Issue (a) - Was s 54(1) of the Act engaged?
40 At all relevant times, s 54 of the Act provided:
54 Insurer may not refuse to pay claims in certain circumstances
(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the 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.
(5) Where:
(a) the act was necessary to protect the safety of a person or to preserve property; or
(b) it was not reasonably possible for the insured or other person not to do the act;
the insurer may not refuse to pay the claim by reason only of the act.
(6) A reference in this section to an act includes a reference to:
(a) an omission; and
(b) an act or omission that has the effect of altering the state or condition of the subject matter of the contract or of allowing the state or condition of that subject matter to alter.
41 The High Court recently considered s 54 of the Act in Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590 (Maxwell). In that case, the plaintiff in the proceeding below, Highway Hauliers Pty Ltd, owned a fleet of vehicles which it used to operate an interstate freight transport business. The vehicles included prime movers and trailers able to be linked together in double combinations known as "B Doubles".
42 The plaintiff entered into a contract of insurance with certain Lloyds underwriters. Under the contract, the insurers indemnified the plaintiff against specified loss, damage or liability occurring to or in respect of its vehicles during the period from 29 April 2004 to 30 April 2005.
43 An endorsement forming part of the relevant contract of insurance stated that no indemnity was provided unless the particular vehicle was being operated by a driver who had a prescribed driver profile score in a psychological test approved by the insurers.
44 During the period of insurance, the plaintiff claimed indemnity from its insurers in respect of two accidents involving its vehicles. The drivers of the vehicles involved in both accidents had not undertaken an approved test.
45 The insurers denied indemnity upon the ground that the relevant drivers had not undertaken the approved test, relying upon the endorsement to which I have referred.
46 At the trial, it was conceded by the insurers that the fact that each vehicle was being operated by an untested driver could not reasonably be regarded as being capable of causing or contributing to any loss incurred by the insured as a result of either accident and that the insurers' interests had not been prejudiced as a result of the vehicles being so operated. For this reason, s 54(2) was not relevant.
47 In the Supreme Court of Western Australia, it was held that s 54(1) of the Act applied to the case with the consequence that the Court rejected the insurers' only defence.
48 The High Court agreed with the conclusions reached by the Supreme Court and dismissed the appeal. The Court (comprising Hayne, Crennan, Kiefel, Bell and Gageler JJ) delivered a joint judgment.
49 After outlining the relevant facts (at 593-595 [1]-[11]), the Court commenced its consideration of the s 54 issue at 595 [12].
50 At 596 [17]-[18], the Court summarised the insurers' argument in the following terms:
17. The argument of the Insurers focussed on the contractual effect of the relevant endorsement being that no indemnity was provided under the Policy in respect of an accident which occurred when a vehicle was being operated by an untested driver. The substantive effect of the Policy, as the Insurers put it, was that the claims for indemnity which the Insured made were for damage to vehicles whose drivers had a characteristic that removed the accidents from the scope of cover. Their argument reduced to the proposition that the "claim" to which s 54(1) refers is limited to a claim for an insured risk.
18 For that proposition the Insurers sought to rely on reasoning of the plurality in this Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [(2001) 204 CLR 641], as interpreted and applied in the Court of Appeal of the Supreme Court of Queensland in Johnson v Triple C Furniture & Electrical Pty Ltd [[2012] 2 Qd R 337]. The Court of Appeal of the Supreme Court of Western Australia declined to follow Johnson in the decision under appeal, as more recently did the Court of Appeal of the Supreme Court of New South Wales in Prepaid Services Pty Ltd v Atradius Credit Insurance NV [(2013) 302 ALR 732].
51 As I have already mentioned, the insurers' argument in Maxwell was ultimately rejected by the Court.
52 At 597 [19]-[20], the Court referred to the objects of s 54 of the Act in the following terms:
19 The Act is described in its long title as an Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds, and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly.
