies), which also contains sections 55 and 55A (Representative actions by the ASIC). Sections 54 and 55 are in the following terms: 54 (Insurer may not refuse to pay claims in certain circumstances) (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurers liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurers interests were prejudiced as a result of that act. (2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act;

10 11

2010: Woody Allen, director and screenwriter. The date the insurer commences to be on risk does not always coincide with the date on which the parties enter into the insurance contract.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

(5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject matter of the contract or of allowing the state or condition of that subject matter to alter . 55 (No other remedies) The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission. A contractual term that purports to limit or exclude the operation of the ICA to the prejudice of a person other than the insurer, is void: section 52.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

THIRD QUESTION: SECTION 54, WHEN IS IT NOT IN PLAY? (Whats (not) New Pussycat12) Section 54 precludes an insurer from refusing to pay a claim where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into Section 54 limits the ability of an insurer to refuse to pay a claim; it does not affect the remedies available to an insured for an insurers non-compliance with, or breach of, a term of an insurance contract. As the premise of section 54 is an act or omission that occurs after an insurance contract is made, it is not brought into play: by a non-disclosure or misrepresentation before an insurance contract is made; by a breach of a warranty of existing fact, because a warranty of existing fact has the effect of a pre-contractual representation;13 or if there is simply no cover (see discussion below). Nor is section 54 triggered by a fraudulent claim within the scope of section 56 of the ICA.14 That is because it is the effect of a statutory provision (section 56), not the effect of an insurance contract, that enables the insurer to refuse to pay a fraudulent claim.15 Section 54 is not brought into play if there is simply no cover Section 54 is not brought into play by circumstances that do not give rise to a claim for an insured loss because the policy does not cover, deal with, respond or extend to those

12 13

1966: Woody Allen, screenwriter. Section 24 of the ICA; Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606, [18] (Mason CJ, Dawson, Toohey and Gaudron JJ). 14 Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC 616; (2004) 13 ANZ Insurance Cases 61-620, [44] - [47] (Einstein J). 15 To v Australian Associated Motor Insurers Ltd [2001] VSCA 48; (2001) 3 VR 279; 11 ANZ Insurance Cases 61-490, [28] (Buchanan JA).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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circumstances.16 That is because the section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim.17 What is or is not an inherent restriction or limitation in a claim is a matter of judgment and depends on substance not form.18 So for example, the operation of section 54 is attracted in the case of a motor vehicle policy with an insuring clause that covers: accidental damage to your roadworthy vehicle; accidental damage to your vehicle, unless/but not whilst it is unroadworthy; or accidental damage to your vehicle and an exclusion for accidental damage to your vehicle whilst it is being driven in an unroadworthy condition, if accidental damage occurs and the insurer disputes its liability to pay for the damage because it occurred whilst the vehicle was unroadworthy.19 That is because in this context and however drafted, the relevant substance, effect, core or essence20 of the insurers contractual promise21 is that it will pay for accidental damage to the vehicle, whatever the vehicles characteristics, qualities or attributes when the damage occurs.22 Section 54 operates because it is not an inherent limitation or restriction in the claim that, subject to section 54, allows the insurer to refuse to pay for the damage, but rather the act of driving the vehicle after the contract was made and whilst it has the attribute of being unroadworthy that has that effect. The operation of section 54 is also attracted in the following cases: (a) An insurance contract covers fire damage to a warehouse. It includes a condition which provides that if there is a material alteration in the nature of the occupation of the warehouse during the insurance period which might increase the risk of a claim being made, then no benefits will be payable unless You have advised Us in writing as to any such changes and We have agreed to them.

16

FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [40]-[44] (McHugh, Gummow and Hayne JJ), [84] (Kirby J). 17 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [41] (McHugh, Gummow and Hayne JJ). 18 Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, 661 (Dawson, Toohey, Gaudron and Gummow JJ). 19 Australian Law Reform Commission Report No. 20, Insurance Contracts , [229]. 20 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [60] (Kirby J). 21 Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35;(1997) 188 CLR 652, 660-1 (Brennan J). 22 A car is a car is a car.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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During the insurance period, a plastics manufacturer moves into the warehouse. The insured does not notify the insurer of the arrival of the plastics manufacturer. If it had done so, the insurer would have chosen not to cover the increased risk. The insurer refuses to pay a claim for fire damage to the warehouse after the arrival of the plastics manufacturer because it did not agree to cover the increased risk. The operation of section 54 is attracted because the relevant core of the insurers contractual promise is that it will pay for fire damage to the warehouse, whatever the characteristics, qualities or attributes of the warehouse (in this case, its occupation by a plastics manufacturer without the insurers knowledge or agreement to the increased risk). It is not an inherent limitation or restriction in the claim that, subject to section 54, allows the insurer to refuse to pay the claim, but rather the insureds act of allowing the plastics manufacturer to move into the warehouse, or its omission in not notifying the insurer of that after the contract was made, that has that effect.23 (b) An insurance contract covers legal costs incurred by the insured in defending third party claims, but only if the insured obtains the insurers prior written consent to the incurring of the legal costs, which consent will not be unreasonably withheld. The insured incurs $100,000 worth of legal costs in defending a third party claim. The insurer refuses to pay for the legal costs because the insured incurred them without obtaining the insurers prior written consent to their being incurred. The operation of section 54 is attracted because the relevant core of the insurers contractual promise is that it will pay for legal costs incurred by the insured in defending a third party claim, whatever the characteristics, qualities or attributes of the legal costs (in this case, their being incurred without the insurers prior consent). It is not an inherent limitation or restriction in the claim that, subject to section 54, allows the insurer to refuse to pay the claim, but rather the insureds omission in not seeking the insurers prior agreement to incurring the costs after the contract was made that has that effect.24

23

Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd and Insurance and General Brokers Services Pty Ltd [2000] QCA 524; (2001) 11 ANZ Ins Cas 61-484. 24 Antico v Heath Fielding Australia Pty Ltd [2007] HCA 35; (1997) 188 CLR 652.

