The first issue: the engagement or not of s 54
32 Ultimately there was a significant degree of agreement on the approach to resolving this question. That agreement reflected the gradual distillation of the jurisprudence on s 54 over nearly 20 years of litigation: see, in particular, East End Real Estate Pty Ltd (t/as City Living) v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; 188 CLR 652; FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641; Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282; [2012] 2 Qd R 337; Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115; 45 WAR 297; Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252; 302 ALR 732; Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33; 252 CLR 590. It is first necessary, however, to have regard to the section, which is in the following terms:
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.
33 As is made clear by the plurality (McHugh, Gummow and Hayne JJ) in Australian Hospital Care 204 CLR at 658 [39]:
…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.
34 The difficulty over the years has been the reconciliation of what was seen as the proper nature of the scope of cover and qualifications on that by exclusions or conditions. The difficulty of maintaining that distinction as the operative one to decide on the engagement of s 54 is that it would place the engagement and operation of a key protection for the insured in the hands of the drafter of the policy. Any exclusion from, or condition of, cover can be redrafted as a question of the limit of cover.
35 But it cannot be that s 54 operates on any refusal of a claim for some act or omission of an insured. The plurality in Australian Hospital Care directed attention to this difficulty at 204 CLR at 659 [40]-[42] saying the following:
[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).
36 The meaning and significance of this approach has been discussed in two recent judgments: the judgment of Meagher JA (in which Macfarlan and Emmett JJA agreed) in the New South Wales Court of Appeal in Prepaid; and the judgment of the High Court (Hayne, Crennan, Kiefel, Bell and Gageler JJ) in Maxwell.
37 At the time Meagher JA delivered his reasons in Prepaid (8 August 2013), there was an apparent disagreement between the Western Australian and Queensland Courts of Appeal in Maxwell and Johnson v Triple C.
38 The analysis of Meagher JA of the working-through of what the plurality had said in Australian Hospital Care 204 CLR at 659 [40]-[42] and the importance of that for the reconciliation of the different views in Maxwell in the Court of Appeal and Johnson v Triple C was set out by his Honour in Prepaid 302 ALR at 764-767 [130]-[140]. It should be set out in full. With one additional important comment, we would respectfully adopt all that his Honour said, as a clear analysis of what has been a difficult area for practitioners and judges:
[130] The 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 403-4 (East End) per Gleeson CJ, cited with approval in Antico at CLR 660 and 668-9; ALR 389 and 395-6 and Australian Hospital Care at [35] and [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.
[131] The facts in East End and in Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 158 ALR 592 (Greentree) 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 that 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.
[132] An 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].
[133] The 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: at [41]. The plurality (at [41] and [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".
[134] That 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.
[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 403-4. 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].
[137] The 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 [2012] 2 Qd R 337; [2010] QCA 282 (Triple C) and by the Western Australian Court of Appeal (McLure P, Pullin and Murphy JJA) in Maxwell v Highway Hauliers Pty Ltd (2013) 298 ALR 700; [2013] WASCA 115 (Maxwell). 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: Triple C at [77]-[79]; Maxwell at [71], [73] and [75] per McLure P, at [114] per Pullin JA and [131] per Murphy JA.
[138] In Maxwell 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 while 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] and [115].
[139] In Triple C the policy indemnified the owner of an aircraft against legal liability for accidental bodily injury to passengers while they were on board the aircraft. An exclusion provided that the policy did not apply while 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 reg 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: at [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 while it was operated by a pilot with the necessary qualification: especially at [72], [82] and [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.
[140] In 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. 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, especially at [217], [229] and App A, cl 54, notes 3 and 4; and explanatory memorandum, at [177]-[182].
39 The conclusion reached by Meagher JA as to the correctness of Maxwell in the Court of Appeal was vindicated in the High Court appeal in Maxwell. Though the High Court in the Maxwell appeal referred to Prepaid, it did not expressly comment on Meagher JA's reasons. Nevertheless, in somewhat shorter terms, essentially the same approach to the question of the engagement of s 54 was taken. This can be seen at 252 CLR at 598-599 [23]-[27] as follows:
[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". 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 . 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.
[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.
40 These paragraphs lead to our additional comment to the analysis of Meagher JA in Prepaid. The process of understanding what are the restrictions or limitations that are inherent in the claim is one that involves the construction of the policy, not merely as to what its constituent words mean, but in a broad sense so as to characterise as a matter of substance what is the essential character of the policy. Once that essential character is decided upon, the restrictions or limitations that necessarily inhere in any claim under such a policy (to which s 54 does not apply) and the restrictions or limitations that do not necessarily inhere in any claim under such a policy (to which s 54 may apply) can be ascertained.
