If it doesn’t matter, pay up! The High Court keeps a broad interpretation of Section 54

Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33

The High Court today handed down a decision concerning Section 54 (1) of the Insurance Contracts Act. The decision is important for many insurers, particularly those covering the carriage of goods and road transport operators.

Highway Hauliers Pty Ltd owned a fleet of vehicles. It insured that fleet with certain Lloyd’s underwriters. The relevant policy period was 29 April 2004 to 30 April 2005. The policy provided cover for accidental damage to vehicles. The policy had a clear endorsement which said that ‘No indemnity is provided under this policy of insurance … unless the driver … has a PAQS driver profile score of at least 36, or an equivalent program approved by us.’

PAQS referred to People and Quality Solutions Pty Ltd, which is a company that undertook psychological testing of drivers attitudes towards safety. 

During the period of insurance Highway Hauliers sought cover for accidents where the driver had not undertaken a PAQS test. The insurers relied on the policy endorsement, to say that no indemnity was available under the policy. The insured argued that its failure to organise a PAQS assessment of the relevant driver, was an act to which Section 54 (1) applies and the insurer could only deny indemnity if he could show prejudice.

At trial before the Western Australian Supreme Court, the insurers conceded that it could not show any prejudice by reason of the driver not undertaking the PAQS test. Nor could it establish that their interests were prejudiced to any other extent. The sole argument advanced by the insurers was that the policy made it clear that indemnity was not available to claims arising out of drivers that had not undertaken such a psychological assessment. 

Decision of the High Court

The High Court found for the insured, finding that section 54 modified the impact of the policy endorsement. The judgment is brief. It held that the failure by the insured to organise a PAQS assessment of some of its drivers was clearly an act that occurred after the contract was entered into.  Unless the insurer was able to show prejudice suffered by reason of this failure, it was not entitled to refuse to pay a claim even though this was what the policy endorsement provided for. 

The High Court has given Section 54 a very broad interpretation. In essence, it matters not that the term of the policy, in this case, related to the scope of coverage, as opposed to a new policy condition.  The High Court considered the intention of the Insurance Contracts Act, to be remedial and quoted Chief Justice Brennan from the 1990s case of Antico v Heath Fielding Australia Pty Ltd that section 54:

            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 a 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

In short, the High Court is really coming down to fairness. If the endorsement appears to needlessly write back cover, then the remedial provisions of Section 54 will come to an insured’s rescue. 

The decision will have far reaching effects for insurers that cover road transport. Many policy wordings will need to be reviewed as an endorsement which limits cover to drivers of a particular type, is not going to work unless you can clearly show that this is the cause of the accident. It will of course be interesting to see what “Maxwell Proof” wordings will come into the market in the next few months.