BETWEEN : MATTHEW MAXWELL in capacity as the authorised, nominated representative on behalf of various LLOYDS underwriters

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : HIGHWAY HAULIERS PTY LTD -v- MATTHEW MAXWELL (The authorised, nominated representative on behalf of various Lloyds underwriters) [2012] WASC 53

Insurance - Section 54 of the Insurance Contracts Act 1984 (Cth) - Insurance contract covering accidental damage to insured's trucks and trailers - Claims to be indemnified for damage to vehicles being driven by drivers who had not satisfactorily completed driver test as required by insurance contract - Failure to complete driver test did not cause or contribute to losses subject of claims - Whether insurers obliged to indemnify the insured by reason of s 54(1) of the Insurance Contracts Act

Damages - Consequential losses flowing from failure to make timely payment of indemnified amount - Whether obligation to indemnify insured arises under insurance contract or s 54(1) of the Insurance Contracts Act - Whether loss of profits caused by insured's impecuniosity too remote in the context of an insurance contract for property damage cover.

Insurance Contracts Act 1984 (Cth), s 54

Alexander v Ajax Insurance Co Ltd [1956] VicLawRp 70; [1956] VLR 436

Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652

Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485

Brescia v QBE [2007] NSWSC 598

Bull v Attorney-General (NSW) [1913] HCA 60; (1913) 17 CLR 370

CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 197; (2007) 69 NSWLR 680

CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232

CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384

East End Real Estate Pty Ltd v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400

F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139

FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641

Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd [1993] HCA 5; (1993) 176 CLR 332

Greentree v FAI General Insurance Co Ltd [1998] NSWSC 544; (1998) 44 NSWLR 706

Hadley v Baxendale (1854) 9 Exch 341; (1854) 156 ER 145

Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; (2010) 243 FLR 336

Khoury v Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622

Liesbosch Dredger v SS Edison [1933] UKHL 2; [1933] AC 449

Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZ Ins Cas 61-420

Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd [1998] NSWSC 1011; (1998) 44 NSWLR 186

Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd's Rep IR 111

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office [1998] NTSC 73; (1998) 148 FLR 441

Williams v The Minister Aboriginal Land Rights Act 1983 and the State of New South Wales [2000] NSWCA 255; (2000) Aust Torts Reps 81-578

1 McLURE P: The primary issue in this appeal is the proper construction of s 54 of the Insurance Contracts Act 1984 (Cth) (the Act).

2 On 26 March 2012 Corboy J entered judgment against the appellant as representative of various Lloyd's Underwriters (the Insurers) in favour of Highway Hauliers Pty Ltd (the Insured) in an amount of $571,710.03 for breach of an insurance contract made on 27 May 2004 (the Insurance Contract) for the period 29 April 2004 to 30 April 2005 (the period of insurance).

3 The Insured carried on a trucking business. It operated a fleet of trucks and trailers to transport freight to and from the Eastern States (the east-west run). The Insurance Contract covered, inter alia, accidental damage to the Insured's trucks and trailers nominated in the schedule of cover forming part of the Insurance Contract (the Vehicles). Two such trucks and trailers were damaged in separate accidents (in June 2004 and April 2005 respectively) during the period of insurance. The Insured made two claims under the Insurance Contract for the cost of repairing or replacing the damaged vehicles. The Insurers rejected the claims on the grounds that the drivers of the trucks involved in the accidents:

(a) had not complied with an endorsement in the Insurance Contract providing for drivers of particular types of vehicles used for east-west runs to have achieved a minimum score on a driver test known as the 'PAQS test' (the PAQS endorsement); and

(b) were 'non-declared' (that is, non-approved) drivers for the purpose of an exclusion in the Insurance Contract.

4 The drivers of the damaged vehicles were non-declared drivers and had not undertaken the PAQS test. However, the evidence established that those matters did not, as a matter of fact, cause or contribute to the losses the subject of the claims.

5 The Insured sued the Insurers for indemnity against the repair costs for the trucks and trailers involved in the accidents. It also claimed damages for breach of the Insurance Contract arising from the Insurers' refusal to indemnify. The damages claimed were for loss of profits caused by not being able to use the damaged trucks and trailers on the east-west run.

(a) the Insurers were obliged to indemnify the Insured for the cost of repairing the damage to the trucks and trailers by reason of s 54(1) of the Act;

(b) by denying indemnity to the Insured, the Insurers had breached the Insurance Contract and were liable for consequential loss of profits.

7 The trial judge assessed the profit lost by the Insured at $145,000.

8 The Insurers claim in the appeal that the trial judge erred in law in holding that: (1) by reason of s 54 of the Act, the Insurers were obliged to indemnify the Insured for the damage to the trucks and trailers (ground 1); (2) the Insurers breached the Insurance Contract by denying indemnity to the Insured and that the Insurers were liable for consequential loss of profits by reason of that breach (ground 2).

Section 54 of the Act

9 Section 54 of the Act relevantly provides:

(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 insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's 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.

...

(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.

10 Relevantly, the scheme of the section is as follows. Section 54(1) has no application if the relevant act or omission is one to which s 54(2) applies. Section 54(2) is not concerned with causation in fact but with the capacity of the act to cause or contribute to the loss. That assessment can be made at the time of entry into an insurance contract. However, s 54(2) is subject to s 54(3) and s 54(4). That is, s 54(2) does not apply in whole or in part if the insured proves that:

(i) no part of the loss that gave rise to the claim was caused by the act, in which event the insurer may not refuse to pay the claim by reason only of the act: ss (3);

(ii) some part of the loss that gave rise to the claim was not caused by the act, in which event 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: ss (4).

11 The Insurers accepted at trial that the fact that the drivers involved in the accidents were non-declared drivers and had not undertaken a PAQS test (and therefore not attained a driver profile score of 36) could not reasonably be regarded as being capable of causing or contributing to any losses incurred by the Insured as a result of the accidents and that the Insurers were not prejudiced by either of those matters [59]. That is, the Insurers did not rely on s 54(2) to avoid the operation of s 54(1).

12 In view of the evidence in relation to factual causation, the Insurers' concession as to the non-applicability of s 54(2) may have been to its benefit. However, the trial and the appeal were conducted on the basis that s 54(2) did not apply.

13 The Insurers maintained that s 54(1) had no application because the cover provided by the Insurance Contract did not extend to damage suffered by the Insured while its trucks were driven on the east-west run by drivers who had not attained a driver profile score of 36 in a PAQS test.

14 The Insurers do not rely on the fact that the drivers were 'non-declared' in support of their claim that s 54(1) of the Act does not apply.

15 The Insurance Contract includes (1) a Schedule of Cover (the Policy Schedule); (2) the nominated policy of the Insurers' agent, SRS Underwriting Agency (the Policy); and (3) the insurance proposal for cover completed by the Insured's broker (the Insurance Proposal).

After You have paid or agreed to pay the premium, including endorsement premiums, We will insure You against loss, damage or liability as described herein, occurring within the Commonwealth of Australia, during the Period of Insurance subject to the terms and conditions of the policy and Your being truthful in all Your statements.

The Policy, together with the Insurance Proposal, Driver Declaration, and any other statement or Endorsement, sets out Our agreement. All form part of this policy of Insurance and are always to be considered together.

17 The expression 'Insurance Proposal' is defined in the Policy to mean '[t]he form of that title, completed by You, in application for Insurance, which We use to determine whether to provide You with a policy, and if so, its terms'.

18 The expression 'Driver Declaration' is defined in the Policy to mean '[t]he form of that title, completed by each and every driver of Your Vehicle, which We use to determine whether the driver is an approved driver for the purposes of this insurance cover'.

19 'Policy Schedule' is relevantly defined in the Policy to mean '[t]he most current Policy Schedule ... issued to You by Us. It sets out Your policy number, the covers which apply and any special conditions and limits which will apply to each of them'.

20 The Policy Schedule describes the 'Covering' as 'All vehicles owned, leased or acquired by the Insured or for which the Insured is responsible. Refer to schedule attached'.

21 The Policy Schedule describes the cover under the Insurance Contract as 'material damage cover' and 'third party liability cover' which includes third party property damage cover and third party bodily injury supplementary cover.

• Incurs Accidental Damage (defined as a happening or event, not otherwise excluded, which is unexpected and unintended), or damage caused by fire, hail, flood, storm or earthquake;
• Is lost by theft and not found; or
• Incurs malicious damage;

• Pay the reasonable cost of repairing or replacing Your Vehicle;
• Repair or replace Your Vehicle; or
• Pay the lesser of the Sum Insured or Market Value of Your Vehicle, less any applicable Excess.

23 Clause 2 of the Policy extends cover to third party liability for property damage and personal injury arising out of the use of the Insured's Vehicles.

24 All cover under the Insurance Contract is occurrence/event based, not claims made, within the period of insurance.

25 It is a condition of the Insurance Contract that in the event of a claim the Insured must without delay lodge a claim form (clause 4). That was done in relation to each accident.