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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On the other hand, the operation of section 54 is not attracted in the following cases: (a) A motor vehicle policy covers accidental damage to a vehicle: during the period 4.00pm on 8 September 2009 to 4.00pm on 8 September 2010. The insurer refuses to pay a claim for accidental damage to the vehicle because it occurred on 9 September 2010;25 during journeys of up to 450 kilometres. The insurer refuses to pay a claim for accidental damage to the vehicle because it occurred whilst the vehicle was on a journey of more than 450 kilometres; 26 in Australia. The insurer refuses to pay a claim for accidental damage to the vehicle because it occurred whilst the vehicle was in New Zealand;27 (b) A personal valuables policy covers theft of items of jewellery specified by the insured. The insurer refuses to pay a claim for stolen jewellery not specified by the insured prior to their being stolen;28 (c) A liability policy indemnifies against liability for damage to property incurred in connection with construction contracts for works valued at up to $1 million. The insurer refuses to pay a claim where the insureds liability for property damage is incurred in connection with a construction contract for works valued at more than $1 million; (d) A claims made and notified policy (without an expanded definition of claim or a deeming provision). The insurer refuses to pay a claim where a third party does not make a claim against the insured during the insurance period.29 Section 54 does not apply in any of these cases (a) to (d) because the reason the insurer is refusing to pay the claim is that the circumstances that gave rise to a claim on the policy do not fall within the core of the insurers contractual promise. The refusal is simply because the insured did not have cover for those circumstances and did not choose to

25

FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [42] (McHugh, Gummow and Hayne JJ). 26 Stapleton v NTI Ltd [2002] QDC 204, [34] (McGill DCJ). 27 Stapleton v NTI Ltd [2002] QDC 204, [34] (McGill DCJ). 28 Kelly v New Zealand Insurance (1996) 9 ANZ Ins Cas 61-317. 29 FAI Insurance Ltd v Aust Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [42] (McHugh, Gummow and Hayne JJ).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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expand or extend the insurers contractual promise to cover those circumstances;30 it is not because of an omission of the insured "to exercise a right, choice or liberty which the insured enjoys under the contract of insurance"31. The distinction between the two is not always easy to make.

30

FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [40]-[44] (McHugh, Gummow and Hayne JJ), [84] (Kirby J). 31 Antico v Heath Fielding Australia Pty Ltd [2007] HCA 35; (1997) 188 CLR 652, 669 (Dawson, Toohey, Gaudron and Gummow JJ).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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FOURTH QUESTION: SECTION 54, WHEN IS IT IN PLAY? ( Deconstructing Harry (section 54))32 Introduction Section 54 precludes an insurer from refusing to pay a claim where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into As has already been noted, the operation of section 54 is only attracted if the relevant act of the insured or of some other person occurs after the contract is made. An act of the insured or of some other person includes an omission: section 54(6). An omission can be inadvertent, careless or deliberate.33 It includes a failure to perform a contractual obligation34 and a failure "to exercise a right, choice or liberty which the insured enjoys under the contract of insurance".35 Although the act or omission can be of the insured or of some other person, that some other person will not be the insurer.36 Section 54 does not qualify the act or omission with the word breach or by reference to the nature or characteristics of the relevant contractual term. Accordingly, it applies to acts or omissions relevant to all types of contractual term, no matter how characterized.37 In Antico v Heath Fielding Australia Pty Ltd38, Brennan J put it this way (at 660-1): [Section 54] focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim - falling outside a covered risk, coming within an exclusion or noncompliance with a condition - but on the actual conduct of the insured, that is, on some act which the insured does or omits to do. The legal classification of the act or omission is

32 33

1998: Woody Allen, director, screenwriter and actor. Drayton v Martin [1996] FCA 1504; 9 ANZ Insurance Cases 61-322, [99] (Sackville J). 34 FAI Insurance Limited v Aust Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641, [22] (McHugh, Gummow and Hayne JJ). 35 Antico v Heath Fielding Australia Pty Ltd [2007] HCA 35; (1997) 188 CLR 652, 669 (Dawson, Toohey, Gaudron and Gummow JJ). 36 Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, 661 (Brennan J). 37 The application of section 54 to the provisions of an insurance contract depends on substance, not form: Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, (Dawson, Toohey, Gaudron and Gummow JJ). 38 [1997] HCA 35; (1997) 188 CLR 652.

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immaterial. The act or omission must have occurred "after the contract was entered into" so that sub-s (1) does not operate to alter the contractual promise of the insurer to pay a claim. It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured. The act or omission does not have to be the only reason why the insurer is entitled to refuse to pay the claim.39 Accordingly, section 54 will be triggered if: a) the circumstances that gave rise to a claim on the policy fall within the core of the insurers contractual promise; and b) but for section 54, the effect of the contract is that the insurer could refuse to pay some or all of the claim made40 because of an act or omission by the insured or some other person after the insurance contract was made. Section 54 and the duty of utmost good faith Section 54 limits an insurers remedy for an insureds breach of the duty of utmost good faith, not the scope of the duty. 41 It operates because section 13 of the ICA makes the duty an implied term of the insurance contract, so that an insurers refusal to pay a claim by reason of an insureds breach of the duty is due to the effect of the contract, not of a statutory provision (unlike section 40(3) - see the discussion under Question 9). Onus of proof The operation of section 54 is not triggered unless: (a) the insured proves that the circumstances that gave rise to a claim on the policy fall within the core of the insurers contractual promise;42 (b) the insurer persuades the Court that subject to section 54, it is entitled to refuse to pay for all or part of a loss because:

39

Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, 672-3 (Dawson, Toohey, Gaudron and Gummow JJ). 40 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, [41] (McHugh, Gummow and Hayne JJ). 41 Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Insurance Cases 61-059, 77,136 (Ipp J). 42 Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9, [28].