20 The more specific objects of s 54 of the Act were explained in the report of the Australian Law Reform Commission which recommended its introduction [Law Reform Commission, Insurance Contracts, Report No 20, (1982). See also Australia, House of Representatives, Insurance Contracts Bill 1984, Explanatory Memorandum at 78-80]. Those objects included striking a fair balance between the interests of an insurer and an insured with respect to a contractual term designed to protect the insurer from an increase in risk during the period of insurance cover [Law Reform Commission, Insurance Contracts, Report No 20, (1982) at xxxi-xxxii, 132-140]. That balance was to be struck irrespective of the form of that contractual term. In particular, no difference was to be drawn between a term framed: as an obligation of the insured (eg "the insured is under an obligation to keep the motor vehicle in a roadworthy condition"); as a continuing warranty of the insured (eg "the insured warrants he will keep the motor vehicle in a roadworthy condition"); as a temporal exclusion from cover (eg "this cover will not apply while the motor vehicle is unroadworthy"); or as a limitation on the defined risk (eg "this contract provides cover for the motor vehicle while it is roadworthy") [Law Reform Commission, Insurance Contracts, Report No 20 (1982), pp 140, 289-290].
53 The Court then referred to Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 (Antico). At 597-598 [21], the Court said:
Antico v Heath Fielding Australia Pty Ltd [(1997) 188 CLR 652] established, conformably with those objects, that s 54 takes as its starting point nothing more than the existence of a claim and of a contract the effect of which is that the insurer may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the contract was entered into; it does not postulate a liability of the insurer to pay the claim that has been made. In terms consistent with the reasoning of the majority [(1997) 188 CLR 652 at 669-670, 673], Brennan CJ there said that s 54(1) [(1997) 188 CLR 652 at 660-661]:
"focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim - falling outside a covered risk, coming within an exclusion or non-compliance with a condition - but on the actual conduct of the insured, that is, on some act which the insured does or omits to do ... 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."
54 At 598 [22], the Court noted that the Antico construction to which it referred at 597 [21] was inconsistent with the insurers' proposition that the "claim" to which s 54(1) refers is limited to a claim for an insured risk. The Court then referred to FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 (FAI) at 659 [40]. The Court said that the plurality in FAI emphasised at 659 [40] that s 54(1) "directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made" and that "no distinction can be made", for the purposes of s 54(1) of the Act, "between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim". These latter remarks were taken from FAI at 656 [33].
55 At 598-599 [23]-[27], the Court then said:
23 The Insurers sought support for their argument from a statement of the plurality in FAI that the section "does not operate to relieve the insured of restrictions or limitations that are inherent in [the] claim" [(2001) 204 CLR 641 at 659 [41]]. They misapply that statement in equating its reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of the cover that is provided under the contract. A restriction or limitation that is inherent in the claim which an insured has in fact made, in the sense in which the plurality in FAI used that terminology, is a restriction or limitation which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made.
24 Thus, as explained in FAI, the making of a claim under a "claims made and notified" contract necessarily acknowledges that the indemnity sought can only be in relation to a demand made on the insured by a third party during the period of cover [(2001) 204 CLR 641 at 659 [42]]. The section does not operate to permit indemnity to be sought in relation to a demand which the third party omitted to make on the insured during the period of cover but made after that period expired. Similarly, the making of a claim under a "discovery" contract, of the type in issue in FAI itself, necessarily acknowledges that the indemnity sought can only be in relation to an occurrence of which the insured became aware during the period of cover [(2001) 204 CLR 641 at 659-660 [43]].
25 The making of a claim under an "occurrence based" contract, the type of insurance contract in the present case, necessarily acknowledges that the indemnity sought can only be in relation to an event which occurred during the period of cover. That restriction or limitation is inherent in a claim which is made under such a policy. But it is of no moment in the present case.
26 Here the fact that each vehicle was being operated at the time of the accident by an untested driver is properly characterised as having been by reason of an "act" that occurred after the contract of insurance was entered into. There was an omission of the Insured to ensure that each vehicle was operated by a driver who had undertaken a PAQS test or an equivalent program approved by the Insurers. That omission occurred during the Period of Insurance.
