Is Atradius prevented from refusing to pay Optus Mobile's claim by the application of s 54?
125Section 54 of the Act relevantly provides:
"54(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.
...
(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."
126Optus Mobile argues that the effect of the contract of insurance is that Atradius may not refuse to pay its claim by reason of its acts, engaged in after the policy was issued, either in contracting with BXP for the supply of e-vouchers on credit terms which were not within the description in Item 6 or in supplying on the terms of such a contract. Atradius does not argue that these acts fall within the class of acts described in s 54(2): none is said to be an act that "could reasonably be regarded as being capable of causing or contributing to [the] loss in respect of which the insurance cover was provided". Accordingly, it is only necessary to consider the operation of s 54(1) in relation to those acts: Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd [1993] HCA 5; 176 CLR 332 at 339-340 (Brennan, Deane, Dawson, Gaudron and McHugh JJ) and Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; 188 CLR 652 at 670 (Dawson, Toohey, Gaudron and Gummow JJ). Relying upon s 54(1), Optus Mobile says that Atradius may not refuse to pay its claim by reason only of those acts.
127In response, Atradius says that the subject matter of the insurance was losses suffered resulting from payment defaults of the single buyer, BXP, and that the event or circumstance which engaged its obligation to indemnify was the failure during the policy period of BXP to pay an invoiced payment obligation under the contract identified in Item 6. The payment defaults giving rise to the losses for which Optus Mobile claims to be indemnified do not answer that description, and accordingly were not covered by the policy. Section 54(1) has no application because the reason for its refusal to indemnify is not some act or omission of the insured or of some other person.
128The leading decision on the operation of s 54 is FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641. That case concerned the operation of s 54 in relation to a professional indemnity policy of insurance that contained a provision (condition 3) which entitled the insured to notify the insurer during the policy period of any occurrence which may subsequently give rise to a claim and deemed any third party claim subsequently made, arising out of the circumstance notified, to have been made during the policy period. The insured became aware of an occurrence during the policy period but did not notify the insurer of it during that period. A claim was subsequently made arising out of that occurrence but outside the period of cover. The Court (McHugh, Gummow, Kirby and Hayne JJ; Gleeson CJ dissenting) held that the failure by the insured to give immediate notice of that occurrence during the policy period was an omission to which s 54(1) applied. The essence of the reasoning of the plurality (McHugh, Gummow and Hayne JJ) is at [39]-[43]. It was observed at [39] that 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".
129The plurality judgment continued:
"[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. ....
[41] ... 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)."
130The effect of the contract of insurance must be determined as a matter of construction, unconstrained by distinctions between provisions which define the scope of cover and conditions or exclusions which affect the entitlement of an insured to claim. It is not controversial that s 54 is concerned with the effect of the contract as a matter of substance: East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 at 403-404 (Gleeson CJ), cited with approval in Antico at 660, 668-669 and Australian Hospital Care at [35], [50]. It is necessary to consider the effect of the contract in the way in which it responds to the claim actually made by the insured. It is at this point that difficulties may arise in applying s 54(1) in circumstances where it is said by the insured that the act or omission is the reason why the insured's claim is not with respect to a risk or event covered by the policy.
131The facts in East End and in Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706 provide examples of such circumstances. In East End the third party demand was made but not notified in the policy period. The effect of the insurance was that a third party demand was covered if made and notified in that period. The insured's claim was not covered because the demand was not notified. That was an omission. The insurer's entitlement to refuse arose by reason only of that omission: East End per Mahoney JA at 407. However, as the plurality point out in Australian Hospital Care, it does not follow that s 54 prevents the insurer from refusing to pay a claim which is not in respect of the risk insured by the policy.
132An argument to that effect was advanced by the insured in Greentree where the third party demand was not made (or notified) in the policy period. The relevant omission was said to be that of the third party in not making a demand in the relevant period. It was argued that had the omission not occurred the insured's claim would have been within the terms of cover. The flaw in that argument is addressed by the plurality in the paragraphs set out above. Section 54 provides that the insurer may not refuse to pay the claim "by reason only of" the relevant act or omission. That was the position in East End, where the claim was in respect of an event of the kind insured (a third party demand made in the policy period): Australian Hospital Care at [45]. However, s 54 does not permit or require the reformulation of the insured's claim so that it includes elements or characteristics which it is said would have been present but for the relevant act or omission. If that claim is not, as was the position in Greentree, in respect of an insured event, s 54(1) does not apply. The reason the insurer could refuse the claim was that the policy did not respond to a third party demand not made in the policy period: at [44].
133The respects in which the insured's claim does not have the characteristics of the event of the kind insured are referred to by the plurality in Australian Hospital Care as "restrictions or limitations" inherent in that claim. Section 54 does not "relieve" the insured of those restrictions or limitations: [41]. The plurality (at [41], [42]) describe that event as "the event insured against" and as "an event of the type contemplated by the contract" and note that it will vary according to "the type of insurance in issue".
134That event may be an accident which results in personal injury or property damage; or the happening of that injury or damage; or the making of a demand against the insured by a third party; or the happening of an occurrence or circumstance which may give rise to such a demand; or the insured's becoming aware of such an occurrence or circumstance. These descriptions of themselves are not sufficiently specific to define the event covered by a particular type of policy. The accident will have to be of a particular kind, or arise out of or in the course of a specified activity. The injury or damage will usually have to happen in the course of or in connection with a particular activity. The third party demand is usually described as arising out of or in connection with the conduct of a particular business or professional activity. The same may be said of an occurrence or circumstance which may give rise to a claim.
135The 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.
