Abstract

Section 54 of ICA - Limits

Article

Section 54 of ICA - Limits

Not long after the enactment of the Insurance Contracts Act 1984 (Cth), it was recognised that s 54 could not literally apply so as to render a policy liable to cover a loss irrespective of its terms, which might clearly indicate that the cover should have no application to the claim.  Yet literally the section said that the inurer could not rely on such limiting terms which rely on an act or omission of the insured or some other person.

 

As a prefacing remark, it should be noted that it provides protection to the insurer if the act or omission could reasonably be regarded as being capable of causing or contributing to the covered loss, or if it causes prejudice to the insurer.

 

The difficulty is a reconciliation of the proper nature of the scope of cover and qualifications on it by exclusions or conditions. To  apply that distinction for the engagement of the section would place this protection for the insured in the hands of the drafter of the policy: Watkins Synd 0457 at Lloyds v Pantaenius Aust [2016] FCAFC 150, but conversely, the section cannot apply to all refusals of a claim when  some act is involved: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd 204 CLR 641. The plurality describe that event to which the section does not apply as “the event insured against” and as “an event of the type contemplated by the contract” and note that it will vary according to “the type of insurance in issue”

 

The elements with which the section deals are the effect of the contract of insurance between the parties, the claim which the insured has made,  and the reason for the insurer’s refusal to pay it. The effect of the contract of insurance is as a matter of construction, unconstrained by distinctions between provisions which define the scope of cover and conditions or exclusions which affect the insured’s entitlement.

 

The section is concerned with the effect of the contract as a matter of substance. It directs attention to the effect of the contract on the claim which the insured has in fact made. For example, if he claims indemnity against a claim first made on him outside the period of cover, his claim necessarily has a temporal dimension. If he is covered only if the claim on him was made within the period of cover, his claim on the insurer must identify when the claim was made on him, and his claim could not properly be described without that temporal element. The same reasoning applies when a claim is made for indemnity under an occurrence policy when the occurrence did not take place in the policy period.  These are clear examples.

 

Another clear example with the opposite result is the insurance of an aeroplane, with an exclusion if it is operated otherwise than in accordance with regulations.  Clearly, the substance of the cover is harm to the plane, and the exclusion is an incidental qualification which does not affect the basic scope of the cover. The decision to the contrary in Johnson v Triple C Furniture & Electrical Pty Ltd [2012] 2 Qd R 337 has been refuted by the High Court in Maxwell v Highway Hauliers Pty Ltd 252 CLR 590, where insurance on a vehicle was seen as the substantive cover and a condition as to the driver’s licensing was an incidental feature which came within the influence of the section. In Watkins Synd 0457 at Lloyds v Pantaenius Aust [2016] FCAFC 150, the property insurance of a boat was the essential nature of the cover, and conditions relating to its u and geographical location were subject to the section.

 

The observation that the section does not operate to relieve the insured of restrictions or limitations that are inherent in the claim is not a reference to restrictions or limitations on the scope of the cover that is provided under the contract. A restriction or limitation that is inherent in the claim which an insured has in fact made is a restriction or limitation which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made. Thus, the making of a claim under a "claims made and notified" contract necessarily acknowledges that the indemnity sought can only be in relation to a demand made on the insured by a third party during the period of cover . The section does not operate to permit indemnity to be sought in relation to a demand which the third party omitted to make on the insured during the period of cover but made after that period expired. Similarly, the making of a claim under a "discovery" contract necessarily acknowledges that the indemnity sought can be only in relation to an occurrence of which the insured became aware during the period of cover.

 

It is unnecessary to comb through the history of the authorities which dealt with the issue, since it was authoratively dealt with by the High Court in Australian Hospital Care Pty Ltd and Maxwell v Highway Hauliers Pty Ltd.

 

In Australian Hospital Care it was noted that the actual claim made by the insured is one of the premises from which consideration of the application of the section must proceed, and that it does not operate to relieve the insured of restrictions or limitations that are “inherent” in that claim. These vary according to the type of insurance in issue. Reference was made to an insured’s claim under an occurrence policy or a claims made and notified policy, which would necessarily acknowledge that indemnity is sought in relation to a demand not of a type covered by the policy because it would not be within the temporal limits that identify those demands in relation to which indemnity must be given.

 

The remaining difficulty lay in defining precisely what was referred to by the plurality in Australian Hospital Care as “inherent restrictions or limitations” in that claim, and described as “the event insured against” and as “an event of the type contemplated by the contract”. The restrictions or limitations associated with a claims made or an occurrence policy are easy to understand and apply, but it is still necessary to find some instruction by which their quality of inherence might be identified. In a claims made and notified policy, it is required that both the claim on the insured and the notification of the claim to the insurer take plac within the policy period, a temporal feature in each case. And the prompt notification to the insurer may have a significant benefit to the insurer.