27 The Insured having made claims seeking indemnity under the Policy in relation to accidents which occurred during the Period of Insurance, it is sufficient to engage s 54(1) that the effect of the Policy is that the Insurers may refuse to pay those claims by reason only of acts which occurred after the contract was entered into. Precisely how the Policy produced that effect is not to the point. The conclusion of the Court of Appeal in the present case was correct.
56 At 599 [28], the Court expressly disapproved of the ratio decidendi of Johnson v Triple C Furniture & Electrical Pty Ltd [2012] 2 Qd R 337 at 354-355.
57 As was the case in Maxwell, the claim made by Mr Phillips against Nautilus under the Nautilus policy was a claim made under an occurrence based contract of insurance. The making of such a claim necessarily acknowledges that the indemnity sought can only be in relation to an event which occurred during the period of cover. That restriction or limitation is inherent in the claim. In the present case, the period of cover under the Nautilus policy was from 4.00 pm on 1 December 2012 to 4.00 pm on 1 December 2013. The loss of the vessel occurred on 22 June 2013. Clearly, the indemnity sought in the present case related to an event which occurred during the period of cover under the Nautilus policy.
58 In Maxwell, the High Court emphasised the need for courts which are required to consider the application of s 54 of the Act to concentrate on the words of the section. As the Court noted at 597-598 [21], s 54 takes as its starting point the existence of a claim and of a contract the effect of which is that the insurer may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the contract was entered into.
59 A critical element which must exist before s 54(1) is engaged is an "act of the insured or of some other person" occurring after the insurance contract was entered into which constitutes a legitimate basis under the relevant contract of insurance for the insurer to refuse to pay the particular claim.
60 Section 54(6) of the Act explains and arguably extends the concept of "act" when used in s 54(1).
61 The applicants submitted that, in construing the Nautilus policy, the Court was required to consider the purpose of the policy and the risks against which the policy provided cover. They went on to submit that the scope of cover provided under the Nautilus policy was restricted by a geographic limitation. They submitted that, upon the true construction of the Nautilus policy, cover was only provided when the vessel was sailing in Australian waters. The applicants then argued that, although the expression "Australian waters" is not defined in the Nautilus policy, it can be readily understood as meaning waters within the Australian mainland and Tasmania and waters within 250 nautical miles off mainland Australia and Tasmania. The content thus given to the expression "Australian waters" is derived from the definition of "geographic limit(s)" on p 24 of the Nautilus PDS read with the Certificate of Insurance. The material of particular relevance is the text under the heading "Geographic Limits" on p 2 of that Certificate (as to which, see [27] above) and the mention of geographic limits under the heading "145 Sailboat Racing up to 100 NM" on p 3 of that Certificate (as to which see [28] above).
62 The applicants then submitted that the Nautilus policy was a policy which insured against the risk of an event, such as the grounding and the loss of the vessel in the present case, occurring within Australian waters at a time when the respondent was on risk under the policy. In support of this submission, the applicants relied upon the reasoning of Meagher JA in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732 (Prepaid) at 763-768 [125]-[144] with whom Macfarlan and Emmett JJA agreed. In Prepaid, the Court ultimately held that s 54 of the Act was not engaged because the subject matter of the claim made in that case was never covered by the policy in any event.
63 At 766 [135]-[136] of Prepaid, Meagher JA said:
135 The way in which the provisions of the policy describe and define that event or risk will vary between different types of policy, and sometimes between policies which provide the same type of cover. It is here that matters of form are not to dictate the outcome when considering the effect of the contract: East End at 403-404. It nevertheless remains necessary, in addressing that effect, to have regard to the nature of the risk and subject matter insured as well as the commercial or other context in which the insurance is written, to the extent that evidence of that kind is admissible on that question of construction.