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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(i) it has discharged a relevant onus of proof, for example: a limitation on cover, such as a sum insured or limit of liability which may appear in a Schedule of Insurance which cannot be found;43 or that a loss falls within the scope of an exclusion;44 or (ii) the insured has failed to discharge a relevant onus of proof, for example: in Victoria45 , New South Wales46 and the Northern Territory47 , that the insured complied with a condition precedent to the liability of the insurer to pay the claim (the insurer having raised the issue in its defence); that the insurer is estopped or prevented by the duty of utmost good faith from relying on a breach of, or non-compliance with, a contractual term 48; the operation of an exception to an exclusion;49 and (c) the insured proves that a reason for the insurer refusing to pay the claim is an act or omission of the insured or of some other person that occurred after the contract was entered into. In other words, the characterisation of a contractual term as a condition precedent for example, will not circumvent the substantive protection section 54 gives to an insured, but who bears the onus of proving it has been complied or not complied with might determine whether an insurer can persuade the Court that the contractual effect of the term, but for section 54, would be that the insurer could refuse to pay the claim. If the insurer does not persuade the Court of this, there is no work for section 54 to do. Who bears the onus of proof in relation to the balance of the section 54 issues depends on whether the relevant act or omission falls within sub-section 54(1) or sub-section 54(2), as to which, see the discussion under the next Question. FIFTH QUESTION: IF ENGAGED, IS THE RELIEF IN 54(1) OR IS IT IN 54(2)?
43 44

Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9, [35] [36]. Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458, 461 (Sholl J); Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244, 75,749 (Rolfe J). 45 CGU Insurance Ltd v Lawless [2008] VSCA 38, [37] (Redlich JA). 46 Legal and General Insurance Australia Ltd v Eather [1986] NSWLR 390. 47 Timms v FAI Insurance Ltd (1976) 12 ALR 506, (Muirhead J); S & Y Investments (No.2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 82 FLR 130, [60] [65] (Maurice J). 48 Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274, 283 (Bowen LJ). 49 Boonham v CE Heath Underwriting & Agency Services (NZ) Ltd (1993) 7 ANZ Insurance Cases 61-189, 78,107 (Barker J).

AILA Seminar, Melbourne: Everything you always wanted to know about section 54 but were afraid to ask

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(Crimes and Misdemeanours50 ) If engaged, the relief allowed by section 54 depends on whether the relevant act or omission: could reasonably be regarded as being capable of causing or contributing to an insured loss: sub-section 54(2); or could not reasonably be regarded as capable of causing or contributing to an insured loss: sub-section 54(1). Which of sub-section 54(1) or sub-section 54(2) the relevant act or omission falls into is not always clear. The test is objective (reasonably). It was the issue in Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd and Insurance and General Brokers Services Pty Ltd51, a case in which Gibbs was insured for damage to a warehouse by fire. Clause 2 of the policy (entitled Alteration) provided that if there is any alteration in the nature of the occupation of the insured building after the commencement of the policy which might increase the risk of any claim being made, then no benefits will be payable under these Policies unless You have advised Us in writing as to any such changes and We have agreed to them. During the insurance period, a plastics manufacturer moved into the warehouse. Gibbs did not notify MMI of this. If it had done so, MMI would have chosen to go off risk. The warehouse was subsequently destroyed by fire. The fire had nothing to do with the presence of the plastics manufacturer. Whether an act of the insured fell within sub-section 54(1) or sub-section 54(2) required the Court to identify the relevant act. The court had 3 choices: 1. Gibbs allowing the plastics manufacturer to move into the building; 2. Gibbs not notifying MMI of the plastics manufacturers move into the building; or 3. a composite of (1) and (2). Thomas JA and Mackenzie JA (at [37] and [74] respectively) held that sub-section 54(1) applied because the act of the insured that entitled MMI to refuse to pay the claim (but for section 54) was Gibbss failure to notify MMI of the plastics
50 51

1990: Woody Allen, director, screenwriter and actor. [2000] QCA 524; (2001) 11 ANZ Insurance Cases 61484.

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manufacturers move into the building, and that could not reasonably be regarded as capable of causing or contributing to an insured loss. Pincus JA decided (at [15]) that the act or omission of the insured was a composite of (1) and (2) and that it fell within sub-section 54(2) because Gibbs allowing the plastics manufacturer to move into the building (being part of the act or omission of the insured) could reasonably be regarded as being capable of causing or contributing to an insured loss. Where the act of the insured is a composite, it is wrong to consider only that part of the composite which could not possibly cause any loss to the insured and to ignore that part which could do so. That the act of the insured was a composite of (1) and (2) was relevant to subsection 54(3), because all parts of the act of the insured (all parts of the composite) had to be considered in order to determine whether MMIs refusal to pay the claim was by reason only of the act of the insured: Pincus JA at [9]. Pincus JA concluded that MMI was bound to pay Gibbs under sub-section 54(3) because Gibbs proved that no part of the loss that gave rise to the claim was caused by the whole of the relevant act or omission of the insured. Pincus JA distinguished Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd52 on the basis that in that case the change from unregistered to registered crane (the equivalent of Gibbs allowing the plastics manufacturer to move into the building) could not reasonably be regarded as being capable of causing or contributing to an insured loss and accordingly, sub-section 54(2) could not apply.

52

[1993] HCA 5; (1993) 176 CLR 332.

