The recent Federal Court Judgment in Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds  FCA 1 serves as a good reminder of the breath and application of Section 54 of the Insurance Contracts Act 1984 (Cth)(ICA).
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 Second Pantaenius policy was obtained because the Nautilus policy excluded sailboat racing of more than 100 nautical miles.
The claim fell within the Pantaenius policy and was paid in full. Pantaenius then sought equitable contribution from Nautilus.
Nautilus denied liability by reason of a geographical limits provision which provided for a suspension of the policy after the yacht cleared Australian Customs until it again cleared Customs on return to Australia.
At the time of the loss, although the vessel was back inside Australian waters, the yacht had not cleared Australian Customs and as such, on its face, the Nautilus geographical limits provision was triggered unless ICA Section 54 was engaged.
In summary, Section 54 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.
The Judge stated that the object of Section 54 is to strike a fair balance between the interests of insurer and insured with respect to contractual terms designed to protect the insurer from an increase in risk during the period of insurance cover. That balance is to be struck irrespective of the form of the contractual term, whether it be one that defines the scope of cover or the entitlement to claim. The question the court must ask is – what is the effect of the provision on the insurer and the insured?
The Judge concluded that by causing the yacht to clear Australian Customs for the purpose of leaving Australian waters the Insured committed an act which led Nautilus to refuse to pay the claim. Section 54 was invoked and Nautilus’ defence would fail unless it could show that the act could be reasonably regarded as being capable of causing or contributed to the loss (Section 54(2)) or that Nautilus’s interests were prejudiced as a result of the act (Section 54(1)).
The grounding had occurred after the yacht had re-entered Australian waters. Therefore, the Judge said the geographical location of the vessel could not be said to have caused the loss or increased the risk. The act complained of by Nautilus was the clearing of Australian Customs to leave. The Judge could not accept that the risk of grounding off Port Talbot had increased by reason of the yacht simply clearing Australian Customs, though the Judge said a different result may have been reached had the vessel sunk in Indonesian waters beyond the geographical scope of the policy.
The Judge rejected Nautilus’ argument that the Nautilus policy was not on risk and accepted that the geographical limitation provision was amenable to the operation of section 54.
Further, the Judge also rejected Nautilus’ other argument that Section 54 only applied to assist an insured, not another insurer seeking contribution. He held that the intention of the legislature is to stop insurers from relying upon certain contractual provisions to refuse to pay a claim. There was no reason to deny an insurer claiming a contribution the same benefit as an insured. The Judge ordered Nautilus to contribute 48%.
The Judgment serves as a good reminder of the wide scope of ICA Section 54 and the challenges faced by pleasure craft and other insurers in Australia when relying on express warranties and conditions.
For those of you in the marine market more familiar with the strict application of warranties and conditions under the Marine Insurance Act 1909 (Cth) please note that the ICA will not apply to marine insurance policies with the exception of marine “pleasure craft” insurance which is expressly written back into the ICA by section 9A.
This article was written by Anthony Highfield, Partner and Chris Sacré, Senior Associate.