26 Clause 3 of the Policy contains exclusions. It provides that '[the Insurers] will not pay' if, inter alia, the loss or damage is caused while the Insured's Vehicle is being driven by a person who is under the influence of drugs or alcohol or is unlicensed. The exclusion relating to non-declared drivers is in the following terms:

• We have not received, and approved in writing, a Driver Declaration for the driver in control of Your Vehicle at the time of an occurrence.

OR

If We have not received a Driver Declaration for the driver in control of Your Vehicle at the time of an occurrence, unless we subsequently receive the Driver Declaration and determine, by applying Our underwriting guidelines and principles, that we would have provided cover and on the same terms.

If We do this an Excess in the sum of $3,500 in addition to the basic Excess and any other Excess stipulated in the Policy Schedule and policy wording shall apply.

27 Clause 5 relates to endorsements. It relevantly provides:

Your Policy Schedule will list any of the following endorsements which are to apply to Your policy.

If no endorsement codes are listed, then no endorsements apply.

28 Each endorsement is given a code. Endorsement ANZ 3 in the Policy relates to drivers of certain vehicles. It provides:

No indemnity is provided under this policy of Insurance when Your Vehicle/s are being operated by drivers of B Doubles, B Triples or Road Trains as deemed under the Australian National license [sic] category MC (Multi Combination), unless the driver:

• Is at least 28 years of age and has a minimum of 3 years proven continuous recent experience in [the specified vehicles], and,
• Has a PAQS driver profile score of at least 36, or an equivalent program approved by Us and,
• Does not have diabetes ... and,
• Has been approved in writing by Us to drive Your Vehicle.

29 The Policy Schedule identifies the Insured, the 'Vehicles' covered by the Insurance Contract, the sums insured, the excesses and endorsements. At the commencement of the Insurance Contract only Endorsement 8 was listed in the Policy Schedule. That provides for the payment of an excess for drivers under 25 or over 60 or 25 or over who have held a current driver's licence for less than two years.

30 However, the Policy Schedule was amended in July 2004 to include the following endorsement:

It is hereby noted and agreed that Policy endorsed to note the following:

No cover under the Policy when drivers of articulated units are under 30 years of age, or have less than 5 years proven continuous recent experience driving these vehicles.

No cover under the Policy for drivers doing East-West/West-East cartage who do not have a PAQS driver profile score of at least 36.

31 This amendment was made after the first but before the second accident. In the proceedings below, the Insurers sought rectification of the Policy Schedule to include ANZ 3. At the commencement of the trial the Insured accepted that endorsement ANZ 3 formed part of the Insurance Contract from its commencement [58].

32 The Insurance Proposal shows the proposer's business as being 'east/west general freight, line haul operator'. It identifies the commodities hauled, the frequency of haulage and the pick up and delivery points (the former are all in Western Australia and the latter in the Eastern States). In response to a question whether the driver selection procedure included 'PAQS test', the answer is yes. In response to a question as to the Insured's claim history, it is stated:

Since 1993 client has been insured with NTI. Attached is a full listing of claims together with fleet size and number of kilometres travelled for each year.

33 The claims history showed that in the period April 1993 to April 2004 there were 24 claims (seven in the penultimate year and six in the final year) resulting in a total payout of nearly $760,000.

34 The Insured's broker informed the Insurers' agent by letter dated 5 May 2004 that 'PAQS testing for all drivers will be carried out on 28 May 2004 ... with the minimum score being set at 36'.

35 It was common ground that the Insured submitted claims under the Policy for the damage to its vehicles in the accidents in June 2004 and April 2005. It is also common ground that the vehicles in question were within the schedule attached to the Policy Schedule and that the events enlivening the application of the 'material damage' cover in clause 1 of the Policy occurred within the period of insurance.

36 Relevantly, the Insurers refused to pay the claims on the stated ground that at the time of the accidents each vehicle was being driven by a driver that had not been PAQS tested [49], [84].

Matters in issue on the scope and application of s 54

37 The appellant's case at trial and in the appeal is to the following effect. First, if a matter defines the scope of the cover (that is, it is a necessary element or condition thereof) in an insurance contract, it is not within s 54(1) of the Act.

38 Secondly, on the proper construction of the Insurance Contract, the scope of the relevant cover was the operation of road trains on east-west runs by drivers who had satisfactorily completed a PAQS test. That is, satisfactory completion of the PAQS test is a condition of the cover. Non-satisfaction of the PAQS test had the result that the claims were outside the scope of the cover the subject of the Insurance Contract.

39 Thirdly, there was no 'act' as defined in s 54(6). The only relevant conduct was an omission by the drivers of the vehicles involved in the accidents to satisfactorily complete a PAQS test. That conduct was not an omission as defined but a state of affairs. This submission relies on the decision of the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; (2010) 243 FLR 336.

40 The respondent contends that s 54(1) of the Act must be construed in accordance with its text which draws no distinction between the scope of cover and other contractual terms; in any event, satisfactory completion of the PAQS test was not an element of the scope of cover; and Johnson v Triple C is distinguishable on its facts and wrong.

The trial judge's reasons on the scope and application of s 54

41 The trial judge accepted that s 54(1) of the Act did not operate to modify the scope of cover under an insurance contract. He said:

The section is not directed to instances where an insurer was entitled to refuse to pay a claim because it fell entirely outside the cover provided by the contract of insurance. Rather, the section is concerned with a claim that was within the scope of the cover provided by the insurance contract but which the insurer was entitled to refuse to pay, according to the effect of the contract, 'by reason of' some act or omission of the insured [65].

42 The trial judge rejected the Insurers' contention as to the scope of cover under the Insurance Contract. He held:

In my view, the scope of the ... Policy was defined by reference to [the Insured's] vehicles (the vehicles identified in the schedule to the policy documents), the benefits conferred by the policy in sections 1 to 3 of the policy and the period of insurance. The scope of the policy was not defined by reference to the attributes of the driver at the time of an occurrence. Again, not every occurrence for which cover was provided would involve a driver. As has been emphasised, the substance of the policy was the provision of cover for vehicle damage or loss and third party liability arising out of the use of an insured vehicle. The PAQS endorsement conditioned the Insurers' obligation to meet a particular claim that otherwise fell within the scope of cover; it did not form part of the way in which the scope of the policy was defined [101].

43 The trial judge also held that the relevant 'act' for the purpose of s 54(1) was the act of the Insured in operating the vehicle on the particular east-west run in which each accident occurred with a driver who did not satisfy the requirements of the Policy [86].

44 He rejected the appellant's contention that he was bound by the decision in Johnson v Triple C on the basis that it decided a question of fact, not any principle of construction of s 54 [88].

Legislative history of s 54

45 As the Explanatory Memorandum for the Insurance Contract Bill 1984 (the Bill) explains, cl 54 (which became s 54 of the Act) was based on the Australian Law Reform Commission Report on Insurance Contracts (No 20) (the Law Reform Report).

46 The Explanatory Memorandum describes the law as it was prior to the passage of the Act. It relevantly states:

Any of the following types of terms may be presently used by insurers to protect themselves against an increase in risk during the period of cover and to ensure that their interests are protected once a loss occurs:

(1) 'continuing' or 'promissory' warranties whereby the insured warrants that a certain state of affairs will continue to exist or that certain matters or events will or will not exist or occur during the currency of the contract ... ;

(2) terms framed as obligations to be performed by the insured ... ; and

(3) 'temporal exclusions' whereby cover is suspended during the existence of specified facts or circumstances which increase the risk eg in a motor vehicle policy, liability may be excluded if the driver is under the influence of intoxicating liquor; and

(4) conditions whereby an insured is required to give details of claims or to commence proceedings within a certain time [177].

47 The rationale of cl 54 of the Bill is described in the Explanatory Memorandum as follows:

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 (ALRC paras 228 - 230 and 241 - 242) [182].

48 Paragraph 229 of the Law Reform Report is of particular relevance. It states:

The Commission has already pointed out that its present recommendations should extend not only to strict warranties and other terms imposing obligations on the insured, but also to exclusions from cover of certain risks. Were they not to extend to temporal exclusions, legislation based on the present recommendations might be avoided simply by rephrasing an obligation ('the insured warrants that the car will be kept in a roadworthy condition') as a temporal exclusion ('the insurer will not be liable while the car is in an unroadworthy condition'). That legislation might also be avoided if obligations and exclusions were omitted and the cover itself stated in such a way as to achieve the same end ('cover is granted in respect of the roadworthy car'). Once again, the form in which the insurer seeks to protect itself from an increase in risk should not be allowed to affect the extent of that protection.

49 I propose to confine consideration to the decisions of the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, and Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd [1993] HCA 5; (1993) 176 CLR 332 and to the decision of the Queensland Court of Appeal in Johnson v Triple C.

50 FAI concerned a professional indemnity insurance policy which provided that the insurer would indemnify the insured for claims made during a specified period of cover. It was a condition of the Policy that if during that period the insured should become aware of any occurrence which might subsequently give rise to a claim in negligence, it should give written notice of the occurrence to the insurer; and any such claim which might subsequently be made against the insurer arising out of such negligence would be deemed to have been made during the period of cover. The insured breached the notification provision, it being aware during the period of insurance of a possible third party claim. The third party made a claim against the insured after the expiration of the period of cover. The insured then made a claim for indemnity.