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SIXTH QUESTION: HOW DOES 54(2) OPERATE? (Picking up the pieces53) If an act or omission could reasonably be regarded as being capable of causing or contributing to an insured loss, it will fall into the category described by sub-section 54(2) and the insurer can refuse to pay the claim, except to the extent that the insured proves that the act or omission did not cause or contribute to the loss: subsections 54(3) and (4). Example An insured vehicle with faulty brakes is damaged when the owner unintentionally drives it into the back of another vehicle. The insurer can refuse to pay the owners claim for the damage to the insured vehicle if: the insurance contract excludes cover for a loss that occurs whilst the vehicle is being driven in an unroadworthy condition; and faulty brakes could reasonably be regarded as being capable of causing or contributing to an insured loss. These circumstances fall into the category described by sub-section 54(2), so that subject to sub-section 54(5)(b), the owner will only be able to recover the cost of repairing the damage to the insured vehicle to the extent it proves the faulty brakes had nothing to do with the accident.

53

2000: Woody Allen, actor.

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SEVENTH QUESTION: HOW DOES 54(1) OPERATE ON AN OCCURRENCE BASED POLICY? ( The Purple Rose of Cairo54) What is an occurrence based policy? First party insurance is almost always occurrence based.55 In this type of insurance, the insurers promise to pay is triggered by either the happening of an occurrence, or the happening of a loss, during the insurance period. A motor vehicle first party property damage policy is an example of occurrence based insurance. In this type of insurance and depending on the policy wording, the insurers promise to pay is activated by one or other of: the happening of an event that causes damage to the insureds motor vehicle; or damage to the motor vehicle itself occurring, during the insurance period. Third party (liability) insurance can be either occurrence or claims made. Most liability insurance is occurrence based. In occurrence based liability insurance, the insurers promise to pay is triggered by the insured incurring a liability to a third party during the insurance period, even if the settlement, judgment or arbitration award that resolves the third partys claim against the insured occurs after the insurance period has ended.56 The operation of section 54(1) on an occurrence based policy If an act or omission could not reasonably be regarded as being capable of causing or contributing to an insured loss, it will fall into the category described by sub-

54 55

1996: Woody Allen, director and screenwriter. As David Abell pointed out to me after the Seminar, a Fidelity Guarantee policy is a first party policy that more closely resembles claims made than occurrence based insurance, at least if the trigger for coverage is the insureds discovery of fraud during the insurance period or a subsequent grace period (rather than fraud occurring during the insurance period). Insurers underwrite on this basis because this type of insurance is long tail, in that employee fraud can go undetected for a considerable period of time. For discussion of claims made insurance, see the discussion under the Eighth question. 56 Multiplex Constructions Pty Ltd v Irving; Fugen Holdings Pty Ltd v Irving [2004] NSWCA 346, [60] (Ipp JA); Orica Ltd v CGU Insurance Ltd (2003) 59 NSWLR 14, 27; 13 ANZ Insurance Cases 61596 (Mason P).

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section 54(1) and the insurer cannot refuse to pay the claim; it can only reduce its liability to pay the claim by the extent to which it has been prejudiced by the act or omission. Example An insured vehicle is damaged when the owner unintentionally drives it into the back of another vehicle. The insurance contract contains a term that requires the insured to promptly notify the insurer of any accident involving the insured vehicle. The insured breaches the term by taking 3 months to notify the insurer of the accident. As the insureds breach of the term requiring it to promptly notify the insurer of the accident could not reasonably be regarded as capable of causing or contributing to an insured loss, the insurer cannot refuse to pay the claim; it can only reduce its liability to pay the claim by the extent to which it has been prejudiced by the late notification of the accident. Prejudice is measured by reference to the actual financial damage suffered by the insurer by reason of the act or omission. In Moltoni Corporation Pty Ltd v QBE Insurance Ltd57, QBE insured Moltoni, which carried on a demolition business, under an employers liability policy. Condition 2 of the policy required Moltoni to: give notice to QBE of any disability or personal injury or of any incapacity arising from it as soon as practicable after Moltoni became aware of it; and forward to QBE, forthwith after it receives it, a copy of every written notice of claim or proceedings and all information as to any verbal notice of claim or proceedings. In November 1992, Mr Symons injured his back in an accident that happened during the course of his employment with Moltoni. Moltoni notified QBE of the accident about 18 months later (April 1994). In January 1993, Mr Symonss own doctor certified him fit to return to work. Mr Symons successfully sued Moltoni for

57

[2001] HCA 73; (2001) 205 CLR 149.

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negligently causing the accident. QBE appealed against the District Courts order that it indemnify Moltoni in respect of its liability to Mr Symons. QBE claimed that pursuant to sub-section 54(1), its liability to indemnify Moltoni should be reduced by the prejudice it had suffered as a result of the substantial delay in Moltoni notifying it of the accident. That prejudice was the loss of an opportunity to reduce the extent of its liability to indemnify Moltoni against Mr Symonss claim by: investigating the accident shortly after it happened; and arranging for Mr Symons to see an orthopaedic surgeon or an occupational specialist soon after the accident. QBE called evidence from medical specialists who said that if this had been done, the orthopaedic surgeon or occupational specialist would have advised Mr Symons to stop doing heavy work, he would have stopped doing heavy work and consequently, his injuries would not have been as severe. In the High Court, the majority said (at [16][17]) the amount that fairly represents the extent of the insurers prejudice: invites attention to, and requires identification of, the amount of damage which the insurer suffered as a result of the act or omission in question. Because the act or omission may not always constitute a breach of the contract of insurance by the insured, that damage will not always be identifiable as the amount that would be allowed as compensatory damages on a claim by the insurer for breach of contract. Nonetheless, like an amount allowed for compensatory damages for breach of contract, the amount of which s 54(1) speaks, as fairly representing the extent to which the insureds interests were prejudiced, will be the actual financial damage that has been or will be sustained as a result of the relevant act or omission. ... Thus, although relevant prejudice may be found to consist in the existence of a liability which would not have been borne if there had not been the relevant act or omission, the quantification of the amount representing the extent of the insureds prejudice as a result of the act requires the identification of what are the financial consequences that, in fact, have been, or will be, caused by that act or omission. (underlining added) If an insurer can prove it would not have continued to be on risk if the act or

