A pair of trucking accidents has led to a High Court decision affirming a broad interpretation of the contentious first clause of Section 54 (s54(1)) of the Insurance Contracts Act 1984.

Highway Hauliers owned a fleet of trucks and trailers transporting freight nationally, and was insured through Maxwell, operating as representatives of certain Lloyd’s underwriters. The policy included an endorsement to exclude coverage unless all drivers met certain conditions, including reaching an agreed level of competency in a driver test.

In two separate incidents in 2004 and 2005, two of Highway Hauliers’ vehicles were damaged while being operated by drivers who were found not to have satisfactorily completed the test. Two separate claims were lodged, but both were declined because of the failure to meet the test condition.

This prompted Highway Hauliers to commence proceedings against Maxwell, seeking indemnity under the policy and consequential damages for breach of contract.

Days in court

At first instance, the Supreme Court of Western Australia deemed s54(1) applicable to the case and found in favour of Highway Hauliers. Maxwell appealed this decision, arguing s54(1) was not applicable, as it only referred to a claim for an insured risk.

In their argument, Maxwell’s lawyers relied on the narrow interpretation of s54(1) in Johnson v Triple C Furniture and Electrical Pty Ltd (2010), submitting that non-compliance with the driver test requirement was not an “act” but a “state of affairs” and as such could not enliven s54(1).

The Supreme Court, however, disagreed, instead finding that the policy’s requirement for drivers to complete the test was an exclusion rather than a condition of cover. When Maxwell appealed, the High Court agreed, highlighting that the purpose of s54(1) is to strike a fair balance “between the interests of insurers, insured’s and other members of the public so that the provisions included in such contracts, and the practices of insurers operate fairly”.

Relevantly, the High Court emphasised that this balance should be achieved regardless of the form of a contractual term and that it was not necessary to draw a distinction between a term framed as an obligation to the insured, as opposed to a continuing warranty of an insured, an exclusion from cover, or as a limitation on the defined risk. Furthermore, the Court considered that the Johnson decision had incorrectly interpreted s54(1) and accordingly, should be rejected in its entirety.

The Court ultimately considered that as each vehicle was operated by an untested driver at the time of the incidents and after the policy was entered into, an “act” had occurred, which satisfied s54(1). Further, the Court also noted that because of the Insured’s failure to ensure the drivers had undertaken the PAQS Test, an omission (defined as an “act” under s54(6)) had occurred after the contract was entered into and during the period of insurance. As such, s54(1) was applicable in the relevant circumstances.

Future warning

In light of the above, the High Court held that Maxwell could not deny coverage to the Insured, as but for the “acts”, coverage would have otherwise been confirmed under the policy.

This decision finally sheds some light on the proper construction of s54 of the ICA. It also reconciles some of the ambiguities surrounding the interpretation of s54(1), which arose following the Court’s narrow interpretation of the clause in the Johnson decision.

Moving forward, underwriters should ensure they are well informed of the applicability of s54 and that extra care is taken in the drafting of policy wording, as it’s clear that the broad interpretation of s54 reduces an insurer’s ability to limit the scope of risk that they agree to underwrite.