136In 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: [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: [23], [43]. Kirby J also considered that to be the effect of the contract: [59], [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: [46].
137The principles enunciated in Australian Hospital Care have been considered by the Queensland Court of Appeal (Chesterman JA, Holmes and White JJA agreeing) in Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; [2012] 2 Qd R 337 and by the Western Australian Court of Appeal (McLure P, Pullin and Murphy JJA) in Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115. Each of these decisions addresses, as a step in the process of applying s 54, the need to identify any "restrictions or limitations" inherent in the actual claim to an indemnity, by reference to the characteristics of the event or circumstance to which the policy responds: Johnson v Triple C at [77]-[79]; Maxwell v Highway Hauliers at [71], [73], [75] (McLure P), [114] (Pullin JA) and [131] (Murphy JA).
138In Maxwell v Highway Hauliers the policy insured property damage to nominated trucks and trailers of the insured, occurring during the period of insurance. The insurer relied upon an exclusion in respect of damage caused whilst the vehicle was being driven by a person who did not hold a particular driver test qualification. It argued that the effect of the contract was only to insure vehicles driven by qualified drivers. That argument was rejected. McLure P considered at [73] that the description of the event covered "arguably [extended] 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". Murphy JA also considered at [143] that having regard to the essential character of the risk or type of cover provided for, as a matter of substance, the event or risk insured did not include as part of its description that at the time of any accident the driver had to hold the relevant test qualification. Pullin JA reached the same conclusion at [114], [115].
139In Johnson v Triple C the policy indemnified the owner of an aircraft against legal liability for accidental bodily injury to passengers whilst they were on board the aircraft. An exclusion provided that the policy did not apply whilst the aircraft was, to the knowledge of the insured, being operated in breach of Civil Aviation Safety Authority regulations. The insurer alleged that at the time of the accident the aircraft was being flown by a pilot who had not completed a necessary aeroplane flight review which was required under Regulation 5.81 of the Civil Aviation Regulations 1988 (Cth). The insurer argued that s 54(1) did not apply because the fact that the pilot had not satisfactorily completed that review was not a relevant "omission". Chesterman JA upheld that argument: [72]. His Honour also considered whether s 54 would otherwise have applied. He concluded that the effect of the contract was only to insure the aircraft whilst it was operated by a pilot with the necessary qualification: esp at [72], [82], [83]. In other words, the description of the insured event included that it was being operated by a pilot with that qualification. For that reason he held that s 54(1) did not apply because the insurer's refusal of the claim was not by reason of any act or omission.
140In so describing the insured event, Chesterman JA took into account the operation of an exclusion which had the effect of suspending cover during the existence of a state of affairs resulting from the failure of a third party, the pilot, to obtain or maintain a qualification. In my respectful opinion, in doing so his Honour proceeded other than in accordance with the principles and approach stated in Australian Hospital Care and applied in Maxwell v Highway Hauliers. Taking the operation of such an exclusion into account when identifying the risk insured would mean that s 54 would not address unsatisfactory aspects of the common law which it was intended to reform. Reference to Report No 20 and the Explanatory Memorandum shows that s 54 was intended to prevent reliance upon temporal exclusions, such as those considered in these two cases, as well as other provisions which operated, because of an act or omission occurring after the insurance was entered into, to suspend cover or entitle the insurer to deny a claim irrespective of whether the insurer had suffered any prejudice as a result: Law Reform Commission Report No 20, esp paras 217, 229 and Appendix A, cl 54, notes 3 and 4; and Explanatory Memorandum, paras 177 to 182.
141With these principles and observations in mind it is necessary to consider the circumstances of the present case. The policy indemnifies Optus Mobile and each of the other appellants in respect of losses resulting from the failure of BXP to meet particular payment obligations during the policy period. Those payment obligations must arise, in relation to each of the insured, under a contract identified in Item 6 of the Declarations. Optus Mobile's claim is to an indemnity for losses resulting from payment failures by BXP under a contract which does not answer that description.
142Optus Mobile formulates the relevant act as being the supply of e-vouchers to BXP under a contract or contracts which did not answer the description in Item 6. Because s 54 does not relieve it of the requirement that the payment failures arise under a contract to which the policy applies, Optus Mobile argues that the effect of the insurance is to indemnify against payment defaults of BXP in relation to the supply of e-vouchers. It says that the description of that event does not include reference to the credit terms on which that supply occurs. If it does include that description, Optus Mobile's position is the same as that of the insured in Greentree, where the claim was not in respect of an insured event.
143The event against which the single buyer credit insurance provides an indemnity is the failure of that buyer to meet a payment obligation under, and by the time required by, a specified contract. The policy wording assumes that contract will be one under which there will be ongoing supply over a period of time rather than on one particular occasion. It therefore was necessary for the parties to agree upon that contract. The only characteristics of the Optus Mobile contract that were advised to Atradius before the policy was issued were the names of the parties to it, the subject matter of supply and the credit terms upon which supply was to occur. In the absence of the provision by Optus Mobile of any other means of identifying more precisely the supply contract to which the policy was to apply, the parties adopted the description in Item 6. That description was based upon the statements in the proposal which were taken to form part of the contract. This being the position, there is no basis for disregarding the agreement of the parties as to the description of the relevant contract on the basis that to do otherwise would be to prefer form over substance.
144In the language of s 54(1), the effect of the policy is that Atradius may refuse to pay Optus Mobile's claim because it is in respect of a payment default which is not covered by the policy. The reason for Atradius' refusal to indemnify Optus Mobile is not its act in contracting with BXP on different terms. The primary judge correctly concluded that s 54 did not apply to prevent Atradius from refusing to pay that claim.