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omission had not occurred, then its prejudice is the amount of the claim. This is illustrated by Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd 58, in which the insured was initially covered for the risk of damage to an unregistered mobile crane. The insured subsequently registered the crane so that it could be driven on the road. The crane was damaged when it overturned whilst lifting some steel structures. The insured claimed for the damage. The insurer sought to reduce its liability to pay the claim, in accordance with sub-section 54(1) of the ICA, on the basis that the insured had not complied with a condition in the insurance contract which required it to promptly notify the insurer of a change in material facts during the period of the insurance, in this case, the fact that it registered the crane during the insurance period. The court found that if the insured had promptly notified the insurer of the registration of the crane, the insurer would have cancelled cover for the crane before the accident. Although it probably would have then provided cover for the crane under a different type of policy, that other policy would have excluded cover for loss as a result of overturning. The High Court concluded (at [14]) that: the amount which fairly represents the prejudice suffered by Commercial Union in losing the opportunity to go off risk is the equivalent of the liability prima facie imposed on Commercial Union by s 54(1). The prima facie liability imposed by s 54(1) is thus reduced to nil. On the other hand, if an insureds act or omission would not have led to the insurer going off risk, the insurers prejudice is measured by what would have happened (not what could or might have happened) if the act or omission had not occurred.59 For example, if the act or omission not occurring would have resulted in the insurer charging a higher premium for the insurance, then the insurers prejudice is measured by the extra premium it would have earned if the act or omission had not occurred.

58 59

[1993] HCA 5; (1993) 176 CLR 332. Moltoni Corporation Pty Ltd v QBE Insurance Ltd [2001] HCA 73; (2001) 205 CLR 149, [18] (Gleeson CJ, Gaudron, McHugh, Kirby and Hayne JJ).

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Onus of proof The insurer bears the onus of proving: that the relevant act or omission prejudiced its interest; the actual financial damage it suffered by reason of the act or omission. 60

60

Moltoni Corporation Pty Ltd v QBE Insurance Ltd [2001] HCA 73; (2000) 205 CLR 149, [24].

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EIGHTH QUESTION: HOW DOES 54(1) OPERATE ON A CLAIMS MADE AND NOTIFIED POLICY? ( Mighty Aphrodite 61) The basic form of claims made and claims made and notified policies Occurrence based liability insurance can be problematic if losses or liabilities are potentially long tail. In a liability policy, long tail is a reference to circumstances in which a substantial amount of time can elapse between an insureds negligence and a third partys loss as a result of that negligence. For example, in a case where: a potential beneficiary of a will does not take their intended entitlement under the will because the testators lawyer negligently failed to ensure the testators signature on the will was properly witnessed; or a third party contracts malignant mesothelioma many years after a manufacturer or supplier of asbestos has negligently exposed the third party to that risk. In the mid 1980s, professional indemnity and product liability insurers began offering claims made instead of occurrence based insurance as a way of dealing with the potential problems associated with long tail risks.62 In a claims made policy, the insurers promise to pay is triggered by a claimant first making a claim against the insured during the insurance period. In a claims made and notified policy, the insurers promise to pay is triggered by: a claimant first making a claim against the insured during the insurance period; and the insured notifying the claim to the insurer during the insurance period, or in some policies, within a grace period after the expiry of the insurance period.63

61 62

1996: Woody Allen, director, screenwriter and actor. HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID00101 [2007] EWHC 1951 (Comm), per Gloster J. 63 In FAI Insurance Ltd v Aust Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641, McHugh, Gummow and Hayne JJ said ([23]) that a claims made and a claims made and notified policy is better described as a discovery policy because the critical facts under the contract are the insured's discovery of the making of a claim on it or its discovery (its becoming] aware") of an occurrence which may give rise to a claim. In the end, however, the application of labels to the contract may obscure more than it illuminates.

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Subject to its terms, in a claims made and in a claims made and notified policy, a claim is a demand for something as due, an assertion of a right to something64 and it is made against the insured when the substance of the claim is in fact brought home to the insured.65 In both types of policy, it does not matter when the insured incurred the liability or when the act or omission occurred that gave rise to the insureds liability, unless it happened before a date nominated in the policy as the retroactive date. Depending on the policy wording, a retroactive date in a claims made or claims made and notified policy indicates that the insurer will not be liable for a claim that arises out of an act or omission that occurred before the retroactive date66. The retroactive date is often the date the insured first took out insurance with that insurer. With long tail risks, claims made and claims made and notified insurance have the following advantages over occurrence based insurance: the insurer and the policy details are usually more easily identified and retrieved; policy wordings and limits of liability are more up to date; the insurer pays claims closer to when premiums were set for the policies giving rise to those claims; the insurer closes its books nearer to when the relevant policies were issued; the level of premium the insurer needs to charge is more accurately calculated having regard to the increased level of certainty achieved by the above. For further discussion of these matters, see Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co67 and HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID0010168. Nowadays, the risk that an insured might be held liable to a third party for loss as a result of the supply of hazardous products, professional malpractice or a company

64 65

Walton v National Employers Mutual General Insurance Association Ltd [1973] 2 NSWLR 73, 82 (Bowen JA). Triden Properties Ltd v Capita Financial Group Ltd (1996) 12 BCL 402, (Sheller JA). 66 Towry Law v Chubb Insurance [2008] NSWSC 1352 at [69] - [70] per McDougall J. 67 [1993] 1 SCR 252; (1993) 99 DLR (4th) 741, at [14][16], per McLachlin J. 68 [2007] EWHC 1951 (Comm), per Gloster J.