 

In Australian Hospital Care, there was a difference of opinion as to whether an omission to give notice of a potential claim which would have been covered had notice been given involved an inherent limitation on the cover which would have excluded s 54. The plurality considered that the effect of the contract was to indemnify against any claim, or occurrence likely to give rise to a claim, of which the insured became aware during the policy period, and irrespective of whether that occurrence was notified during that period, and that therefore the section had application.

It is then necessary to understand the mark that makes the making of the claim in the policy period an inherent limitation while the reporting of it during that period is not. By what criteria is one “the event insured against” and and “an event of the type contemplated by the contract” and the other not?

 

It is not explained in Australian Hospital Care or Maxwell v Highway Hauliers. The point is addressed in Watkins Synd 0457 at Lloyds v Pantaenius Aust [2016] FCAFC 150, which draws on the explanation of Meagher JA in Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252. In Pantaenius, the resolution is stated as follows:

40. The process of understanding what are the restrictions or limitations that are inherent in the claim is one that involves the construction of the policy, not merely as to what its constituent words mean, but in a broad sense so as to characterise as a matter of substance what is the essential character of the policy. Once that essential character is decided upon, the restrictions or limitations that necessarily inhere in any claim under such a policy (to which s 54 does not apply) and the restrictions or limitations that do not necessarily inhere in any claim under such a policy (to which s 54 may apply) can be ascertained.

And later:

Thus the essential character of the claims made and notified policy include(s) the making of a claim on the insured within the policy period. So, the making of the claim against the insured within the period (i)s a limitation or restriction that necessarily inher(s) in a claim under such a policy; but the notification of the claim by the insured to the insurer within the period (i)s not part of the essential character of the policy and so (i)s not a restriction or limitation that necessarily inher(s) in a claim under such a policy. In an occurrence based policy, the occurrence of the impugned event within the policy period (i)s part of the essential character of the policy and so (i)s a restriction or limitation that inher(s) in any claim under such a policy.

The focus is on substance in determining the essential character of the cover – a claims made or occurrence cover, property cover of an aeroplane, a truck or a boat against physical harm.  This is the basic character of the policy, and conditions and exclusions which affect the cover are incidental to that essential character.

The court then addressed the problem arising from the parties’ freedom to agree on the terms of their contract, and in particular on framing the cover of the insurance contract so that it would have a limited scope to which the section would not be intended to apply.  Such a very limited cover might be matched by a very limited premium. The court said: The process of characterisation or construction in the broad sense will, to a significant degree, be influenced by the expression of the parties of the terms of the insurance. Thus, if the underwriter … wished to propound and price a policy that provided only for [specific cover which was limited] in character that could be expressed with some essential clarity. Perhaps assuming that such a wish conformed with a recognisable body of risk, practically or conceptually distinct from coverage that included [a wider activity], such clarity of expression may suffice to impose a restriction inherent in a claim under such a policy that the [activity be limited]. …The process of characterisation and the judgment as to what is the essential character of the policy in a given case will be influenced, but not dictated, by the drafting of the wording of the policy, and will involve the identification of the nature and limits of the risks that are intended to be accepted, paid for, and covered. Thus the essential character of the claims made and notified policy … included the making of a claim on the insured within the policy period. So, the making of the claim against the insured within the period was a limitation or restriction that necessarily inhered in a claim under such a policy; but the notification of the claim by the insured to the insurer within the period was not part of the essential character of the policy and so was not a restriction or limitation that necessarily inhered in a claim under such a policy. In an occurrence based policy, the occurrence of the impugned event within the policy period was part of the essential character of the policy and so was a restriction or limitation that inhered in any claim under such a policy.

It is in the application of this reasoning that difficulty is encoountered, that is, in the identification of the feature(s) which represent the essential features of the cover. In that case, it was identified as cover of matters relating to the insured boat within a specified geographical limit. A temporal or suspensory limitation relating to its use outside the geographical limit was a qualification upon the essential cover, and collateral to the policy’s essential character. The geographic limits delineated the essential risk: the temporal or suspensory limitation qualified the cover in certain circumstances. Under such cover, a claim necessarily incorporated a physical dimension that was part of the essential character of the policy – that the boat was within the specified geographical area. That was the restriction or limitation that must inhere in the claim.

It was noted that neither the words of the policy nor any objective evidence directed analysis of the essential character of the policy or of the risks to a more subtle essential character. This impliedly recognised the possibility that the parties could have agreed on further limitations which would be included in the essential character, provided that it was clearly expressed to be so.

This very helpful elaboration of the issue shows how to deteermine whether the relevant feature is an inherent limitation on the cover: it is necessary to consider whether the claim concerns, in substance, a feature going to the broad essential character of the cover, subject to the parties’ right to agree as to what that essential character should be.

This would suggest that for example, a limitation of the cover the essential nature of which is made sufficiently clear would exclude the section’s application to a limitation of cover of a Motor Vehicle policy to occasions when the insured is personally driving, or to a limitation which excludes cover if the driver of the vehicle is below a stipulated age. The difficulty with this is that, as it has been mentioned above, the section provides just protection of the insurer in respect of  its overriding of such a limitation. That may be a good reason why it should not be found to be capable as going to the essential character of the cover.