51 The High Court (McHugh, Gummow, Kirby & Hayne JJ, Gleeson CJ dissenting) held that the insurer could not refuse to pay the claim for indemnity on the ground that it was made after the expiration of the period of cover because the insured's failure to give immediate notice of an occurrence which might subsequently give rise to a claim against the insured was an omission within the meaning of s 54(1).

52 The plurality (McHugh, Gummow & Hayne JJ) confirmed that s 54 does not depend upon matters of form [32]. They also rejected the submission that s 54 is limited to some condition of, or exclusion in, the contract of insurance. They said:

The first basis proffered for this construction was that the words 'refuse to pay a claim' inferred that there was prima facie a liability, but that the liability was to be avoided 'by reason of some act [or omission] of the insured or of some other person'. This was said to occur only if a loss was within the cover provided by the policy but a condition or exclusion operated to allow the insurer to refuse to pay the claim. We do not accept that the words 'refuse to pay a claim' lead to the suggested inference. Moreover, the distinction between 'cover' on the one hand, and 'condition or exclusion' on the other, is a distinction that depends on the form of the contract and not on its substantive effect. No distinction can be made, for the purposes of s 54, between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim. The substantive effect of the contract can be determined only by examination of the contract as a whole [33]. (emphasis added)

53 The plurality said that s 54 directs attention to the effect of the contract of insurance on the claim which the insured has in fact made and requires the precise identification of the event or circumstance in respect of which the insured claims payment or indemnity from the insurer. They continued:

Section 54 does not permit, let alone require, the reformulation of the claim which the insured has made. It operates to prevent an insurer relying on certain acts or omissions to refuse to pay that particular claim. In other words, the actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed. The section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim.

The restrictions that are inherent within a claim vary according to the type of insurance in issue. Under an 'occurrence' based contract, no claim can be made under the contract unless the event insured against takes place during the period of cover [41] - [42]. (emphasis added)

54 They explained that the restriction inherent in a claims made and notified policy is that the third party demand be made within the period of insurance and said that a demand outside the period was 'not of a type covered by the policy'.

55 Still addressing the case in which there was no claim by a third party on the insured under a claims made and notified policy during the period of cover (as in Greentree v FAI General Insurance Co Ltd [1998] NSWSC 544; (1998) 44 NSWLR 706), the plurality said:

It is apparent that, in the circumstances considered in Greentree, the effect of the contract of insurance was that the insurer might refuse to pay the claim that had been made. This was not, however, by reason of any act or omission of the insured or some other person. The claim made by the insured was for indemnity against liability for a demand that was not a demand of the kind dealt with by the policy because it was not a demand by a third party made within the period of cover. The reason for refusal was not some act or omission of the insured or some other person. It was that the policy did not extend to the demand referred to in the claim for indemnity [44].

56 The contract of insurance in Antico was a claims made policy providing indemnity for legal expenses incurred by the insured as a director. Condition 1 of the policy was to the effect that the insurer would not be liable to indemnify the insured unless he had obtained the insurer's specific consent to the provision of indemnity with respect to the particular claim or proceeding in question. A threshold issue was whether the insured's failure to obtain the consent of the insurer to the incurring of legal fees was an act or omission to which s 54(1) applied. The High Court held that it was an omission within s 54(1). The plurality (Dawson, Toohey, Gaudron & Gummow JJ) held that an omission for the purposes of s 54 includes, but is not limited to, a failure by the insured to exercise a right, a choice or liberty which the insured enjoys under the policy. The point being made is that 'omission' is not confined to the failure to comply with an obligation. The plurality said:

Section 54(1) uses the phrase 'by reason of some act of the insured or of some other person'. It does not specify the act or omission of the insured as being a failure to discharge an obligation owed by the insured to the insurer. The legislation is expressed in broad terms and, on its face, there is no reason why the omission of the insured may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance (669).

57 As noted in Antico, s 54 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent with the actual language employed and to which its words are fairly open (675).

58 In Ferrcom, the appellant was insured under an unregistered mobile machinery policy insuring, among other things, an unregistered mobile crane against 'physical loss or destruction or damage' during a 12-month period. After the policy was issued, the appellant arranged for the crane to be registered so it could be driven on public roads. The registration of the crane was a material variation within cl 1(a) of the policy and the appellant was required to notify the fact of registration to the insurer. It did not do so. During the period of insurance, the crane overturned and was damaged. It was accepted by the parties that the insurer would have been entitled to cancel the policy if it had been notified that the crane had been registered. The High Court held that for the purposes of s 54(1) of the Act, the prejudice to the insurer's interests resulting from the insured's failure to notify it of the registration of the crane included the loss of the opportunity to cancel the policy and that the amount which fairly represented the prejudice in losing the opportunity to go off risk was the equivalent of the liability prima facie imposed on the insurer by s 54(1). That was because the insurer would have cancelled the policy and would only have re-issued it subject to an endorsement that excluded liability for the event that happened.

59 It was common ground that the failure to notify the insurer of registration of the mobile crane could not reasonably be regarded as being capable of causing or contributing to the loss under s 54(2).

60 The plurality noted that s 54 prescribes the effect to be attributed to two classes of 'act': an act that 'could reasonably be regarded as being capable of causing or contributing to the loss' and an act that could not reasonably be so regarded. They continued:

Sub-section (1) relates to acts or omissions occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss; sub-ss (2) - (4) relate to acts or omissions that could reasonably be regarded as being capable of causing or contributing to the loss (339 - 340).

61 The plurality also referred to the definition of 'act' in s 54(6). They said:

It prescribes the effect to be attributed to an 'act', a term which par (a) of sub-s (6) extends to include an 'omission'. Curiously, par (b) which is in form a further extension of the term 'act' includes only acts and omissions of a limited class (339).

62 I would construe s 54(6) as an inclusive definition which is not limited to or by the matters in s 54(6)(b). However, the scope of the statutory definition is not determinative in this case.

63 In Johnson v Triple C the insured company claimed indemnity under an aviation insurance policy arising out of the crash of its aircraft caused by the negligent conduct of the pilot. The insured was a company owned by the pilot and his wife. The pilot was killed and his wife injured. She sued the insured for damages for personal injury and the insured claimed indemnity under the aviation policy which included third party liability cover for bodily injury. The insurer denied liability on the ground that the pilot was prohibited by civil aviation regulations from flying as he had not satisfactorily completed a flight review in the two years preceding the crash.

64 The aviation policy contained an exclusion in the following terms:

... this policy does NOT apply whilst the aircraft, with the knowledge of the insured or the insured's agent ... is ... operated in breach of ... [the Civil Aviation Safety Authority] 'communications' ... issued from time to time.

65 'Communications' were defined to include the civil aviation regulations. The court (Chesterman JA, with whom Holmes JA and White JA agreed) held that s 54 did not prevent the insurer from refusing to pay the claim on a number of grounds. The first ground was that there was no relevant 'act' for the purposes of s 54(1). Chesterman JA identified the relevant conduct as the failure of the pilot to have satisfactorily completed an aeroplane flight review within two years of the flight the subject of the claim [69]. He concluded that the conduct was not an omission for the purposes of s 54 because such an omission had to be 'within the power of the omitter to have done'; satisfactory completion of the review was an assessment to be made by a third party, not the pilot. The appellant described the conduct as 'a state of affairs'.

66 The explanation of the second ground starts in [80]:

From the description essayed in Antico, and endorsed in FAI Insurance, for the purposes of s 54 an act or omission is the performance, or non-performance, of some activity which the contract of insurance requires, allows or contemplates and which may affect its operation. The act or omission is not something which can bring about or alter the circumstances which give rise to a claim for payment or indemnity under a policy of insurance. This understanding of 'act or omission' seems to follow from its designation as something which is not necessarily an obligation contained in the contract of insurance but may be the 'exercise (of) a right, choice or liberty which the insured enjoys under the contract of insurance'. The acts or omissions by reason of which the insurer may refuse to pay a claim are not acts or omissions which change the facts on which a claim is based [80].

67 It is difficult to identify the gravamen of this ground from this passage although it leads to the conclusion ([82] - [85]) that the omission of the pilot was not something that the insurance contract provided for, and (as in Greentree) was relied on to give rise to a claim which the insured could not otherwise make.

68 The Insurers suggest the answer is to be found in the statement that the act/omission must be in relation to an 'activity which the contract of insurance requires, allows or contemplates'. I take the submission to be that flying in breach of the regulations was not required, allowed or contemplated by the contract. I will deal with this submission in the course of dealing with the challenges to the trial judge's findings relating to the relevant statutory 'act'.

69 Thirdly, Chesterman JA said that if he was wrong in his conclusion that there was no act or omission for the purposes of s 54(1), he would conclude that the omission could reasonably be regarded as being capable of causing or contributing to the loss so as to bring the case within s 54(2) and outside s 54(1). The High Court refused special leave to appeal from this decision.