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directors or officers errors or omissions, is usually written as claims made or claims made and notified, rather than occurrence based, insurance. The Proposal for Insurance, the Known circumstances exclusion and the Continuity clause The Proposal for claims made and claims made and notified insurance invariably requires the prospective insured to disclose circumstances which they know about, and which they know or ought to know might give rise to a claim against them during the insurance period of the policy if issued. If the prospective insured knows of such circumstances: and discloses them, the insurer will endorse its policy with an exclusion for claims first made during the insurance period that arise out of the disclosed circumstances; but does not disclose them, the insurer will reject any subsequent claim that arises out of the non-disclosed circumstances. In either case, the insurer acts on the basis that the prospective insured should be notifying, or should have notified, its insurer at the time it first became aware of such circumstances, and it should look to that insurer to cover it for any subsequent claim that arises out of such circumstances. Claims made and claims made and notified policies: invariably contain a Known circumstances exclusion, which excludes indemnity for claims that arise out of circumstances the insured knew about before inception of the policy, and which it knew or ought to have known might give rise to a claim against the insured during the insurance period. Here is an example of a Known circumstances exclusion: This policy shall not cover Loss in connection with any Claim arising out of or attributable to any circumstance the Insured knew about at the inception of this policy, and that the Insured knew or could reasonably be expected to have known might give rise to a Claim. As with the disclosure requirement, the exclusion appears in the policy on the basis that the insured should have notified its insurer at the time it first became

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aware of such circumstances, and it should look to that insurer to cover it for any subsequent claim that arises out of such circumstances. sometimes contain a Continuity clause, which will override non-disclosure issues and negate the effect of a Known circumstances exclusion in relation to circumstances the insured first became aware of after the Continuity date 69 and before the inception of the relevant policy.70 Here is an example of a Continuity clause: Except in the case of fraudulent non-disclosure, where a Claim that would otherwise be covered by this policy is excluded by the Known Circumstances exclusion, then this policy will cover that Claim: a) but only if the Insured first became aware of the facts that might give rise to the Claim after the Continuity Date; and b) on the terms and conditions of the policy in force when the Insured first became aware of those facts. Expanding the definition of claim so as to extend cover to claims first made against an insured after the insurance period Claims made and claims made and notified policies sometimes expand the common law definition of claim so that it includes the intimation of a claim. In that way, a claim first made against an insured after the insurance period is covered: by a claims made policy, if the claim was first intimated to the insured during the insurance period; by a claims made and notified policy, if the claim was first intimated to the insured and notified to the insurer during the insurance period. In the absence of an expanded definition of claim and subject to other provisions of the policy (such as a deeming provision) and to the operation of sub-section 40(3) of the ICA (discussed below), an insured would not be covered by its current policy for a claim first intimated to, but not made against, the insured during the insurance period of the current policy. Nor, subject to other provisions of the policy
69 70

Usually the date the insured first took out claims made or claims made and notified cover with that insurer. Instead of issuing an insured with a loyalty card, an insurer includes a Continuity clause in its policy, which rewards an insured for its loyalty in renewing its policy with the same insurer.

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(such as a Continuity clause), would it be covered by a subsequent policy for a claim first made against it during the insurance period of the subsequent policy that related to a claim first intimated to the insured prior to the subsequent policy, amongst other things, because of the Known circumstances exclusion. Including a deeming provision in the policy so as to extend cover to claims first made against an insured after the insurance period In days gone by, claims made and claims made and notified policies often contained a deeming provision in the following or similar terms: A claim first made against the insured after the insurance period will be deemed to have been made during the insurance period, but only if the insured notifies the insurer during the insurance period of circumstances which they first become aware of during the insurance period which may give rise to a subsequent claim of that nature against the insured. By including a deeming provision in a policy, a claim first made against an insured after the insurance period is covered by a claims made and a claims made and notified policy if circumstances relating to the subsequent claim were notified to the insurer during the insurance period. In the absence of a deeming provision and subject to the operation of sub-section 40(3) of the ICA (discussed below), the insured would not be covered by its current policy for a claim first made against it after the insurance period of its current policy, even if circumstances relating to the subsequent claim were notified to the insurer during the insurance period (pursuant to a contractual obligation to do so or otherwise). Nor would it be covered by a subsequent policy for a claim first made against it during the insurance period of the subsequent policy that related to such circumstances, amongst other things, because of the Known circumstances exclusion. Why deeming provisions have fallen into desuetude is explained below. The operation of section 54 on a claims made policy The core of an insurers contractual promise in a claims made policy is cover for a

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claim first made against the insured during the insurance period. Subject to the policy wording (for example, an expanded definition of claim or the presence of a deeming provision), section 54 does not assist an insured in relation to a claim first made against it after the insurance period because there is no cover for it, not because of the act of the claimant in making the claim after the insurance period instead of during it. The operation of section 54(1) on a claims made and notified policy Subject to the policy wording, section 54(1) extends the scope of a claims made and notified policy to cover a claim first made against an insured during an insurance period that is not notified to the insurer until after the insurance period.71 That is because the core of the insurers contractual promise in a claims made and notified policy is cover for a claim first made against the insured during the insurance period. Section 54 operates because it is not an inherent limitation or restriction in the claim that, subject to section 54, allows the insurer to refuse to pay a claim first made against the insured during the insurance period but not notified to the insurer until after the insurance period, but rather the act or omission of the insured in failing to notify the insurer of the claim during the insurance period that has that effect. In FAI Insurance Ltd v Aust Hospital Care Pty Ltd,72 the High Court held that section 54(1) also extends cover to a claim first made against an insured after the insurance period, if the policy contains a deeming provision (see above), and the insured: first becomes aware of circumstances during the insurance period that may subsequently give rise to a claim of that nature against the insured; and despite the benefit offered by the deeming provision, does not notify the insurer of such circumstances during the insurance period. Insurers reacted to this case73 by ceasing their practice of including deeming provisions in claims made and claims made and notified policies, thereby leaving their insureds to rely on sub-section 40(3) of the ICA to protect them against the

71 72

Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652. [2001] HCA 38; 204 CLR 641. 73 FAI lost at trial and in its appeals to the Queensland Court of Appeal and the High Court.

