Lawyers have often scratched their heads trying to come to terms with section 54 of the Insurance Contracts Act 1984 (Cth) (ICA). Section 54 prevents an insurer from denying a claim on the basis of an act (or omission) of the insured provided the act did not cause the loss.
Two recent cases have considered what is meant by an “act” and provide useful clarification of when section 54 will come to the aid of an insured.
Insurer runs aground on section 54
The first case, Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds, involved a marine insurance policy for a luxury yacht wrecked off Cape Talbot, Western Australia. The policy limited coverage to damage sustained while in Australian territorial waters. However, the relevant clause suspended cover from the time the yacht cleared customs for the purpose of leaving Australian waters until the yacht cleared customs upon its return. While the yacht ran aground within Australian waters, at the relevant time it was returning from Indonesia and had not cleared customs. The insurer therefore denied the claim.
Foster J read the exclusion in light of the underlying purpose of the policy, which was to only extend coverage to the yacht while it was in Australian waters. The question then became whether there had been an “act” as contemplated by section 54(1).
According to his Honour, the relevant “act” of the insured was the act of departing Fremantle harbour with an intention to leave Australian waters and clearing customs at the commencement of the voyage as this act was a necessary pre-condition to the suspension of the insurance policy.
As the insured’s act did not cause the loss and the insurer suffered no prejudice, given the loss occurred in Australian territorial waters, section 54 operated to prevent the insurer from refusing the claim.
A better “state of affairs” for insurers
The above decision can be contracted with the decision of the West Australian Court of Appeal in Allianz Australia Insurance Ltd v Inglis. This case involved a claim on a home insurance policy following injuries sustained by a 10-year-old girl, Ms Georgia Inglis, who was accidentally run over by a ride on lawnmower while playing. The persons claiming indemnity under the policy were the father and brother of the injured girl. Significantly, the home insurance policy excluded coverage for “injury to any person who normally lives with you” and the insurer declined indemnity on that basis.
At first instance, the Western Australian District Court found that the Ms Inglis was a person who normally lived with the father and brother and that this was an act for the purposed of section 54(1).
On appeal, the Court of Appeal concluded that living with another person is not an “act”. In the Court of Appeal’s opinion, the relevant facts were more appropriately defined as a “state of affairs” or a “description of a relationship”. This situation was to be inferred from the conduct of all relevant persons over a prolonged period of time and did not depend on any single act of a particular person on the day that the insurable event occurred. The conduct, therefore, could not amount to an “act” within the meaning of section 54(1) and the insurers succeeded on appeal.
How to act
The above decisions provide some clarity in regard to the operation of section 54 in a post Maxwell v Highway Hauliers Pty Ltd landscape. Although, as demonstrated in Pantaenius, section 54 continues to be applied broadly by the courts, Inglis illustrates that it is not a panacea for all claims.
  FCA 1.
  WASCA 25.
  HCA 33.