Highway Hauliers (the insured) is an interstate freight transport business that owned a fleet of vehicles, including prime movers and trailers. The insured entered into a contract with various Lloyd’s Underwriters (the insurers) in which the insurers indemnified the insured against specified loss, damage or liability occurring to or in respect of the vehicles for the period of the insurance.
The insured’s fleet vehicles were such that they could be linked to form a “B Double”, a formation which the insurers’ policy specifically stated would not be indemnified unless, among other things, the driver of the vehicle had a PAQS score of at least 36. PAQS in the policy refers to “People and Quality Solutions Pty Ltd”, and a psychological test the company provides to measure a driver’s attitude towards safety.
It was two such B Doubles, driven by persons who had not taken the PAQS test or any equivalent program, that were damaged in separate incidents on 16 June 2004 and 2 April 2005. This was the primary ground on which the insurers challenged the indemnity claims.
First instance proceedings
The case was heard at first instance in the Supreme Court of Western Australia, in which the insured sought indemnity under the policy for damage to the vehicles, third party liability and consequential loss. In those proceedings, Justice Corboy held that the insurers had an obligation to indemnify the insured by reason of the operation of section 54(1) of the Insurance Contracts Act (1984) (Cth) (ICA).
Justice Corby went on to state that the fact that neither of the drivers in question had taken the PAQS testing could not reasonably be regarded as being responsible for causing the loss. It was only in this case that section 54(2) of the ICA would have been enlivened enabling the insurers to deny indemnity. His Honour held that the insurers had breached the terms of the policy by refusing to pay the claim and were therefore liable for the insured’s consequential loss.
Court of Appeal
The insurers appealed the decision in the Court of Appeal. However, Justice Corboy’s decision was upheld by McLure P, Murphy and Pullin JJA. Special Leave was granted for the insurers to appeal the decision in the High Court with the condition that they undertake to pay the insured’s reasonable costs on appeal.
High Court decision
The case turned on the interpretation of sections 54(1) and (2) of the ICA.
“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.”
“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.”
The insurers conceded during trial that the loss incurred by the insured could not be reasonably connected to the fact that the drivers of the vehicle had not done the PAQS, leading the Court to find no application of section 54(2) to the issues. The question then became whether section 54(1) had been enlivened.
The High Court found that the fact the insured’s drivers were untested at the time of the accidents was an omission which occurred during the period of insurance. Further, it rejected the insurer’s submission that the ‘claim’ to which section 54(1) refers is a claim for an insured risk and held that as the insured was seeking indemnity under the policy in relation to the accident which occurred during the period of insurance, it was sufficient to enliven s 54(1). Ultimately, the Court agreed with the decision of the Court of Appeal and dismissed the insurer’s appeal.
Implications for insurers
Section 54(2) of the ICA would have applied in this matter if the loss was caused by the insured’s untested drivers.
The High Court’s decision reaffirms that:
For further information on this case, or to discuss its specific implications for you, please contact our Insurance & Risk Management team.
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