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insurance issues created by the absence of a deeming provision (see above). In CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd74 and Gosford City Council v GIO General Ltd75 , the Queensland Supreme Court and the Court of Appeal of New South Wales respectively concluded that sub-section 54(1) does not extend cover to a claim first made against an insured after the insurance period in the circumstances described above if a claims made or claims made and notified policy does not contain a deeming provision. In other words, although sub-section 54(1) cures an insureds failure to notify circumstances during the insurance period if the policy contains a deeming provision, it does not cure an insureds failure to take advantage of the notification provisions of sub-section 40(3) of the ICA, which provides as follows: Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract. That is because it is the effect of a statutory provision (sub-section 40(3)), not of the contract, that enables the insurer to refuses to pay such a claim.

74 75

[2001] QSC 388; (2001) 11 ANZ Insurance Cases 61-507, [43] - [45] (Chesterman J). [2003] NSWCA 34; (2003) 12 ANZ Insurance Cases 61-566, [37] (Sheller JA).

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NINTH QUESTION: WHAT IS THE SCOPE OF 54(5)(b)? ( Sleeper76) By section 54(5)(b), where it was not reasonably possible for the insured or other person not to do the act the insurer may not refuse to pay the claim by reason only of the act. Lynes v HIH Casualty and General Insurance Ltd77 concerned a bloodstock mortality insurance policy taken out by Lynes and others over their newly acquired horse Dujuma78. The policy contained an exclusion: ... for loss arising directly or indirectly from 7. the administration of any medication (except vitamins) unless by a Veterinarian or experienced personnel directed by him/her. Within a week or so of the commencement of the policy, Dujumas trainer injected the horse with the antibacterial agent Tridene in an effort to treat a troubled foot that had appeared a few days earlier. Dujuma had an anaphylactic reaction to the Tridene and shortly afterwards convulsed and fell down to the ground dead. The owners claimed on the policy. HIH denied liability to indemnify, amongst other things, in reliance on exclusion 7, on the basis that the trainer was not a veterinarian or under the direction of a veterinarian when he administered the injection. Nisbet DCJ held that section 54(5)(b) did not assist the owners because the relevant act was that of administering the injection and it was reasonably possible for the trainer not to have done that, in that he could easily have waited and called Dr Johnson [a veterinarian who had assessed Dujuma a few days earlier] without placing the horse in any immediate danger to its life or mobility. Assume a motor vehicle policy that excludes cover whilst an insured vehicle is unroadworthy, and assume the vehicle is involved in an accident because it has defective brakes. It is arguable the section would prevent the insurer from refusing

76 77

1975: Woody Allen, composer (music score), director, screenwriter. [1999] WADC 68. 78 Who knows how the owners came up with the name Dujuma. It almost certainly was not a reference to the Somalian refugee camp of that name, which as you may know is about 200 miles from the coastal capital Mogadishu!

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to pay the claim if immediately before the accident the vehicles owner did not know or suspect, and it was not reasonably possible for the owner to know or suspect, that the brakes were defective. The relevant act is driving the vehicle in an unroadworthy condition. As the owner did not know or suspect that the vehicle had defective brakes, it was not reasonably possible for him not to drive the vehicle with defective brakes, or so the argument goes.79

79

ALRC Report No. 20, Insurance Contracts, Chapter 8, [230].

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TENTH QUESTION: WHAT OF SECTION 40? ( Sweet and Lowdown80) Section 40, why do we have it? Section 40 (Certain contracts of liability insurance) is in the following terms: "(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. (2) The insurer shall, before the contract is entered into: (a) clearly inform the insured in writing of the effect of subsection (3); and (b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover. Penalty: 300 penalty units. (3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract." The explanatory memorandum that accompanied the Insurance Contracts Bill in its passage through Parliament explained what section 4081 was designed to achieve: 126 Present Law - Insurance may be taken out against various forms of legal liability which the insured may incur to third parties eg professional indemnity

80 81

2000: Woody Allen, director and screenwriter. It is in substantially the same terms as clause 41 of the proposed Insurance Contracts Bill appended to the ALRC Report No. 20, Insurance Contracts.

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insurance, public liability insurance in respect of liabilities in connection with particular buildings and employer's liability insurance. The contract is one of indemnity and no obligation arises on the part of the insurer until the insured has suffered a loss. Professional indemnity policies often contain a clause covering claims made after the period of the insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Some contracts of liability insurance apply to claims made during the period of cover rather than to events which occurred during that period. Thus an insurer may be entitled to refuse a claim made after the expiration of the cover even though it was made in respect of an event occurring within the period and the facts were notified to the insurer. 127 Proposed Law - Clause 40 applies to contracts which exclude or limit an insurer's liability because notice of the insured's claim is not given before the expiration of the period of the cover (clause 40(1)). Provided the insured gave the insurer written notice as soon as reasonably practicable of the facts giving rise to the claim and did so before the cover expired, the insurer will not be relieved of liability merely because the claim is made after the expiration of the cover (clause 40(3)) (ALRC para 265). ALRC Report No. 20, Insurance Contracts (Chapter 9 Cancellation and Renewal of Cover), paragraph 265 (Right to Refuse) relevantly says: " Professional indemnity policies often contain a clause covering claims made after the period of insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Extensions are also available to cover claims made within the period of cover in respect of occurrences before the commencement of that period, unless covered by a preceding insurance. Consequently, the Commission suggested that insurers should be required to include in their policies a clause covering claims made outside the period of cover provided they arose out of occurrences notified within the period of cover. Some restriction on variety is justified by the severe complexity of this area of insurance An insurer should be required to provide cover in respect of a claim made after the expiration of the contract provided it was notified as soon as reasonably practicable, and before the contract expired, of facts that might give rise to a claim."

