Allianz Australia Insurance Ltd v Smeaton [2016] ACTCA 59

A jet ski, no licence, and a freak accident which ended a boys’ afternoon out on the Ross River, Queensland.

To top it off, a policy exclusion apparently excluded cover.

Fortunately for the insured, section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) stepped in to preclude reliance on the exclusion. Section 54(3) prevents an insurer from relying on the act or omission of an insured to deny cover if the insured establishes that no part of the loss was caused by the relevant act.

The decision highlights for insurers and insureds that the existence of an exclusion clearly encompassing a relevant act will not necessarily preclude cover unless the act also contributed to the loss.  For insurers, this outcome cannot necessarily be avoided by clever drafting and so should be factored into the underwriting process and assessment of risk.

An unfortunate day on the water

On 27 November 2010, Mr Whittington suffered serious injuries as a result of an accident involving a jet ski while his friend, Scott Smeaton, was driving the jet ski.  Mr Smeaton had a boating licence obtained in NSW but, at the time of the accident, he did not have a personal watercraft licence (PWC licence), although he was very familiar with operating a jet ski.

The jet ski was insured by Allianz Australia Insurance Ltd (Allianz) under a Club Marine policy (Policy). The Policy excluded cover for any claim arising from an accident when the jet ski was under the control of an unlicensed person when a licence was necessary.

Mr Whittington sued and a claim was made under the Policy.  Allianz argued that it was entitled to refuse payment of the claim because Mr Smeaton was unlicensed.

Section 54 to the rescue

At first instance, the trial judge held that Mr Smeaton had been negligent but Allianz was not entitled to refuse payment of the claim.

The trial judge was satisfied that, applying section 54(3) of the ICA, it would not, on the balance of probabilities, have made any difference to the actions of Mr Smeaton if he had obtained a licence (be it in NSW or Queensland). The accident would still have occurred.

Allianz appealed, submitting that it was only the Queensland licensing requirements that should have been examined because the accident occurred in Queensland and Queensland law applied. If this had been done, the trial judge should have found that the more stringent Queensland licensing test would have influenced the manner in which Mr Smeaton drove the jet ski and made a difference to his actions.

The Court of Appeal dismissed the appeal, finding that there was unequivocal evidence that Mr Smeaton would have obtained a licence in NSW.  The Court was also satisfied that Mr Smeaton’s evidence demonstrated that had he obtained the NSW PWC licence (or the equivalent in Queensland) before the accident, it would have made no difference to his actions.

Lessons for insurers and insureds

This case provides useful guidance on the application of subsections 54(2) and (3) of the ICA.  It affirms that an insured bears the onus under section 54(3) but that the bar in overcoming this burden is relatively low.

Absent strong and convincing expert evidence that the alleged disentitling act could reasonably be regarded as being capable of causing or contributing to the loss, insurers face the risk that section 54 will render seemingly clear exclusions of no effect.

Licensing requirements are common in many policies but insurers should take note of their limited effect. Given the primacy of substance over form, clever drafting cannot wholly overcome these limitations.  It is therefore important that these limitations are recognised at both the underwriting and claims handling stage.