70 Of central importance is an understanding of the judgment of the plurality in FAI, in particular, what is comprehended in the notions of 'restrictions or limitations inherent in the claim' and events or claims of a 'type' or 'kind' covered by the policy and how that is to be reconciled with the analysis of the plurality in [33].

71 My understanding of the effect of FAI is as follows. First, the term 'claim' in s 54(1) is the actual claim made by the insured which must be based on the facts as they occurred. That is, s 54 does not operate to alter the factual circumstances of the claim. It operates to alter the contractual consequences of a s 54 'act'. Secondly, the claim must be a claim under the contract of insurance. Thirdly, there are restrictions or limitations that are inherent in a particular claim and those restrictions or limitations are sourced in, and vary according to, the type or kind of insurance in issue. Fourthly, the correct focus is on the actual claim and its inherent restrictions or limitations by reference to the type or kind of policy, not the scope of the cover. Finally, if the actual claim is outside the inherent restrictions or limitations, it will not be a claim under the insurance contract and any refusal by the insurer to pay the claim will not satisfy the causal requirements in s 54(1).

72 It is important to recognise that s 54(1) has no application to provisions of an insurance contract that are fixed from commencement, in the sense that they are unaffected by a subsequent act or omission of the insured or another person. That will often be the case in relation to the property the subject of an event based policy.

73 The only restriction or limitation inherent in a claim under an occurrence/event based insurance policy identified by the plurality in FAI is that the event must have occurred within the period of insurance. That is consistent with the restrictions or limitations being related to the type or kind of policy, not the detail of the cover or the terms and conditions thereof. Potentially, the restrictions or limitations inherent in a claim made under the Insurance Contract arguably extend to, but no further than, the occurrence of the type of event itself (being property damage to an insured vehicle) within the period of insurance.

74 It follows from FAI that s 54(1) can apply even if, on the proper construction of the Insurance Contract, satisfactory completion of the PAQS test is a condition of cover. That conclusion is consistent with the text, purpose and legislative history of s 54 and with FAI.

75 Applying the text and purpose of s 54(1) as explained by the High Court, the steps in the analysis are as follows:

1. Identify the relevant s 54 act or omission;
2. Determine whether the act or omission is one to which s 54(2) applies. If yes, determine whether s 54(3) or s 54(4) applies. If s 54(2) does not apply determine whether s 54(1) applies;
3. In assessing whether s 54(1) applies:

(i) determine whether there are any restrictions or limitations inherent in the actual claim by reference to the type or kind of insurance in issue. If the facts of the claim are outside any inherent restrictions or limitations, it will not be a claim under the insurance contract, any relevant act or omission will not satisfy the causal requirements below and s 54(1) will not apply;

(ii) determine whether the effect of the insurance contract is that the insurer may refuse to pay the claim in question (in whole or in part) by reason of the act or omission; and

(iii) determine whether the insurer is refusing to pay the claim by reason only of that act or omission. If yes, the insurer may not refuse to pay the claim (but the insurer's liability may be reduced to the extent its interests were prejudiced as a result of the act or omission).

76 I would answer question 3(i) in the negative. It is not an inherent restriction or limitation on the Insured's claim that drivers of the damaged Vehicles on the specified routes must have satisfactorily completed the PAQS test. That is most obviously a matter of detail of the particular policy, not the type or kind of policy. Moreover, it is in the same category as the myriad of other restrictions in the Insurance Contract (including in ANZ 3) relating to drivers of the Insured's Vehicles. However, for the sake of completeness I will determine the construction issue.

77 In support of their construction that satisfactory completion of the PAQS test is a condition of cover, the Insurers rely on the language of the endorsement that 'no indemnity is provided' which contrasts with the exclusion clause which provides that the Insurers 'will not pay'; the specificity of the PAQS endorsement in its nomination of the category of vehicles, the route (the east-west run) and the minimum test score; and the objective importance of PAQS testing to the parties having regard to its prominence in the Proposal, the acknowledgement in the letter dated 5 May 2004 from the Insured's broker, the Insured's poor claim history and its associated difficulty in obtaining insurance.

78 On a proper construction of the Insurance Contract, the PAQS endorsement does not, in form or substance, define the scope of cover of the Policy for the reasons given by the trial judge (set out earlier). The purpose of the endorsement clause in the Policy is to provide flexibility in an otherwise standard form contract by permitting additional clauses to be added to the Insurance Contract in appropriate circumstances. ANZ 3 in general, and the PAQS endorsement in particular, are correctly characterised as exclusions rather than a condition of the scope of cover.

79 Further, the objectively determined importance of the PAQS endorsement to the parties does not justify its elevation to a condition of cover nor provide a policy justification for the non-application of s 54(1). As to the latter, the subsection itself provides a mechanism for protecting an insurer from prejudice, as demonstrated in Ferrcom. The Insurers adduced no evidence of any prejudice in this case.

80 The Insurers' formulation of the relevant 'act' as an omission of the drivers to satisfactorily complete the PAQS test and their characterisation of it as 'a state of affairs' is undoubtedly driven by the analysis and result in Johnson v Triple C. The trial judge rejected the Insurers' contentions as follows:

I do not consider that the reason why the Insurers were entitled to refuse Highway Hauliers' claims according to the effect of the ... Policy can be described as a 'state of affairs' so as to avoid the operation of s 54(1). The ... Policy did not impose an obligation on drivers to undertake the PAQS test or to submit driver declarations. The fact that the drivers concerned were non-declared drivers who had not completed the test and obtained the required score was not, by itself, the reason why the Insurers were entitled to reject the claims made by Highway Hauliers. The Insurers were entitled to refuse the claims because the vehicles were being used by drivers who had not satisfied those requirements [86].

81 The first step is to identify the relevant 'act' for the purpose of s 54(1). In that process, I take my lead from the approach in Antico. In that case the insured incurred legal costs without the consent of the insurer. The conduct was characterised as an omission, being the failure of the insured to obtain consent before incurring the legal expenses in question. The failure to obtain consent in Antico did not involve any breach of a contractual promise (warranty) or obligation; the insurance contract provided that there would be no indemnity unless the insured first obtained the consent of the insurer. The obtaining of consent is the 'right, choice or liberty' of the insured (or a third party) to which the plurality in Antico referred. Moreover, it is significant that the provision of consent, in isolation, was outside the control of the insured.

82 The structure of the PAQS endorsement is the same as the provision in Antico. Applying the Antico approach to the facts of this case, there was an omission, being the failure of the Insured's drivers to satisfactorily complete the PAQS test before driving the Insured's nominated vehicles on an east-west run. It matters not whether it is the failure of the drivers to satisfactorily complete the PAQS test before driving the nominated vehicles on an east-west run or the failure of the Insured to use drivers who have satisfactorily completed the PAQS test in the relevant circumstances; s 54(1) applies to the 'act' of the Insured or another person.

83 When the omission is fully formulated consistently with Antico, it is an omission for the purpose of s 54(1). The fact that the insured or another person is not wholly in control of satisfying a requirement for another's consent or in successfully completing a test is of no significance. The failure is in not meeting the requirement before engaging in the relevant conduct in question.

84 There is nothing in the judgment in Johnson v Triple C to indicate that there was any dispute about the relevant act or omission. Chesterman JA in that case did not put the failure in its full factual context. To the extent that his conclusion depends upon an interpretation of the term 'omission' in s 54(1) I would, applying the test in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, depart from that interpretation.

85 I turn now to the Insurers' submission based on their understanding of Chesterman JA's reasoning in [80] of his judgment. The Insurers rely on the judge's reference to the relevant act or omission being in relation to an 'activity which the contract of insurance requires, allows or contemplates'. There is nothing in the statutory text, statutory purpose or binding authorities for concluding that this is an essential element of s 54(1). Even if it is applicable on the facts of this case, the result of the application of the test depends upon the identification of the content of the relevant 'activity'. It should be confined to the particular activity to which the failure relates: in Antico the activity was incurring legal costs; in this case, driving nominated vehicles on the east-west run; and in Johnson v Triple C, flying the aircraft. The relevant omission in each case relates to that activity. There is no warrant for widening the content of 'activity' to include the relevant omission with the consequence that the compound activity (incurring legal costs without consent; driving the nominated vehicles on an east-west run without having satisfactorily completed the PAQS test; or flying an aircraft in breach of the civil aviation regulations) is not what the contract 'requires, allows or contemplates'. This latter approach to narrowing the scope and application of s 54(1) is not consistent with either Antico or FAI and in my respectful opinion is wrong. If that is how the test was applied in Johnson v Triple C, I would decline to follow it.

86 The omission in this case is one to which s 54(1) applies with the consequence that the Insurers cannot refuse to pay the claims. Ground of appeal 1 should be dismissed.