41 The process of characterisation or construction in the broad sense will, to a significant degree, be influenced by the expression of the parties of the terms of the insurance. Thus, if the underwriter of the Nautilus Policy wished to propound and price a policy that provided only for voyages that were domestic in character that could be expressed with some essential clarity. Perhaps assuming that such a wish conformed with a recognisable body of risk, practically or conceptually distinct from coverage that included international voyages, such clarity of expression may suffice to impose a restriction inherent in a claim under such a policy that the voyage be domestic and not international. The respondent accepted as much in argument. The process of characterisation and the judgment as to what is the essential character of the policy in a given case will be influenced, but not dictated, by the drafting of the wording of the policy, and will involve the identification of the nature and limits of the risks that are intended to be accepted, paid for, and covered. Thus the essential character of the claims made and notified policy such as in Australian Hospital Care included the making of a claim on the insured within the policy period. So, the making of the claim against the insured within the period was a limitation or restriction that necessarily inhered in a claim under such a policy; but the notification of the claim by the insured to the insurer within the period was not part of the essential character of the policy and so was not a restriction or limitation that necessarily inhered in a claim under such a policy. In an occurrence based policy, the occurrence of the impugned event within the policy period was part of the essential character of the policy and so was a restriction or limitation that inhered in any claim under such a policy.
42 Here, the parties agreed that this was the correct approach; they disagreed, however, on the proper conclusion to draw from the construction in the broad sense, i.e. from the characterisation of the Nautilus Policy.
43 Under the Nautilus Policy the Certificate of Insurance provided a broad and clear cover: "…we agree to cover you, subject to the conditions, exclusion, and endorsements of the policy…" (see p 1 of the Certificate of Insurance). That cover was for occurrences affecting identified property within the 250 nautical mile limit (and legal liability and personal accident cover). The provision on page 11 of the PDS concerned with the period between customs clearance was a suspension of cover. Such a provision was a temporal or suspensory limitation of a well-known kind discussed by the Australian Law Reform Commission (ALRC) in Insurance Contracts, Report No 20 (1982) at [217] and [229]. Such a temporal or suspensory limitation is more easily seen to be a qualification upon the essential cover, as collateral to the policy's essential character, than the geographic limits as stated in the Certificate of Insurance. The latter delineates the essential geographic risk; the former qualifies cover in certain circumstances. This can be illustrated by comparing the circumstances of Mr Phillips' claim and another claim that can be posited hypothetically: Where a yacht departed Australian waters and sailed more than 250 nautical miles from Australia with the purpose of leaving Australian waters, but without clearing customs, and which then returned and grounded on the same reef, there would be no impediment to recovery from the provision on page 11.
44 Neither the words of the policy, nor any objective evidence directed analysis of the essential character of the policy, or of the risks undertaken, to a more subtle essential character that was propounded by the appellant: cover within 250 nautical miles, as long as the yacht had not cleared customs for the purpose of leaving Australian waters and not re-cleared customs and immigration on return.
45 The essential attributes of the policy find a reflection in the policy as a time policy (though not governed by the MI Act). Time policies insure risk independently of the voyage, although it will be common for there to be warranted exceptions of type of voyage, or geographic limits: see, generally, Mustill MJ and Gilman JCB, Arnould's Law of Marine Insurance and Average (Vol 1, 16th ed, Stevens & Sons, 1981) pp 356-357 [511]-[512]. The distinction between time and voyage policies is important because certain principles concerned with risk do not apply to time policies as they do to voyage policies, including deviation, change of voyage and delay: see Gilman J, Merkin R, Blanchard C and Templeman M, Arnould: Law of Marine Insurers and Average (18th ed, Sweet & Maxwell, 2008) at pp 459-460 [13-02].
46 The Nautilus Policy provided cover where, as here, the yacht suffered a casualty within its stated geographic limits of 250 nautical miles off mainland Australia and Tasmania. But for the operation of the suspension of cover after the insured's act of causing the yacht to clear Australian Customs for the purpose of leaving Australian waters and the insured's omission to clear Australian Customs after the yacht had re-entered the geographic limits on the return voyage, the Nautilus Policy would have responded to the casualty. The act of clearing Australian Customs and the omission (as yet at the time of the casualty) on the yacht's return to clear Australian Customs, can each be seen to be an act or omission of the insured that occurred after the inception of the Nautilus Policy, during its period of cover and within its geographic limits. That was sufficient to engage s 54(1) because the effect of the suspension of cover in those circumstances entitled Nautilus to refuse to pay the insured's claim: Maxwell 252 CLR at 599 [26]-[27].
47 Here the insured's claim necessarily incorporated a physical dimension that was part of the essential character of the policy - that the yacht was within 250 nautical miles of Australia. The contract of insurance only applied if that were the case. That was the restriction or limitation that must inhere in the claim.