High Court Clarifies section 54

General Insurance

Although 30 years old this year, section 54 of the Insurance Contracts Act 1984 still requires its application to be determined by the High Court.

In Maxwell v Highway Hauliers Ltd [2014] HCA 33 the High Court has resolved the apparent tension between 2 different Court of Appeal decisions in Maxwell and Johnson v Triple C Furniture & Electrical [2010] QCA 282 (Johnson) and Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 (Maxwell).

In Maxwell the insurers sought to exclude the loss arising from 2 separate truck crashes because the 2 drivers failed to obtain a required PAQS test score (a psychological test about safety) so that cover was excluded by way of an endorsement, notwithstanding that such failure was accepted as not being causative of the accidents.  The WA Court of Appeal held that s54 applied to the insured’s omission so that the insurers were precluded from denying cover on that basis.  This was potentially in conflict with an earlier Queensland Court of Appeal decision in Johnson which held that section 54 did not apply to an insured’s failure to undertake a mandatory flight review (an independent assessment of the pilot’s skill and knowledge) where the plane subsequently crashed because of pilot error, so that the insurer was able to deny cover on the basis that that requirement had not been satisfied.

In Maxwell the High Court held that s54 applied to the insureds’ failure to obtain the requisite PAQS scores and that the decision in Johnson was wrongly decided, rather than able to be distinguished as some commentators have said.  In so finding, the High Court emphasised that s54 applies to form over substance, so it does not matter whether a policy requirement is termed a condition, warranty or exclusion – all that mattered was that an insurer was seeking to deny or limit cover because of an insured’s act or omission occurring after the policy incepted.

It is important to note that the decision would have been different if the insured’s omission was causative of the loss, as s54(2) would still allow an insurer to deny cover for such loss.  The decision means that insurers will not be able to rely automatically on a policy requirement that involves an act or omission on the part of an insured occurring after policy inception.  In Maxwell that was obtaining the PAQS scores, however it could extend to other requirements such as dual signatories on valuations or approved product lists of financial products, if the requisite temporal requirements were satisfied and the omissions were not causative of the loss.

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If you have any questions in relation to this note, please feel free to contact Patrick Boardman.