87 The trial judge made the following findings. The respondent was unable to replace the vehicles damaged in the April 2005 accident from its own resources and without the benefit of a payment by the Insurers under the Policy [216]. The respondent would have replaced the vehicles damaged in the April 2005 accident had the Insurers paid the benefits under the Policy [217]. Finally, the respondent had lost the opportunity to service the Melbourne/Perth runs as part of its business [219].

88 The trial judge held that the principle in Liesbosch (Liesbosch Dredger v SS Edison [1933] UKHL 2; [1933] AC 449, 460) had no application [141] - [155]. That is not challenged in the appeal.

89 In addressing the question whether the claim for loss of profits was too remote, the trial judge applied the rule in Hadley v Baxendale (1854) 9 Exch 341; (1854) 156 ER 145, as expressed by Lord Reid in Koufos v C Czarnikow Ltd [1969] 1 AC 350 as follows:

The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation (385).

90 The trial judge concluded that the claim for loss of profits was not too remote for the following reasons:

The policy was for the insurance of commercial vehicles, including truck/trailer combinations. The Insurers knew through their agent, SRS, that Highway Hauliers operated a haulage business using the insured vehicles. The policy document commenced with a statement by SRS that it was 'ensuring the wheels keep moving' by underwriting 'standard, non-standard and specialty commercial motor protection'. Further, the proposal ... submitted to SRS disclosed that the business of Highway Hauliers comprised interstate haulage of certain specified commodities, 'all set runs on a weekly basis' (exhibit 144; TB 419 - 433). Obviously, the Insurers knew that a prime mover and any trailers that it might have been hauling could be so severely damaged in an accident as to require replacement. The SRS policy provided that, in those circumstances, the Insurers could either replace the damaged vehicles or pay to Highway Hauliers their insured or market value. It was, in my view, reasonably contemplated by the Insurers that Highway Hauliers could lose a 'set run' if they breached the contract of insurance by not replacing a vehicle that was 'written-off' in an accident or by not paying its insured or market value within a reasonable time after a claim was made. More generally, I consider that it was within the reasonable contemplation of the Insurers that Highway Hauliers could lose the opportunity to operate a repaired or replacement vehicle as part of its haulage business and earn income by doing so if they wrongfully refused to provide the benefits specified by s 1 of the SRS Policy when an insured vehicle was damaged [163].

91 In the appeal the Insurers accepted that consequential loss caused by non-payment of damages may, as a matter of principle, be compensated in this case because the Insured would have used the money due from the Insurers to repair or replace its damaged Vehicles.

92 The appellant contends the trial judge erred in awarding loss of profits on two grounds; first, that the trial judge erred in holding that the appellant breached the Insurance Contract because the obligation to indemnify arose under s 54 of the Act, not the contract, and, secondly, that the loss was too remote.

93 The appellant provides no authority for its first claim that its obligation to indemnify the Insured arose under s 54 not the Insurance Contract. The ground should be rejected. The effect of s 54 of the Act is to alter the contractual rights and obligations of the parties, albeit in a temporal sense, by reference to the relevant act or omission: FAI [20]. However, the rights and obligations of the parties in relation to the provision of indemnity continue to arise under and are based on the Insurance Contract as statutorily modified.

94 Moreover, the parties should be taken to know the relevant law at the time of entry into the Insurance Contract. The existence and potential application of s 54 is neutral in the determination of whether the loss is too remote.

95 The trial judge rejected the appellant's contention at trial that the claim for loss of profits (a claim for consequential losses flowing from the failure to make timely payment of the indemnified amount) would convert the Policy into one that provided cover for business interruption losses, which were outside its scope. Business interruption insurance covers loss from damage to insured property. The Insured's claim was for loss caused by the Insurers' breach of contract to provide indemnity. As the trial judge correctly observed, the claim for loss of profits was not a claim to enforce the indemnity provisions of the Policy but a claim for damages caused by the Insurers' refusal to indemnify under the Policy. The grounds of appeal do not challenge the rejection of this claim.

96 However, the Insurers submit in the appeal that where business interruption insurance is available in addition to property damage insurance, it ought to be inferred that the mutual intention of the parties in providing only for indemnity for property damage is that they did not intend that the Insurers be liable for damages for loss of profits from its failure to provide indemnity. If such an inference is drawn, the Insurers submit that they must succeed on the issue of remoteness.

97 The existence of business interruption cover with property damage cover would undoubtedly provide strong support for a finding that a consequential claim for loss of profits was not too remote. However, the absence of business interruption cover does not require an inference that recovery of damages for lost profits was outside the contemplation of the parties as the consequence of a breach to make timely payment of the indemnified amount under a property damage policy. It is reasonable to expect that the nature and extent of insurance cover taken out by an insured is informed by matters going to cost, with a resulting preparedness to carry the risk of delay pending timely receipt of insurance monies.

98 The Insurers also contend that recovery of damages for lost profits caused by the Insured's impecuniosity and consequent inability to repair the vehicles was outside the contemplation of the parties and too remote. That is, it would not be in the reasonable contemplation of the parties to an insurance contract for property damage cover that the Insurers should bear the risk of the Insured's loss of profits from the use of the property if indemnity is wrongfully refused. Reliance is again placed on the difference between property insurance and business interruption insurance in support of that proposition.

99 The issue of remoteness raises questions of degree on which reasonable minds may differ. I am satisfied that it was open to the trial judge for the reasons he gave to find that the claim for loss of profits was not too remote. Ground of appeal 2 should be dismissed.

101 PULLIN JA: I agree with McLure P that the appeal should be dismissed for the following reasons.

Ground 1 The construction of s 54(1) of the Insurance Contracts Act 1984 (Cth)

102 The operative part of s 54(1) is in the second half of the subsection. It reads:

[T]he insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act.

103 Before that part of the subsection applies, there is a condition which must be satisfied which identifies the 'act' referred to in the part of the subsection set out above. This condition requires the court to construe the contract of insurance. This is because of the words which read:

[W]here 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 ...

104 This condition requires the court to make a finding about whether there was some act or omission of the insured or of some other person occurring after the contract was entered into which affords a reason (and the only reason) for the insurer to refuse to pay the claim. If the court finds that the only reason which exists for refusing to pay the claim was by reason of that act or omission, then the insurer may not refuse to pay the claim. In effect, as Brennan CJ notes in Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652:

[Section 54(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 (661).

The requirement to construe the contract of insurance

105 The High Court has said that it is necessary to 'concentrate on the substance and effect' of the contract (see Dawson, Toohey, Gaudron

Gummow JJ at 669 in Antico quoting from the explanatory memorandum). If this suggests that the court must ascertain what reasonable persons would have understood the contract to mean, then that is what a court always seeks to do when construing a contract: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]. Section 54(1) does not ask the court to engage in some bending of the usual rules of construction or to strain or exceed the true signification of the contract: cf Bull v Attorney-General (NSW) [1913] HCA 60; (1913) 17 CLR 370, 384 (Isaacs J). The court will not 'pervert the meaning of clear language' of the contract, even when applying the contra proferentem rule: Cheshire & Fifoot, Law of Contract (10th Aust ed, 2012) [10.73]. The interpretation adopted 'must be restrained within the confines of "the actual language employed" and what is "fairly open" on the words used': Khoury v Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622, 638.

106 If, on a proper construction of the contract, the insurer has no reason to refuse to pay the claim, then s 54(1) has no application. However, if the effect of the contract of insurance, but for s 54(1), would be that the insurer may refuse to pay the claim, then it is necessary to consider the reason for that entitlement.

107 Not every refusal to pay a claim will result in the application of the section. An example will illustrate the point. A motor vehicle insurance policy may cover the insured's fleet of listed and specified trucks. Assume that the insured claims for damage to a truck not listed or specified. The effect of the contract would be to provide motor vehicle cover for listed and specified trucks and the insurer may refuse to pay the claim for damage to a non-listed and non-specified truck.

108 Before s 54(1) applies, the refusal to pay the claim must be 'by reason of some act of the insured or of some other person'. The phrase 'by reason of some act of the insured or of some other person' does not allow the insured to ascribe to the insurer fanciful reasons for why it is that the insurer may refuse to pay the claim. Nor does it allow the insurer to ascribe fanciful reasons for refusing the claim. The question is determined objectively. This is not to say that the reason actually offered by the insured is ignored. However, that reason is not determinative. The insured, in the example set out above, cannot ascribe to the insurer as a reason for the insurer refusing to pay the claim that the insured omitted to ask for the policy to be extended to the unlisted and unspecified truck. That would be fanciful. Hodgson CJ gave a more extreme example to illustrate the point in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd [1998] NSWSC 1011; (1998) 44 NSWLR 186 where his Honour said:

Suppose a person has fire insurance for 1995, and not 1996. An arsonist burns down the person's house in 1996. The insured claims under the 1995 policy, arguing that the insurer cannot refuse the claim by reason of the omission of the arsonist to burn down the house in 1995 (227).

[T]he reason for the refusal is that there was no fire whatsoever in 1995, whether caused by an arsonist or by accident or in any way whatsoever; so it would be bizarre to characterise the reason for refusal of cover in terms of an omission by the arsonist (227).

