In the world of commercial and consumer transactions, parties often seek to redistribute risk. Risk can be transferred or assigned by a variety of different vehicles including warranties, waivers, guarantees or simply under the terms of the agreement. Often, the method adopted can exhibit a number of similarities with a contract of insurance, such as risk being transferred in return for financial consideration. However, for organisations not permitted to carry on an insurance business by APRA, it is imperative that the method employed is not characterised as an insurance arrangement.

In the case of Gardam v WTH Pty Ltd [2016] TASFC 10 (Gardam), the Tasmania Full Court of the Supreme Court offers a useful insight into the court’s view of commercial risk allocation. Here the Full Court endorsed a businesslike approach to the issue which should give some degree of relief to commercial parties.

On a Roll!

The Appellant, Thomas Gardam, rolled and damaged a rented Toyota Hi-ace van, whilst travelling in Tasmania.  The van was hired from the Respondent, WTH Pty Ltd trading as Avis Australia. At the time, the Appellant was recorded as having a blood alcohol concentration of 0.053 per cent by the Tasmanian Police. The legal limit in of blood alcohol concentration in Tasmania is 0.05 per cent: section 2, Road Safety (Alcohol and Drugs) Act 1970 (Tas) (RSA).

The Appellant’s rental agreement with the Respondent contained a provision which waived the Respondent’s right to make a claim in respect of damage to the rental vehicle caused by the Appellant (Loss Damage Waiver). The Loss Damage Waiver also provided that the Appellant would be indemnified under the “AVIS Insurance Policy” in respect of third party damage.

In accordance with clause 8.3, the Loss Damage Waiver option was superseded in the event damage resulted from a breach by the Appellant of, among other things, clause 4.1. Clause 4.1(d) read as follows:

4.1        You and any Australian Driver must: […]

(d)        not be under the influence of alcohol, drugs or have a blood alcohol content that exceeds the legal limit in the State or Territory in which the Vehicle is driven;

The Respondent successfully sued the Appellant in the Magistrates Court to recover the amount of damage to the vehicle.

The Appellant appealed the Magistrate’s decision and when unsuccessful appealed to the Full Court of the Supreme Court of Tasmania contending that the primary judge erred in:

  • finding that it was not necessary for the Respondent to prove the damage to the rental vehicle was caused by the Appellant’s breach of clause 4.1(d); and
  • holding that the Loss Damage Waiver provision was not rendered void by section 21 of the RSA. 

Decision of the Full Court

First Ground of Appeal

The substance of the first ground of appeal involved an intricate construction of the wording used in clauses 8.3 and 4.1 by the Appellant. The Appellant contended that the language in clause 4.1 is broad and not limited to use of the vehicle. To limit the scope of clause 4.1, the Appellant argued it should be read in conjunction with clause 8.3(a)(iii) which required damage to the vehicle to be “caused by” a breach of clause 4.1 before the exclusion would apply. As the Respondent had not established such a causal connection, the Appellant asserted that the exclusion did not apply.

The Full Court dismissed this construction. In doing so, Estcourt J, at [18], applied the ordinary test for contract interpretation, being:

what a reasonable person would have understood [the terms] to mean having regard to the text of the clauses and also the surrounding circumstances known to the parties and purposes and objects of their transaction.

In Estcourt J’s opinion (with whom Wood and Pearce JJ agreed), taking all relevant circumstances into account, the respective clauses could only be understood to mean “damage…occasioned at a time when the vehicle was being driven in breach of clause […] 4.1”: at [19]. Thus, his Honour considered it was the parties’ intention to limit clause 4.1 to damage caused when the vehicle was being driven rather than requiring proof that the driver’s alcohol concentration caused the damage.

Second Ground of Appeal

The second ground of appeal is potentially of more interest, given it concerns a less traversed area of law. This ground concerns section 21 of the RSA which voids any provision in a contract of insurance which purports to avoid liability due to a driver exceeding the legal blood alcohol limit in Tasmania.

The question for the Full Court was whether the Loss Damage Waiver could be considered a contract of insurance. The Appellant argued in the affirmative on this point and submitted that section 21 of the RSA should apply to render the waiver void.

On this issue, Estcourt J agreed with the findings of the magistrate. That is, that the clauses 8.3 and 4.1, when taken together, do not amount to a contract of insurance but merely a waiver: at [22]. This was despite his Honour noting that the waiver exhibited a number of features commonly associated with a contract of insurance. The Loss Damage Waiver could be distinguished from an indemnity against third party liability (which would be insurance) as it only allocated liability in respect of damage to the vehicle itself and provided an entitlement to be indemnified under a separate Avis Insurance Policy.

As the waiver did not constitute a contract of insurance, section 21 did not apply. Nor, as Estcourt J pointed out, did section 54 of the Insurance Contracts Act 1984 (Cth): at [24]. Had section 54 applied, this statutory provision may have presented the Respondent with a more favourable vehicle for its causative connection argument raised in the first ground of appeal.

Broader application

Gardam offers judicial approval for the position that waivers and other commercial loss spreading arrangement will not necessarily be considered a contract of insurance, even where the arrangement bears significant similarity with such a contract.

This offers some comfort to manufacturers, service providers and suppliers who often incorporate insurance-like risk allocation provisions in sale or service contracts. However, where businesses rely on waivers, warranties, guarantees or other risk allocation methods, careful attention should be paid to the drafting of such provisions to ensure the intention of the parties is explicit and such arrangements are not otherwise considered “financial products” under the Corporations Act 2001 (Cth).