Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33: Insurance Contracts Act s 54

Wednesday 10 September 2014 @ 12.22 p.m. | Legal Research | Trade & Commerce

In Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33 handed down on 10 September 2014, the High Court of Australia has, in a unanimous decision, dismissed an appeal from an earlier decision of the Court of Appeal of the Supreme Court of Western Australia (see Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 (5 July 2013)) regarding the application of the Insurance Contracts Act 1984 (Cth) (the Act) section 54, a provision dealing with the circumstance when an insurer may not refuse to pay claims.

In its decision, the High Court found that section 54(1) of the Act prevented the insurers in the case from refusing to pay claims for indemnity made by the insured, even in circumstances where the insured had failed to comply with an endorsement forming part of the contract of insurance.

Relevant Legislative Provision

Section 54(1) of the Act states that:

“. . . where the effect of a contract of insurance would, but for [that] section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into . . . the insurer may not refuse to pay the claim by reason only of that act",

and also that:

“. . . the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced . . .” by that act.

Section 54(2) of the Act states that:

“Subject to the succeeding provisions of this section [54], where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.”

In other words, providing that the insurer may nonetheless refuse to pay a claim where the relevant act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the insurance contract.

Background, Trial and WA Court of Appeal Decision

In the WA Court of Appeal, Highway Hauliers (the respondent) made insurance claims related to damage to two of its trucks. Both claims were rejected by the insurer (the appellant) on the grounds that under the terms of the insurance contract, the drivers of the two damaged trucks in question were not qualified or approved to have made the hauling runs during which the damage eventuated. The appellant had therefore argued that it did not have to indemnify the respondent for the damage and repairs to the two trucks.

At trial, it had been established that the drivers’ lack of qualifications or approval had not caused the loss claimed by the respondent and the WA Court of Appeal upheld the findings of the trial judge, holding that section 54 the Act provides that an insurer may not refuse to pay a claim on the basis of breach of contract if that breach did not cause any part of the loss claimed. The appellant insurer was required to indemnify the respondent, and refusal to do so was a breach of the insurance contract.

Following the respondent’s success in proceedings for indemnity under the policy and for damages for breach of the insurance contract in the WA Court of Appeal, the appellant, who was nominated as the authorised representative of the insurers, by way of special leave, appealed to the High Court of Australia.

The High Court’s Interpretation of the Act and section 54

In its interpretation of the Act, the High Court considered the objects of the Act as described in its long title emphasised the need to strike a “fair balance . . . between the interests of insurers, the insured, and other members of the public” and stressed the need for “such contracts [to] operate fairly” (see paragraph [19] of the judgment).

Looking more specifically at the objects of section 54 of the Act (see paragraph [20] of the judgment) the court accepted the explanation in the report of the Australian Law Reform Commission, Insurance Contracts, (Report No 20, (1982) at xxxi-xxxii, 132-140) which recommended the introduction of the current Act saying the objects included:

“. . . striking a fair balance between the interests of an insurer and an insured with respect to a contractual term designed to protect the insurer from an increase in risk during the period of insurance cover. That balance was to be struck irrespective of the form of that contractual term. In particular, no difference was to be drawn between a term framed: as an obligation of the insured (eg ‘the insured is under an obligation to keep the motor vehicle in a roadworthy condition’); as a continuing warranty of the insured (eg ‘the insured warrants he will keep the motor vehicle in a roadworthy condition’); as a temporal exclusion from cover (eg ‘this cover will not apply while the motor vehicle is unroadworthy’); or as a limitation on the defined risk (eg ‘this contract provides cover for the motor vehicle while it is roadworthy’)”.

The High Court’s Decision

On appeal, the High Court rejected the appellant's argument that the "claim" to which section 54(1) of the Act refers is a claim for an insured risk. The High Court held that the respondent’s claims made in relation to accidents which occurred during the period of insurance were sufficient to engage section 54(1) of the Act, and that the effect of the contract of insurance was that the appellant may refuse to pay those claims by reason only of acts which occurred after entry into the insurance contract. Section 54(1) of the Act applied to the respondent's claims because the operation of each vehicle by an untested driver was properly characterised as having been by reason of an “act” that occurred after entry into the contract of insurance.

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