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Extending cover to claims first made against an insured after the insurance period by notifying circumstances during the insurance period claims made and notified policies By sub-section 40(3), a claims made and notified policy covers claims first made against an insured after the insurance period if the insured gives sufficient notice to the insurer during the insurance period of facts which the insured first became aware of during the insurance period that might give rise to a claim of that nature. As mentioned in the discussion under the Eighth question, in the absence of a deeming provision and subject to the operation of sub-section 40(3) of the ICA, the insured would not be covered by its current policy for a claim first made against it after the insurance period of its current policy, even if circumstances relating to the subsequent claim were notified to the insurer during the insurance period (pursuant to a contractual obligation to do so or otherwise). Nor would it be covered by a subsequent policy for a claim first made against it during the insurance period of the subsequent policy that related to such circumstances, amongst other things, because of the Known circumstances exclusion. This is not an issue if the subsequent policy contains a Continuity clause, because that clause will override non-disclosure issues and negate a Known circumstances exclusion in relation to circumstances the insured first becomes aware of after the Continuity date and before the inception of the relevant policy. claims made policies Section 40 does not apply to a claims made policy if section 40(1) is read literally. That is because it is not an effect of such a policy that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. That is because unlike a claims made and notified policy, the cover does not depend on the insurer being notified of the claim during the insurance period. However, in Newcastle City Council v GIO General Ltd82, the High Court

82

[1997] HCA 53; (1997) 191 CLR 85.

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held that section 40 should be read as applying to claims made policies because that was clearly the intention of the legislature. What facts must be notified in order to capture a claim made after the insurance period? An insureds written notice of facts to an insurer will be interpreted objectively on the basis of the words used, having regard to the factual context in which it was served83 for the purpose of determining whether it satisfies the requirements of sub-section 40(3). Amongst other things, the sub-section requires that the insured first became aware of the facts during the insurance period84 and that: a) the insured is aware of those facts when the notice is given; b) when the notice is given, the insured is aware of the possibility of a claim against itself in connection with those facts, regardless of whether it thinks that such a claim would have any merit;85 c) the notice explain why the insured thinks a claim might be made against it in connection with those facts. This would usually involve identifying a possible basis for such a claim or referring to the relevant actions of the party that might make the claim. Otherwise an insured could give the most general notice of facts and thereby capture every subsequent claim,86 and a reasonable insurer would have no idea as to what was being notified or why;87 d) a reasonable insurer receiving the notice would appreciate that the insured is giving the notice for the purpose of triggering coverage under the policy if a claim is subsequently made against the insured after the insurance period in connection with those facts.88 A notice given pursuant to sub-section 40(3) will capture a subsequent claim if the claim is

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Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC), [99(h)] (Akenhead J). FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89, 93 (Gleeson CJ), 96 (Kirby P). 85 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [1999] QCA 243; (1999) 10 ANZ Insurance Cases 61445, [10] [12] (Derrington J). 86 Simply stating in a notice to an insurer I hereby give notice that my practice of the law might give rise to a claim against me or identifying in a notice a matter handled by the insured, is not sufficient to trigger the protection provided by sub-section 40(3). 87 Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-315; HLB Kidsons v Lloyds Underwriters [2007] EWHC 1951 (Comm). 88 Antico v CE Heath Casualty and General Insurance Ltd (1996) 38 NSWLR 681, 712 (Powell JA), 699 and 702-3 (Kirby P suggesting a lesser threshold); HLB Kidsons v Lloyds Underwriters [2007] EWHC 1951 (Comm), [74] (Gloster J).

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sufficiently causally related to the [notified facts] that it can be fairly said to have arisen out of [them].89 The link between the two must be causal; coincidental is not enough.90 An insured can give notice of a hornets nest or can of worms type of circumstance.91 For example, an insured can give notification in respect of the particular project to the effect that it has come to the insureds attention that a named individuals possible incompetence on other projects might well have been repeated on the particular project in question. 92 HLB Kidsons (a firm) and Lloyds Underwriters subscribing to Lloyds policy No 621/PK1D0010193 concerned a company, Solutions at Fiscal Innovation Ltd, which was owned and managed by HLB Kidsons, a firm of chartered accountants. claiming that they had been wrongly advised to enter into a scheme. HLB Kidsons insurance covered them for claims first brought against them during the insurance period. It also covered them for claims first brought against them after the insurance period in the circumstances described in General Condition 4, a deeming provision in the following terms: The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof. In their letter to insurers dated 31 August 2001 (described in the Court of Appeal as a part of the Second Presentation), HLB Kidsons said the Inland Revenue, if minded, could be critical of some procedures followed in certain cases. The letter accompanied a bordereau that said across from the heading NATURE OF CLAIM, possible tax errors in Solutions marketed tax avoidance schemes. Some of Solutions clients made claims against them,

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HLB Kidsons v Lloyds Underwriters [2007] EWHC 1951 (Comm), [78] (Gloster J). Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC), [99(f)] (Akenhead J). 91 Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC), [99(c)] (Akenhead J). 92 Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC), [99(a)] (Akenhead J). 93 [2008] EWCA Civ 1206.

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fiscal engineering work. The trial judge held that this was insufficient notification for the purpose of the policies because it was far too vague and nebulous. The Appeal Court disagreed, concluding (at [92], Rix LJ) that it was sufficient notice that the implementation of certain of Solutions at FIs products might be criticised, and thus might give rise to possible claims or losses.

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CONCLUSION To paraphrase the quotation from Lord Dennings judgment in Roles v Nathan that heads this paper: The ICA has been very beneficial. It has almost rid us of those two unpleasant contractual terms, the warranty and the condition precedent, that haunted insureds for hundreds of years, and it has replaced them by the attractive section 54, which has so far given us no trouble that we couldnt handle.