136 In Australian Hospital Care, the significant point of difference between the plurality and Gleeson CJ was in the characterisation of the effect of the contract and the identification of the event insured. Gleeson CJ considered that the effect of the contract was to indemnify against third party claims made, or potential claims notified, during the policy period: at [11]. The plurality considered that the effect of the contract, particularly by reason of condition 3, was to indemnify against any claim, or occurrence likely to give rise to a claim, of which the insured became aware during the policy period, and irrespective of whether that occurrence was notified during that period: at [23] and [43]. Kirby J also considered that to be the effect of the contract: at [59] and [60]. The actual claim made by the insured was for an indemnity against liability for an occurrence of which the insured first became aware during the period of cover. If the effect of the contract was as Gleeson CJ considered it to be, the claim made by the insured did not involve an insured event because no third party claim had been made or potential claim notified during the policy period. The reason for refusal of the insured's claim would not have been an act or omission of the insured and s 54(1) would not have applied. The effect of the contract as characterised by the plurality led to the opposite conclusion: at [46].
64 I agree with the observations made by Meagher JA at 766 [135] of Prepaid. I propose to approach my consideration of the Nautilus policy with those observations in mind.
65 In FAI, the plurality (McHugh, Gummow and Hayne JJ), at 655-656 [32]-[33], said:
32 It is convenient to deal at this point with the New South Wales decisions mentioned earlier. As Gleeson CJ rightly pointed out in East End [(1991) 25 NSWLR 400 at 403] "by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature … evinced an intention to avoid the result that the operation of s 54 depends upon matters of form". Some of the suggested bases for confining the operation of s 54 have, however, depended on the form of the contract of insurance. In argument in East End, it was suggested that there were two bases on which the apparent generality of its words could, and should, be qualified. It was argued that its operation should be limited to cases in which the insurer relied on some condition of, or exclusion in, the contract to deny liability. That is, it was suggested that the form of the contract of insurance (and, in particular, whether the basis for refusing liability was to be found in a condition or exclusion) should determine the operation of s 54.
33 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 [East End Real Estate Pty Ltd v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 at 408 per Mahoney JA; cf Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 414 per Handley JA]. 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.
66 The plurality then discussed East End Real Estate Pty Ltd (t/as City Living) v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 (East End); FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; and Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 44 NSWLR 186 at 227.
67 At 658-660 [39]-[46], the plurality continued:
39 The reasoning in Greentree and in Permanent Trustee v FAI should, therefore, be rejected but the actual decision in each was right. Although the distinctions suggested in those cases are open to the criticisms we have made, the discussion reveals that there is thought to be a difficulty in reading the section literally. That difficulty stems from an intuitive rejection of a construction of s 54 which would require an insurer to pay a claim where there has been no event during the period of cover which the insured could have relied on as engaging the insurer's obligations under the contract. In the end, however, the difficulty is more apparent than real. Close attention must be given to the elements with which s 54 deals: the effect of the contract of insurance between the parties; the "claim" which the insured has made; and the reason for the insurer's refusal to pay that claim.
40 Section 54 directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made. It is not concerned with some other claim which the insured might have made at some other time or in respect of some other event or circumstance. It requires the precise identification of the event or circumstance in respect of which the insured claims payment or indemnity from the insurer. For example, in Greentree the insured claimed indemnity against liability for a claim which the third party had first made on it outside the period of cover. (To distinguish between the claim which a third party makes on the insured, and the claim which the insured makes on the insurer, it is convenient to refer to the former as the "demand" by the third party.) The insured's claim necessarily incorporated a temporal dimension. The contract of insurance applied only if the third party's demand on the insured was made within the period of cover. The insured's claim on the insurer therefore had to identify when the demand was made. That being so, the claim could not properly be described without that temporal element.
41 Even if the fact that the third party made no demand on the insured within the period of cover were said to be an "omission" it is, nevertheless, of the first importance to recognise that the claim to which s 54 refers is the claim by the insured on the insurer that was actually made. It is not a claim for indemnity against some other demand (such, for example, as a demand assumed to have been made during the period of cover). 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.
42 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. Under a "claims made and notified" policy, if no demand is made by a third party upon the insured during the period of insurance, any claim that may subsequently be made by the insured on the insurer (that is, the claim to which s 54 refers) would necessarily acknowledge that indemnity is sought in relation to a demand not of a type covered by the policy (because not within the temporal limits that identify those demands in relation to which indemnity must be given).
