Section 54(1) of the Insurance Contracts Act 1984 (Cth)
Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd  FCAFC 150
On 8 November 2016, the Full Court of the Federal Court of Australia (the Full Federal Court) unanimously held that the remedial provision of section 54(1) of the Insurance Contracts Act 1984 (Cth) (the Act) operated to prevent an insurer from seeking to rely on a temporary suspension of insurance cover and to allow another insurer, where there was double insurance, to obtain equitable contribution.
In short, section 54(1) of the Act prevents an insurer from refusing to pay a claim following an insured’s non-compliance with certain terms of an insurance policy, instead only allowing it to reduce its liability if the insured’s conduct has caused its interests to be prejudiced.
Section 54(2) of the Act provides that, where the insured’s conduct is found to be capable of causing or contributing to the loss covered by the policy, the insurer can refuse to pay a claim.
Both Watkins Syndicate 0457 at Lloyds (Watkins) and Pantaenius Australia Pty Ltd (Pantaenius) issued policies to a common insured that provided cover for specified loss, damage or liability occurring to or in respect of the insured’s luxury yacht (the vessel).
The policy issued by Watkins (the Nautilus policy) provided cover for an agreed fixed value of $250,000 and relevantly provided that the cover would be automatically suspended upon the vessel clearing Australian Customs and Immigration (Australian Customs) for the purpose of leaving Australian waters, to recommence when the vessel cleared Australian Customs upon its return (the location limitation).
The policy issued by Pantaenius provided cover for an agreed fixed value of $275,000 and relevantly included optional additional cover for participation in the international Fremantle to Bali yacht race (the race) and the vessel’s return voyage from Bali to Fremantle.
On 4 May 2013, the vessel cleared Australian Customs and left Fremantle for the purpose of competing in the race.
On 22 June 2013, on its return to Fremantle, the vessel ran aground. The vessel was in Australian waters at the time, but had yet to clear Australian Customs.
The insured made claims for indemnity on both policies. Pantaenius granted indemnity and paid the insured approximately $350,000. Watkins declined indemnity on the basis of the location limitation, given the vessel had not cleared Australian Customs before it ran aground.
Pantaenius commenced proceedings in the Federal Court against Watkins, seeking equitable contribution on the basis of double insurance.
First Instance decision
Pantaenius argued that section 54(1) operated to require Watkins to both indemnify the insured and, consequently, provide equitable contribution as an insurer of the same risk.
Watkins argued that the location limitation meant it was not on risk and, otherwise, that section 54(1) only operated to assist an insured and not another insurer seeking contribution.
In finding for Pantaenius, Justice Foster concluded that the insured’s act of causing the vessel to clear Australian Customs was conduct that would have allowed Watkins to refuse to pay the claim. Section 54(1) therefore operated to excuse that conduct and to trigger coverage under the Nautilus policy unless that conduct either caused Watkins’ interests to be prejudiced or was otherwise capable of causing or contributing to the loss covered by the policy pursuant to section 54(2).
His Honour did not consider that the risk of grounding in Australian waters had increased by reason of the vessel merely having cleared Australian Customs on its departure. His Honour therefore found that the geographical location of the vessel could not be said to have caused the loss, increased the risk or prejudiced Watkins’ interests. That said, his Honour did indicate that he may have reached a different decision had the vessel grounded outside of Australian waters.
His Honour also held that there was no reason that section 54(1) should not operate to assist another insurer in seeking contribution; the purpose of section 54(1) is to prevent insurers from refusing to pay claims by relying on particular policy terms.
Watkins appealed to the Full Federal Court.
In essence, the issues on appeal were whether section 54(1) was engaged to prevent Watkins from refusing to pay the claim and, if so, whether Pantaenius’ claim for contribution could be based upon the assumed liability of Watkins to the insured.
In unanimously upholding Justice Foster’s decision, their Honours Allsop CJ, Rares and Besanko JJ held that:
- section 54(1) was engaged as the insured’s act of causing the vessel to clear Australian Customs for the purpose of leaving Australian waters, as well as the insured’s later failure to clear Australian Customs upon its return to Australian waters, would, but for the operation of section 54(1), trigger the operation of the location limitation and enable Watkins to refuse to pay the claim/contribute to Pantaenius; and
- the relevant question in determining contribution was whether the respective obligations of each insurer could be characterised as being of the same nature and the same extent. Their Honours characterised those respective obligations as being the same in nature, extent and function.
This decision further confirms the Court’s willingness to apply section 54(1) and its broad relief in a wide array of circumstances. It reinforces the need for a proper analysis, at both the underwriting stage and when a claim is made, of the scope of the risk intended for cover and whether an exclusion or limitation clause will ever really operate due to section 54(1).
It is also a good reminder that the operation of section 54(1) is not restricted to claims made by an insured, but also applies where other insurers seek equitable contribution on the basis of double insurance.
Date: 10 November 2016