110 See also the example given by Mason P in Greentree v FAI General Insurance Co Ltd [1998] NSWSC 544; (1998) 44 NSWLR 706, 715.

111 The person making the claim for damage to his unlisted and unspecified truck under the motor vehicle insurance policy in my example would have his claim refused not because of some act or omission of the insured, but simply because the policy did not apply. The claim would be outside the scope of the contract of insurance. To use the words of the plurality in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, the policy would not 'extend to the demand referred to in the claim for indemnity' [44].

112 However, merely because the claim would be outside the scope of the contract is not determinative. If the reason for refusing the claim the insurer 'may' offer is one which is based on an act or omission of the insured which occurred after the contract was entered into, the section may still apply.

113 So, if the motor vehicle insurance policy in my example set out above covered the insured's fleet of listed and specified trucks while the trucks were licensed, then the scope of the policy would cover the insured's fleet of listed and specified and licensed trucks. If, at some stage during the life of the policy, one of the trucks ceased to be licensed because of the failure of the insured to pay the licence fee and so it ceased to be covered by, or within the 'scope' of, the policy, then, by reason of the omission to keep the truck licensed, the insurer would be permitted to refuse to pay a claim relating to damage to the unlicensed truck. That would mean that the operative part of s 54(1) then had application. The truck in this second example was once within the scope of the policy, but, by reason of the omission occurring after the contract of insurance was entered into, ceased to be within the scope of the policy.

The proper construction of the policy in this case

114 Properly construed, the policy covered 'all vehicles' which were 'owned, leased or acquired by the Insured or for which the Insured is responsible'. The policy covered 'accidental damage' to vehicles. The claim for accidental damage to the two trucks was a claim relating to trucks covered by the policy and was therefore within the scope of the policy.

115 Clause 5 contained an endorsement in the form of ANZ 3, which provided that 'no indemnity' was to be provided in the circumstances of this case 'unless the driver ... has a PAQS driver profile score of at least 36'. To state that 'no indemnity' was to be provided meant that the insurer was entitled to refuse to pay compensation (that being the ordinary meaning of the word indemnity). Thus, properly construed, this was a policy which provided insurance cover in relation to the two vehicles and which contained a condition - an exclusion clause - which allowed the appellant to refuse to pay a claim by reason that the condition about the driver had not been met. In effect, the claim was within the scope of the policy but fell within the exclusion clause.

The reason why the appellant refused to pay the claim

116 The appellant declined the claim with respect to each truck via a letter dated 16 May 2006 sent from its lawyers to the lawyers for the respondent. The letter referred to the PAQS endorsement and read, in part:

Our client's position is that on a true construction of the clear words in the Schedule of Cover incorporated in the policy of insurance, it is a precondition that unless the driver has been PAQS Tested in accordance with the terms of the policy then any vehicle being driven by an untested driver is not covered by the policy.

We understand that the driver involved had not been PAQS Tested and in these circumstances the terms and conditions of cover have been breached. In other words, there is an absence of relevant cover between our client and your client by virtue of the fact that the vehicle was being driven by an untested driver.

Our client takes the view that the scope of cover provided is clear and your client is not entitled to the indemnity provided by the policy. Our instructions are that indemnity in respect of both claims has been declined by your client's underwriters.

117 Although the letter from the appellant's lawyers asserts that the claim was outside the 'scope of cover', the fact is that the appellant relied upon the circumstance that the drivers had not been PAQS tested. The appellant's attempt to characterise this reason as a reference to the scope of the policy and not to the act of the insured or a third person was not determinative. The appellant relied on, and was entitled to rely on, the fact that the drivers were not PAQS tested. Therefore, the appellant was entitled to rely on the exclusion clause to refuse to pay the claim.

Was the refusal to pay the claim by reason of an act or omission of the insured or third person?

118 The only question then is whether the fact that the claim was refused because the driver was not PAQS tested can be described as an act or omission of the insured or a third person occurring after the contract was entered into.

119 The appellant submitted that there was no relevant act or omission of the insured or a third person. The appellant submitted that the claim fell outside the 'scope of cover'. Alternatively, reliance was placed upon an observation made by Chesterman JA in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; (2010) 243 FLR 336 when his Honour said that:

[F]or the purposes of s 54 an act or omission is the performance, or non-performance, of some activity which the contract of insurance requires, allows or contemplates and which may affect its operation [80].

120 What the section requires is a decision about whether the insurer 'may' refuse to pay the claim by reason only of some act of the insured or of some other person. It is therefore necessary to inquire whether there was such an act or omission which the insurer was entitled to rely upon in order to refuse to pay the claim.

121 In my view there was such an act or omission. The act of the insured was the act of giving permission to a driver to operate the vehicles when the driver did not have the requisite PAQS driver profile score. Alternatively, there was an omission by a third person, namely, the omission of the insured's drivers to satisfactorily complete the PAQS test before driving the insured's nominated vehicles on an east-west run. This act or, alternatively, omission, provided the only reason the appellant

could rely upon (and did, in substance, rely upon) for refusing to pay the claim. The act and omission occurred after the contract was entered into. The appellant's attempt, through its lawyers, to characterise the reason for refusal to pay as based on a contention that the claim was outside the scope of the policy is of no avail.

122 If the words used by Chesterman JA are applied the same result is produced; that is, the act of the insured was an act relating to the activity of driving which the contract of insurance contemplated may affect its operation. Alternatively, the failure of the driver to complete the PAQS test was the non-performance of an activity which the contract of insurance contemplated may affect its operation. Ground 1 of the appeal should be dismissed.

123 I agree with McLure P that this ground should be dismissed for the reasons given by her Honour.

124 MURPHY JA: McLure P has set out the relevant background, which I gratefully adopt. I too would dismiss the appeal. These are my reasons.

125 Section 54(1) of the Insurance Contracts Act 1984 (Cth) provides:

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 insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act.

126 An 'act', for the purposes of s 54(1), includes an omission: s 54(6)(a).

127 Section 54 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent with the actual language employed and to which the words are fairly open: Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652, 675.

128 Also, s 54(1) operates by reference to substance over form: Antico (668 - 669). Thus the phrase, 'the effect of a contract of insurance', invites attention to the substantive effect of the contract determined by an examination of its provisions as a whole. No distinction can be made, for the purposes of s 54(1), between provisions which define the scope of cover and conditions or exclusions which affect the entitlement to claim: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641 [33].

129 The acts or omissions to which s 54(1) relates are those occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss: Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd [1993] HCA 5; (1993) 176 CLR 332, 339.

130 An omission, for the purposes of s 54, includes a failure by the insured, deliberately or inadvertently, to exercise a right, choice or liberty which the insured has under the policy: FAI v Australian Hospital Care [35]. It also includes omissions by 'some other person', ie, third parties to the policy: s 54(1); FAI v Australian Hospital Care [34].

131 The 'claim' to which s 54(1) refers is the actual claim which the insured has in fact made on the insurer: FAI v Australian Hospital Care [40] - [41]. In order to attract the operation of s 54(1), that actual claim must be a claim made consistently with the inherent limitations and restrictions which necessarily qualify any claim for indemnity under the policy, having regard to the essential character of the risk or type of cover provided for, as a matter of substance, in the relevant contract of insurance: FAI v Australian Hospital Care [41] - [46].

132 The phrase 'by reason of' is not limited to the sole or unique cause of an entitlement of the insurer to refuse payment: Antico v Heath (672 - 673).

133 McLure P has set out the terms of the relevant contract of insurance. I will not repeat them all here, although it is convenient to record the terms of endorsement ANZ 3 which senior counsel for the appellant (insurer) said was the relevant endorsement for the purposes of his arguments on scope of the cover (ts 7 - 8). ANZ 3 provides:

B Doubles, Triples and Road Trains/A-Trains and B-Trains (ANZ 3)

No indemnity is provided under this policy of insurance when Your Vehicle/s are being operated by drivers of B Doubles, B Triples or Road Trains as deemed under the Australian National Licence category (Multi-Combination), unless the driver,

• Is at least 28 years of age and has a minimum of 3 years proven continuous recent experience in B Double/B Triple/Road Train/A-Train/B-Train, and,
• Has a PAQS driver profile score of at least 36, or an equivalent program approved by Us and,
• Does not have diabetes, whether or not diabetes caused or contributed to an accident, unless they have complied with the relevant licensing authority and is certified to drive by an Endocrinologist, or a medical specialist in the field of diabetes/related conditions and,
• Has been approved in writing by Us to drive Your Vehicle.

134 The term 'PAQS' was defined to mean 'People and Quality Solutions Pty Ltd'.

135 The schedule of cover (GB 140) refers to 'Australia wide' operation, as does the 'Our Agreement' clause (first par GB 147). The introductory explanation of cover (GB 145) also refers, in effect, to haulage between capital cities.