43 In the context of "discovery" contracts, containing clauses such as condition 3, the analysis is similar. If an insured "become[s] aware of any occurrence which may subsequently give rise to a claim" during the period of cover, an event of the type contemplated by the contract of insurance has occurred. Any subsequent claim would be for indemnity against a demand of a type covered by the contract.
44 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.
45 By contrast, if a third party had made a demand on the insured during the period of cover but, for whatever reason, the insured had not notified the insurer of the making of that demand until after the period of cover ended, it is apparent that the effect of the contract, but for s 54, would be that the insurer may refuse to pay the insured's claim only by reason of the failure to notify the fact of the demand.
46 Similarly, in the present case, the claim which the insured made on FAI was for indemnity against liability for an occurrence of which the insured first became aware during the period of cover. The effect of the contract of insurance is that FAI could refuse to pay that claim by reason only of the fact that the insured did not give notice of the occurrence to it. Section 54, therefore, requires the conclusion that FAI may not refuse to pay the insured's claim. The effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured's claim by reason only of the omission of the insured to notify the occurrence which, at the time, was one which might subsequently give rise to a claim by the third party against it. That being so, the section is engaged. No prejudice to the insurer's interests was suggested.
68 The applicants submitted that the geographic limitations specified in the Nautilus policy were akin to the temporal limitation in the policy under consideration in FAI.
69 The respondent agreed that the Nautilus policy provided cover only while the vessel was within the specified geographic limits. However, it submitted that the Nautilus policy prescribed how the geographic limits stipulation was to operate at a practical level in circumstances where the person in charge of the vessel intends to leave Australian waters. In those circumstances, so the respondent submitted, cover was not provided from the moment that the insured vessel cleared Australian Customs until it again cleared Australian Customs on the return journey. The respondent went on to submit that the Nautilus policy was an occurrence based policy for a sea journey subject to prescribed geographic limits and that the prescription of those limits included specific terms governing the scope of cover in circumstances where the insured vessel intended to leave Australian waters. The respondent submitted that the case was on all fours with the decision in Prepaid.
70 It may be accepted that the clear policy intent of the Nautilus policy is that cover is not provided at all in respect of journeys where the intention of the person in charge of the insured vessel is to leave Australian waters.
71 It was ultimately submitted on behalf of the applicants that the claim made by Mr Phillips was a claim under the policy for loss and damage occasioned to the vessel while it was in Australian waters, that is to say, within the geographic limits of the Nautilus policy. For this reason, they contended that the claim was within the risk covered by the policy subject to the operation of any relevant exclusions.
72 The applicants then submitted that the automatic suspension referred to in the p 11 clause, as a matter of construction, took effect as if it were an exclusion clause rather than a limitation on the scope of coverage provided under the policy. In support of that proposition, they relied upon the fact that no premium rebate or adjustment was offered during any period of suspension and the circumstance that the respondent did not treat the policy as having come to an end, when the suspension period began and as recommencing when the suspension period ended. Rather, so it was submitted, the policy continued in full force and effect and the premium remained payable in respect of the risk insured.
73 The applicants submitted that the effect of the contract of insurance must be determined as a matter of construction and paying due regard to the substance of the matter, unconstrained by distinctions between provisions which define the scope of cover and conditions or exclusions which affect the entitlement of an insured to claim (citing Meagher JA in Prepaid at 764-765 [130] and Gleeson CJ (Clarke JA agreeing) in East End at 403-404. In East End, the Chief Justice said (at 403C-D to 404B):
The respondent seeks to answer the appellant's argument in two ways, one depending upon general considerations as to the construction of s 54, and the other depending upon the relationship between s 54 and another provision of the Act to which reference will be made below.
