Written by Madeleine Los
Section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) is a significant and frequently litigated provision in Australian insurance law. Its operation has consequences for claims handling, and insurers must understand its correct application to avoid adverse judicial scrutiny on its claims decisions. It can also be a powerful Defence to third party claims if your insured’s act or omission has genuinely prejudiced your interests in a claim.
Statutory Framework and Purpose
Section 54 is designed to prevent insurers from relying on technical post-contractual breaches to refuse otherwise valid claims.
In simple terms, where an insured does (or fails to do) something after the policy begins, and the insurer seeks to refuse a claim solely because of that act or omission, the insurer is generally not entitled to decline the claim outright. Instead, the insurer’s remedy is limited to reducing its liability to the extent it can demonstrate actual prejudice caused by the insured’s act or omission.
In practical terms, this requires a causal connection. The insurer must show that the relevant act or omission could reasonably be regarded as having caused or contributed to the loss.
What Does Cause or Contribute Mean?
In the case of Cleanaway Waste Management Ltd v Insurance Australia Ltd t/as Swann Insurance [2022] WADC 37 (Cleanaway), a vehicle owned by Cleanaway was involved in a collision with a motorcycle which was insured by Swann Insurance. The driver of the motorcycle passed away as a result of the collision, and it was later found he had methamphetamine in his system. Cleanaway sought to make a claim under the Swann policy as a third party, however their claim was declined as Swann argued the methamphetamine use triggered the drug and alcohol exclusion in their policy and as such there was no indemnity.
The question for the Court was whether the use of methamphetamine caused or contributed to the collision such that it prejudiced Swann’s interests. Ultimately, the Court found the mere existence of methamphetamine in the driver’s system was not sufficient to establish he was ‘under the influence’. Further, the Court found that any influence the methamphetamine may have had on the driver could not reasonably be regarded as causing or contributing to the collision.
While causation may be more straightforward in cases involving significant alcohol or drug consumption, it is often more complex in other scenarios, such as a lapse in vehicle registration or a failure to provide requested documentation. Although these may technically constitute breaches of the policy, if they did not cause or contribute to the loss itself, section 54 may prevent the insurer from declining the claim.
What Is an Act or Omission?
Understanding an ‘act’ is relatively straightforward. In the context of a claim it may be, an insured being under the influence of drugs or alcohol. Some further examples include:
- driving an unroadworthy vehicle;
- permitting an unauthorised or unlisted driver to use the insured vehicle;
- removing security features of a property after policy inception;
- allowing damage to spread at a property.
In the matter of Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681 an insured sought indemnity under an insurance policy, intended for legal expenses for directors/officers of companies, for legal fees he incurred in defending legal proceedings brought against him as a director of a company. The insurer rejected the claim because the insured failed to provide written notification of the claim, and the legal expenses were incurred prior to obtaining the insurer’s consent and as such the insurer had been prejudiced by the insureds failure to lodge a claim and section 54 was enlivened.
Ultimately, the Court found that while there actually had been prior notification of the claim to the insurer, the insured had incurred the legal expenses without consent which was an ‘omission’ for the purposes of section 54. This meant the insurer could decline the claim to the extent it was prejudiced (which in this case, was the entirety of the claim).
In the context of other insurers, such an omission might look like a failure to notify of a claim before the commencement of legal proceedings. This can lead to increased legal costs and interest which may not have been payable by the insurer had they been given an opportunity to settle the claim prior to litigation. As such, an insurer can enact section 54 to decline cover for the legal costs and interest portion of the claim (e.g. the amount it has been prejudiced by).
Section 54(5): Statutory Exceptions
Section 54(5) provides important exceptions. The section does not apply to an act that was necessary to protect the safety of a person or to preserve property. Nor does it apply where it was not reasonably possible for the insured (or another person) to avoid the act or omission.
These exclusions ensure that insureds are not penalised for conduct undertaken in emergencies or in circumstances beyond their control.
Key Takeaways
When considering the application of section 54, it is important to remember the following:
- section 54 applies only to post-contractual acts or omissions, not pre-contractual matters such as non-disclosure or misrepresentation;
- insurers cannot rely on mere technical breaches to refuse indemnity where the breach cannot reasonably be regarded as having caused or contributed to the loss;
- a causal connection must exist between the insured’s act or omission and the insurer’s prejudice;
- the insurer’s remedy is generally limited to reducing liability to the extent of proven prejudice, rather than declining the claim outright;
- where the insured’s conduct has materially prejudiced the insurer’s position, section 54 may permit a partial or complete reduction of indemnity; and
- statutory exceptions apply where the act was necessary for safety, preservation of property, or could not reasonably have been avoided.
If you wish to discuss any of the above, please call Jessica Woods on 03 9947 4516 or one of the Ligeti Partners team members on 03 9947 4500.