136 The insurer contends, in effect, that the primary judge erred in that he should have found that:

(a) the scope of cover provided by the policy did not extend to damage to vehicles involved in accidents whilst driven by drivers who had not undertaken PAQS testing and who had not obtained a minimum driver profile score on the PAQS test of 36;

(b) the requirement of a minimum driver profile score of 36 was an inherent restriction or limitation upon the scope of cover provided by the insurer.

137 The insurer submits that by reason of the endorsement, the minimum driver profile score of 36 on a PAQS program conditioned the scope of cover. It says that this is apparent on the face of the policy, and to the extent that there is any ambiguity, the extrinsic evidence indicates that the parties recognised the importance to the insurer of drivers, particularly on east/west routes, having safety training of the kind provided for by the PAQS program (or an equivalent program approved by the insurer). In this regard, the insurer refers to the judge's finding that:

[T]he effect of the evidence was that insurers writing commercial vehicle policies considered at the relevant time that requiring drivers to achieve a minimum PAQS score enhanced the likelihood that insured vehicles would be driven safely [100].

138 The insurer also contends that what the primary judge has done is, in effect, to extend the risk for which the insurer provided cover.

139 In the course of argument, senior counsel for the insurer indicated, in effect, that, properly construed, endorsement ANZ 3 only relevantly precluded cover where the driver of the vehicle involved in the accident did not have a minimum PAQS profile score of 36. Thus, the insurer said, it would not preclude cover if the driver concerned in the accident or circumstances giving rise to the claim did have the relevant PAQS score, but there were other drivers in the fleet, driving vehicles, unconnected with the loss or accident, who did not meet the PAQS criteria. In other words, on the insurer's case, a loss is not within cover where the loss or damage to the vehicle occurs when the vehicle is being driven by a driver without the specified PAQS qualification.

140 It was common ground that in the case of each accident in respect of which a claim for indemnity was made, the operation of the vehicle by a driver without the relevant PAQS qualification was an act which could not reasonably be regarded as capable of causing or contributing to the loss in question and also that the insurer was not prejudiced by reason thereof.

141 Assuming (without deciding), for present purposes, the correctness of the insurer's argument that endorsement ANZ 3 conditions the scope of the cover and does not operate as an exclusion, that point, nevertheless, falls short of determining the appeal in favour of the insurer.

142 As noted earlier, s 54(1) does not distinguish between provisions which define the 'scope of cover' and conditions affecting an entitlement to claim: FAI v Australian Hospital Care [33]. The ultimate question is not whether the loss claimed for is within the 'scope of cover', but whether, relevantly, a minimum driver profile score of 36 in a PAQS program is an inherent restriction or limitation which would necessarily qualify any claim for indemnity under the policy, having regard to the essential character of the risk, or type of cover, provided for, in substance, by the contract of insurance.

143 The essential character of the risk, or type of cover provided for, in substance, by the contract of insurance in this case is an Australia-wide material damage/third party liability indemnity insurance in respect of events occurring within the period of insurance relating to certain nominated vehicles. The respondent (insured) made claims for such indemnity, and whilst a driver PAQS profile of 36 conditioned (it may be assumed for present purposes) the scope of the cover, on the proper construction of the policy, it was not an inherent limitation or restriction qualifying any claims under such insurance.

144 In Antico v Heath Fielding, Dawson, Toohey, Gaudron and Gummow JJ referred with approval to certain observations of Mahoney JA in East End Real Estate Pty Ltd v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400, 407:

For [s 54(1)] to apply, the entitlement to refuse to pay the claim must be 'by reason of some act of the insured or of some other person'. In the present case, the immediate reason why the insurer could refuse to pay the claim was not, in terms, by reason of an act (for which may be substituted 'omission') of the 'insured or of some other person' but by reason merely of the fact that, the making of the claim upon the insured not having been 'notified' to the insurer, the claim was not within the cover. But it was not within the cover by reason of an (omission) of the insured. Therefore the entitlement to refuse arose by reason of that omission. (emphasis added)

145 In this case, the reason why the claims were not within cover (again making that assumption) is that the insured's vehicles in question were being driven at the relevant time by drivers who did not hold the specified PAQS qualification. Accordingly, the effect of the policy was that the insurer could refuse to pay such claims by reason of the act of the insured in operating the relevant vehicles using drivers who did not hold the specified PAQS qualification. That act occurred after the contract was entered into. It may also be characterised as an omission, ie, the failure of the insured to use drivers who had the relevant PAQS qualification on each of the haulage runs on which the accidents in question occurred. In my view, s 54(1) is accordingly engaged. The result is not an extension of the risk for which the policy provides, but the payment of a claim within the risk insured against in the events which happened upon the operation of s 54(1).

146 The insurer nevertheless says that such a conclusion is inconsistent with the decision of the Queensland Court of Appeal in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; (2010) 243 FLR 336. That case concerned a policy of aviation insurance covering a small family company, the only directors of which were the husband and the wife. The husband flew the aircraft. The policy insured the company against legal liability for bodily injury to passengers onboard the aircraft. The aircraft industry and the aircraft in question were, relevantly, regulated by the Civil Aviation Regulations 1988 (Cth). The company was in breach of the relevant regulations at the time of the accident in respect of which a claim was made under the policy. The husband (pilot) had not undertaken a flight review as required by the Civil Aviation Regulations. The policy contained an exclusion to the effect that it did not apply whilst the aircraft, with the knowledge of the insured, was operated in breach of the relevant Civil Aviation Regulations (340 - 341). The company sought to rely on s 54(1) to relieve it of the operation of the exclusion. It is not apparent from the report of the judgment as to whether there was any debate about the nature of the act or omission for the purposes of the application of s 54(1). It was said that the:

act identified here was an omission: [the husband's] not having satisfactorily completed an aeroplane flight review ... But for that omission, so that argument ran, the pilot would not have been in breach of [the relevant regulation], the aircraft would not have been operated in breach of the Regulation, and the policy exclusion would not apply [69].

147 The Queensland Court of Appeal (Chesterman JA with whom Holmes & White JJA agreed) rejected the insured's reliance on s 54(1) on two bases. One was that the identified 'omission' was not an omission within the meaning of s 54(1). The second basis is set out in the reasons at [74] - [83] of Chesterman JA's reasons for judgment. It is the second basis upon which the insurer relies in support of its arguments in this appeal. In particular, the insurer says that the primary judge erred in not applying the 'legal principle' in Johnson v Triple C at [80]:

From the description essayed in Antico, and endorsed in FAI Insurance (at 652), for the purposes of s 54 an act or omission is the performance, or non-performance, of some activity which the contract of insurance requires, allows or contemplates and which may affect its operation. The act or omission is not something which can bring about or alter the circumstances which give rise to a claim for payment or indemnity under a policy of insurance. This understanding of 'act or omission' seems to follow from its designation as something which is not necessarily an obligation contained in the contract of insurance but may be the 'exercise (of) a right, choice or liberty which the insured enjoys under the contract of insurance'. The acts or omissions by reason of which the insurer may refuse to pay a claim are not acts or omissions which change the facts on which a claim is based. (emphasis added)

148 The insurer places particular reliance on the italicised part of the passage.

149 The purport and effect of the words italicised are not to be ascertained by looking at them in isolation from their overall context. As I would understand it, the actual decision in that part of the court's reasons depended upon the court's view of the effect of the policy of aviation insurance and, it appears, its view that the essential character of the risk or type of cover for which the policy provided, when viewed as a matter of substance, inherently required compliance with the Civil Aviation Regulations, and that non-compliance was not merely 'something in the policy' ([83]) by reason of which the insurer could refuse to pay the claim in that case. That would seem to me to be the effect of his Honour's reasons at [80] - [83] when read as a whole, and in particular the last sentence of [80] and the second sentence of his Honour's reasons at [83]. Like the primary judge, I would not, with respect, see the observations of Chesterman JA at [80] as laying down some independent 'legal principle' which it is necessary to apply in the construction or application of s 54(1). The distinction which his Honour is seeking to make at [80] is to be read in light of the illustrations to which his Honour refers, by reference to case law, in [81] and [82].

150 Furthermore, and in any event, the contract of insurance in the present case in terms contemplates the activity of operating or driving vehicles without the driver holding the relevant PAQS qualification (as it also contemplates, eg, the activities of operating the vehicles by drivers below a certain minimum age) and those activities may affect the operation of the contract of insurance. Accordingly, even if it were necessary to find 'some activity which the contract of insurance ... contemplates and which may affect its operation', that requirement was satisfied in my view in this case.

151 For these reasons, the decision in Johnson v Triple C does not require a different conclusion from the one reached earlier on the application of s 54(1) in this case.

152 Ground 2 concerns the primary judge's finding that the insurer was liable to the insured for consequential loss of profits by reason of breach of contract.

153 In the case of insurance policies against destruction or damage to property, subject to any express terms to the contrary, the implied nature of the promise is to acknowledge liability within a reasonable time and pay the sum for which the policy provides: CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384, 401 - 402; see also Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office [1998] NTSC 73; (1998) 148 FLR 441, 489. Although the members of the High Court in CIC (402) referred to the sum payable as a 'liquidated sum, for the computation of which the Policy provided', they made it clear that where the insured has to establish the amount of its claim under the policy, its cause of action is not in debt or for a liquidated demand. It is an unliquidated claim, under the policy: CIC Insurance Ltd v Bankstown Football Club (402).