The respondent's first submission is that s 54 has nothing to say concerning acts (or omissions) which form part of the definition of the risk insured. According to the respondent the reference in the section to the hypothesis that the effect of a contract would be that the insurer may refuse to pay a claim covers such matters as warranties, conditions, and perhaps exclusions, but not matters directly affecting the ambit of the insurance cover. In the present case, it is observed, the appellant is only covered in respect of claims both made and notified during the period of cover. Reliance is placed upon a statement made by Handley JA, in a different context, in Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 414 to the effect that s 54 does not widen the cover in a policy but, subject to the abatement provided for, it prevents that cover being lost through breach of a condition.
I do not read the language of s 54 so narrowly. Unlike s 18 of the Insurance Act 1902 it is not in its terms limited to providing relief in the event of a failure by the insured to observe or perform a term or condition of the contract of insurance. Even in relation to s 18, there was room for argument as to the ambit of the expression "term or condition": cf Accident Insurance Mutual Ltd v Sullivan (1986) 7 NSWLR 65 at 71-72 per Priestley JA. When an insurer desires to frame a policy of insurance in such a way that a particular act or circumstance will bring about the result that the insurer is not liable to the insured there is often a range of drafting techniques available to produce that result, and the selection of one rather than the other may be a matter of form and not of substance. In the case of a policy of professional indemnity insurance there may be a condition obliging the insured promptly to notify all claims received, or, as in the present case, the insurance may be expressed to cover only claims that are not only received but also notified during a particular period.
In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s 54, the respondent may refuse to pay the appellant's claim. The circumstance that this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material. The case falls within the general words of the section and I see no justification for reading them down.
74 The applicants ultimately submitted that the suspension under the Nautilus policy ought to be read, consistently with authority and principle, as being amenable to the beneficial operation of s 54 of the Act. This was because the suspension did not go to the nature of the risk covered by the policy but simply operated as if it were an exclusion.
75 In my judgment, when careful consideration is paid to the terms and structure of the Nautilus policy, it is, as was submitted by the applicants, an occurrence based policy which provided cover to Mr Phillips against loss or damage to the vessel caused by (inter alia) impact or sinking or any other event not specifically excluded by the policy occurring while the vessel was within Australian waters at any time between 4.00 pm on 1 December 2012 and 4.00 pm on 1 December 2013, being the period when the respondent was on risk under that policy.
76 The loss of the vessel occurred while the respondent was on risk (viz on 22 June 2013) and when the vessel was within Australian waters. "Australian waters" for the purposes of the Nautilus policy are those waters within the land mass of the Australian mainland and the island of Tasmania and those coastal waters which are within 250 nautical miles of the Australian mainland and the island of Tasmania.
77 The respondent did not agree to cover Mr Phillips for loss or damage to the vessel wherever it sailed: There were geographic limits on the cover provided. Those limits constrained the scope of that cover.
78 However, the provision suspending cover when the insured vessel cleared Australian Customs for the purpose of leaving Australian waters was almost always going to come into effect well before the insured vessel actually left Australian waters. Usually, as was the case here, the suspension period would commence while the insured vessel is in its home port - here, Fremantle WA. The suspension provision was in the nature of an exclusion and did not operate as one of the contractually prescribed elements of the geographic limits on the scope of cover itself.
79 For these reasons, and for the reasons advanced by the applicants, I accept the submissions made on behalf of the applicants as to the scope of cover provided under the Nautilus policy and as to the correct characterisation of the suspension provision. It follows that, in my judgment, the suspension provision is amenable to the beneficial operation of s 54 of the Act.
80 I now turn to the question of whether the respondent's entitlement to refuse to pay Mr Phillips' claim, either in whole or in part, was by reason of some act on the part of Mr Phillips or of some other person, being an act that occurred after the Nautilus policy was entered into but not being an act in respect of which s 54(2) applies.
81 In their Third Further Amended Statement of Claim filed on 6 March 2015, at par 24, the applicants described the relevant act or omission relied upon by them for the purposes of s 54(1) as:
… the re-entry, presence, operation and sailing of the vessel into the Geographical Limits of the Nautilus policy, being 250 nautical miles off mainland Australia and Tasmania (the Nautilus Policy Zone) without having cleared Australian Customs and Immigration from the time of re-entry until and including at that time, or alternatively at the time of the [grounding on 22 June 2013].
