In January this year we reported to you on the first instance Judgment in Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds (Nautilus Marine). The Federal Court found in favour of Pantaenius at first instance and the matter was appealed to the Full Federal Court.
The Full Federal Court (Allsop CJ, Rares, Besanko JJ) handed down judgment on 8 November 2016 dismissing the appeal. The Full Federal Court provided further useful guidance on the application of section 54.
Section 54 of the Insurance Contracts Act 1984 (Cth) (section 54)
For those not familiar with consumer protection afforded by section 54, it requires an insurer who wishes to refuse to pay a claim (in whole or in part) by reason of an act or omission of the insured, to prove either a causal link between the act and the loss or prejudice suffered as a result of the act.
Put another way, if the insured, by an act or omission, breaches a warranty or condition, or triggers an exclusion, but that act or omission does not contribute to the loss, section 54 will generally operate to stop the insurer from denying the claim by reason of that act alone.
Many of you will be more familiar with the strict application of warranties and conditions under the Marine Insurance Act 1909 (Cth). In this case the yacht was a pleasure craft and as such the section 9 and 9A of the ICA expressly provides that the ICA and not the MIA will apply.
The subject yacht ran aground in Australian waters off Port Talbot WA on 22 June 2013 while returning to Australia, having completed the Fremantle to Bali race.
The yacht was covered by two pleasure craft insurance policies issued by Nautilus Marine and Pantaenius Australia. The Pantaenius policy was obtained specifically for the race because the Nautilus policy excluded sailboat racing of more than 100 nautical miles (nm).
The claim fell within the Pantaenius policy and was paid in full. Pantaenius then sought equitable contribution from Nautilus because the Nautilus policy also covered the loss.
Nautilus denied liability by reason of a policy clause that operated to suspend cover from the time the yacht cleared Australian Customs to leave Australia until it again re-cleared Customs on return to Australia. The Nautilus policy also had a geographical limit of 250 nm.
At the time of the grounding, the yacht was within the 250 nm geographical limits but had not re-cleared Australian Customs. As such, on its face, the customs clearance exclusion was triggered unless ICA Section 54 was engaged to prevent Nautilus relying on the insured’s failure to re-clear customs as the reason for not paying the claim.
The first instance decision
At first instance, the Federal Court (Foster J) found in favour of Pantaenius and concluded that section 54 did apply to prevent the operation of the exclusion.
Click here to read our case note on the first instance decision.
Nautilus appealed to the Full Federal Court.
Appeal decision – Full Federal Court
Dismissing the appeal, the Full Federal Court found that when determining whether section 54 applied to a claim one must determine what policy restrictions or limitations are inherent in any claim under the Policy (to which s 54 does not apply), as opposed to restrictions or limitations that are not necessarily inherent in any claim under the Policy (to which s 54 may apply).
The Court noted that the scope of cover offered by a policy will influence its price and it was open to underwriters to impose restrictions inherent in any claim under the Policy.
The process of characterisation of policy clauses and identifying the essential character of the Policy will be influenced, but not dictated, by the drafting of the wording of the policy, and will involve the identification of the nature and limits of the risks that are intended to be accepted, paid for, and covered.
The court explained the distinction by reference to:
a. The 250 nm geographical limits on the cover; and
b. The suspension of cover if the vessel had cleared customs for the purpose of leaving Australia and did not re-cleared customs on return.
The 250 nm geographical limit delineates the essential geographic risk and defines part of the policy’s essential character. The Nautilus policy only responded if the yacht was within 250 nm of Australia. That was a restriction that must inhere in every claim made on the Nautilus policy. Therefore, Section 54 would not have assisted the insured if the yacht had been outside the 250 nm limit at the time of grounding.
The customs clause provided for a temporal suspension of cover for a period triggered by the act of the insured of clearing customs. The act or omission of the insured in clearing customs and failing to re-clear customs was sufficient to engage section 54.
The application of the customs exclusion was dependant on an act of the insured during the period of cover. It did not apply to all claims or define the policy scope in the same way the geographical limits did.
In other words, the geographic limits delineated the essential risk of the policy, whilst the customs clearance suspension only qualified cover in certain circumstances.
The Full Court’s decision also confirmed that section 54 is available to an insurer seeking contribution from another insurer if it could have been relied on by their joint insured.
The Full Federal Court’s decision does provide greater clarity as how section 54 will apply to certain policy clauses. However, each clause must be considered carefully and worded correctly if the application of section 54 is to be avoided. It is insufficient to simply label a clause as one relating to the scope of policy coverage rather than an exclusion to that cover. The avoidance of ambiguity in this area will help both avoid claims and avoid the cost of litigation fuelled by uncertainty.
Should you require a review of a claim or policy terms in light of this decision then do not hesitate to contact a member of our team.
This article was written by Anthony Highfield, Partner and Chris Sacré, Special Counsel.