154 The amount payable under the policy is itself loosely described as 'unliquidated damages', albeit that it is a claim for payment of a sum under the policy not dissimilar in nature to liquidated claims for goods sold and delivered or work and labour done: CIC Insurance Ltd v Bankstown Football Club (402); Alexander v Ajax Insurance Co Ltd [1956] VicLawRp 70; [1956] VLR 436, 448 - 449; F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139, 143 - 144.

155 Where the insurer is in breach for not paying within a reasonable time, the insurer may recover compensation for late payment of the money owed under the insurance policy, subject to the principles of remoteness in Hadley v Baxendale (1854) 9 Exch 341; CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232, 75,565 - 75,566; 75,571; Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZ Ins Cas 61-420, 74,716; CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 197; (2007) 69 NSWLR 680 [76] (Mason P in the passage cited in CGU appears, with respect, to have misstated the observations of the English Court of Appeal in Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd's Rep IR 111 - however, that does not detract, in my view, from the ultimate correctness of his Honour's conclusion); Brescia v QBE [2007] NSWSC 598 [510] - [515].

156 I am in broad agreement with McLure P's reasoning on this ground.

157 The judge's relevant finding on the question of remoteness was in the following terms:

In my view, Highway Hauliers' claim for damages was not too remote applying that test. The policy was for the insurance of commercial vehicles, including truck/trailer combinations. The Insurers knew through their agent, SRS, that Highway Hauliers operated a haulage business using the insured vehicles. The policy document commenced with a statement by SRS that it was 'ensuring the wheels keep moving' by underwriting 'standard, non-standard and specialty commercial motor protection'. Further, the proposal prepared by Phoenix and submitted to SRS disclosed that the business of Highway Hauliers comprised interstate haulage of certain specified commodities, 'all set runs on a weekly basis' (exhibit 144; TB 419 - 433). Obviously, the Insurers knew that a prime mover and any trailers that it might have been hauling could be so severely damaged in an accident as to require replacement. The SRS policy provided that, in those circumstances, the Insurers could either replace the damaged vehicles or pay to Highway Hauliers their insured or market value. It was, in my view, reasonably contemplated by the Insurers that Highway Hauliers could lose a 'set run' if they breached the contract of insurance by not replacing a vehicle that was 'written-off' in an accident or by not paying its insured or market value within a reasonable time after a claim was made. More generally, I consider that it was within the reasonable contemplation of the Insurers that Highway Hauliers could lose the opportunity to operate a repaired or replacement vehicle as part of its haulage business and earn income by doing so if they wrongfully refused to provide the benefits specified by s 1 of the SRS Policy when an insured vehicle was damaged [163].

158 The insurer has, in effect, pointed to the possibility of a different conclusion, but has not demonstrated why his Honour's finding was wrong.

159 The observations of Heydon JA (as his Honour then was) (Spigelman CJ and Sheller JA agreeing) in Williams v The Minister Aboriginal Land Rights Act 1983 and the State of New South Wales [2000] NSWCA 255; (2000) Aust Torts Reps 81-578 [60] are pertinent:

The appeal was by way of rehearing ... It was not a trial de novo or a trial of the case afresh on the record. The plaintiff bore the burden in the appeal not merely of showing that on the facts her contentions might be available or even correct, but of showing that the trial judge's conclusions ought to be reversed ... Most of her challenges were to inferences drawn, or characterisations made, by the trial judge. Even in relation to those challenges, however, the Court of Appeal is in the same position as that ascribed to the Full Federal Court in Minister for Immigration, Local Government and Ethnic Affairs v Hamsher [1992] FCA 184; (1992) 35 FCR 359 at 369 per Beaumont and Lee JJ:

'... the court is not obliged to proceed to make new findings of fact on all relevant issues and discharge the judgment appealed from if those findings differ from those of the trial judge and do not support the judgment. The court must be satisfied that the judgment of the trial judge is erroneous and it may be so satisfied if it reaches the conclusion that the trial judge failed to draw inferences that should have been drawn from the facts established by the evidence. The court is unlikely to be satisfied if all that is shown is that the trial judge made a choice between competing inferences, being a choice the court may not have been inclined to make but not a choice the trial judge should not have made. Where the majority judgment in Warren v Coombes [(1979) [1979] HCA 9; 142 CLR 531] (at 552-553) states that an appellate court must not shrink from giving effect to its own conclusion, it is speaking of a conclusion that the decision of the trial judge is wrong and that it should be corrected. (See also Edwards v Noble [1971] HCA 54; (1971) 125 CLR 296, per Barwick CJ (at 304), per Menzies J (at 308-309) and per Walsh J (at 318-319).)'

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : MATTHEW MAXWELL -v- HIGHWAY HAULIERS PTY LTD [2013] WASCA 115 (S)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : HIGHWAY HAULIERS PTY LTD -v- MATTHEW MAXWELL (The authorised, nominated representative on behalf of various Lloyds underwriters) [2012] WASC 53

Costs - Whether unreasonable rejection of a Calderbank offer

Legal Practitioners (Supreme Court) (Contentious Business) Determination 2012 (WA)

Commissioner of State Revenue v Artistic Pty Ltd [2008] WASCA 24 (S)

Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1

Highway Hauliers Pty Ltd v Matthew Maxwell [2012] WASC 53

Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S)

1 REASONS OF THE COURT: These reasons deal with an issue about costs of the appeal. In the judgment appealed against, the respondent was awarded $571,710.03 for breach of an insurance contract which comprised of $299,807.09 by way of indemnity under the insurance policy, $145,000 for consequential loss, and interest pursuant to s 32 of the Supreme Court Act 1935 (WA): see Highway Hauliers Pty Ltd v Matthew Maxwell [2012] WASC 53. The appellant's appeal was dismissed.

2 The respondent seeks an order that the appellant pay the costs of the appeal to be taxed. The appellant does not oppose that order. The respondent also applies for an order that:

Except insofar as they are an unreasonable amount or were unreasonably incurred, the respondent be completely indemnified by the appellant for its costs of the appeal from 4 September 2012.

4 The parties were ordered to file written submissions, and both parties have done so. An order has also been made that the application be determined on the papers.

5 The respondent seeks the order for indemnity costs because of the unreasonable rejection of a Calderbank offer which the respondent had made to the appellant. This application is supported by an affidavit sworn by the respondent's lawyer revealing that the Calderbank offer was made by letter dated 28 August 2012, giving the appellant until 4 September 2012 to accept the offer. The offer in the letter was essentially that the respondent would concede ground 2 of the appeal if the appellant abandoned ground 1. In effect, by offering to concede ground 2, the respondent was prepared to give up the damages it had been awarded by the trial judge for the consequential loss of $145,000. The respondent's offer was rejected.

6 The affidavit sworn also reveals that costs raised against the respondent by its lawyers for the legal work performed after 4 September 2012 exceed the maximum amount recoverable under the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2012 (WA) (Determination). The affidavit reveals that the total of the costs in excess of the maximum recoverable under the Determination is $8,239. The affidavit also reveals that a significant amount of those extra costs relate to problems associated with settling the appeal book indexes and in the preparation of the appeal for hearing. A smaller component is for counsel fees, which only slightly exceed the maximum permitted under the relevant item in the Determination.

7 Considerations which are often relevant to the determination of whether an indemnity costs order will be made after the rejection of Calderbank letter are referred to in Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1 [16] - [19].

8 The appellant does not make any complaint about the stage at which the offer was made, the time given to consider the offer, or the clarity of the terms of the offer. The extent of the compromise offered was significant, and the offer did foreshadow an application for indemnity costs in the event of the offeree rejecting the offer. Costs to be charged by the respondent's lawyer after 4 September 2012 exceed the maximum allowed in the Determination. Those factors all strongly favour the making of the indemnity costs order. The rejection of the offer was unreasonable.

9 The appellant raised two points in opposition to the order for indemnity costs. The first was that the order of indemnity costs was said to be reserved for exercise in cases where the court wishes to mark its disapproval of a party's conduct. Two cases were cited by the respondent, namely, Commissioner of State Revenue v Artistic Pty Ltd [2008] WASCA 24 (S) [3]; Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S) [10]. Neither of those cases are relevant. They were not cases involving the rejection of a Calderbank offer. In cases where indemnity costs orders are sought based on the conduct of a party, different considerations apply.

10 The second point raised by the appellant was that the court 'cannot be satisfied that the costs which would be recovered under the usual scale or under a special costs order would be inadequate'. The respondent proved by affidavit that the respondent's costs will exceed the maximum allowed under the Determination. The appellant merely submitted that the maximum amount claimed by way of costs over the maximum amount allowed under the scale is 'small'. That is no reason for refusing to make the order.

11 Orders should be made as sought by the respondent, and the respondent should also have the costs associated with the resolution of the dispute about the order for costs.