82 In the Written Submissions filed on behalf of the applicants, the relevant act or omission was said to be the sailing or presence (re-entry) of the vessel in Australian waters without having cleared Australian Customs on its return from Indonesia. Although there was some momentary confusion in oral submissions, I took the applicants to be maintaining at the hearing the position as pleaded and as outlined in their Written Submissions.
83 The respondent contended that, in the circumstances of the present case, there was no act or omission of the type contemplated by s 54(1). The respondent submitted that the alleged act is not an act that would have permitted it to deny indemnity. It argued that cover ceased to be available and was suspended from the time that the vessel cleared Australian Customs in Fremantle in May 2013 and was never reactivated. The reason that cover was not reactivated was that the vessel never cleared Australian Customs on the return journey. The respondent submitted that the circumstance that the vessel had not cleared Australian Customs on the return journey was not the result of any act or omission on the part of Mr Phillips. It submitted that Mr Phillips never had an opportunity to clear Australian Customs on the return journey. It submitted that the act or omission relied upon by the applicants was in truth a non-event.
84 In my view, the circumstance that the vessel was sailing within Australian waters but had not yet cleared Australian Customs on the return journey from Indonesia to Australia when it ran aground on 22 June 2013, taken in isolation, is not an act or omission of the relevant kind contemplated by s 54(1) of the Act. This is because it was not the re-entry, presence, operation and sailing of the vessel in Australian waters, looked at in isolation, that provided a basis for the respondent to deny indemnity. Rather, it was the vessel's departure from Fremantle Harbour in the first place, for the purpose of leaving Australian waters, having cleared Australian Customs, which led to the automatic suspension of cover under the Nautilus policy by reason of the terms of the p 11 clause. Cover remained suspended at all relevant times thereafter because the vessel was never cleared by Australian Customs on the return journey. The suspension was put into place as a result of acts on the part of Mr Phillips which occurred after the Nautilus policy was entered into. Those acts were leaving Fremantle Harbour with the intention of leaving Australian waters and clearing Australian Customs.
85 The act or omission expressly relied upon by the applicants in their pleading and in their Written Submissions as the act or omission which engaged s 54(1) in the present case may be characterised as Mr Phillips' failure to clear Australian Customs before running aground. Looked at only in that way, the pleaded act or omission invites the retort made by the respondent to the effect that it was a non-event (ie not an act or omission within s 54(1)) because it was not a positive act and because Mr Phillips had no opportunity to clear Australian Customs before running aground.
86 However, the only reason that there is any point at all in focussing upon the circumstance that the vessel had not cleared Australian Customs upon the return journey from Bali after completing the Fremantle to Bali sailboat race is that, because it cleared Australian Customs in May 2013 at Fremantle and intended to leave Australian waters at the time that it did so, cover under the policy was suspended. In other words, it is a necessary pre-condition to the relevance of par 24 of the applicants' pleading and their Written Submissions that cover was suspended in the first place.
87 There is no dispute about the relevant facts.
88 In the circumstances, I propose to approach the question of whether there was a relevant act or omission in the present case within the meaning of s 54(1) of the Act by having regard to the circumstance that the reason cover was suspended in the first place was because the vessel left Fremantle and cleared Australian Customs with a view to leaving Australian waters. No prejudice is caused to the respondent by my taking such an approach.
89 By causing the vessel to clear Australian Customs for the purpose of leaving Australian waters in order to compete in the Fremantle to Bali sailboat race, Mr Phillips committed an act or acts within the meaning of that term in s 54(1) which led the respondent to refuse to pay his claim being an act which occurred after the Nautilus policy was entered into.
90 For this reason, subject to s 54(2), I am of the view that s 54(1) was engaged in the present case.
91 Although some reliance was placed upon s 54(5)(b) by the applicants in their pleading, the point was not addressed in submissions. I took it to be abandoned. In those circumstances, for present purposes, subss (3), (4) and (5) of s 54 may be ignored.