Australia: Section 54 encounters more turbulence - Does section 54 of the Insurance Contracts Act apply to an exclusion relating to a breach of a Civil Aviation Regulation?

Johnson v.  Triple C Furniture & Electrical Pty Ltd [2010] QCA 282

Facts

Mrs Johnson sustained serious injuries in an aircraft accident in which her husband, the pilot, was killed. She sued the owner of the aircraft (a company she controlled with her husband) alleging it was vicariously liable for the negligence of the pilot.

The owner joined the aircraft insurer as a third party claiming indemnity for any liability to Mrs Johnson. The insurer denied indemnity, relying on an exclusion that avoided cover where the aircraft was being operated in breach of a CASA regulation. The regulation required the pilot to have satisfactorily completed an aeroplane flight review in the two years before the subject flight.

Trial

Mrs Johnson succeeded at trial and was awarded substantial damages. In order to exclude indemnity for that award, the insurer had the onus of proving that no flight review had been undertaken within the two years before the accident. It adduced evidence from the investigating loss adjuster that he had noted the pilot's log book (which was recovered from the aircraft) did not record a review flight in the preceding two years. Neither the log book nor copies of its entries were produced at trial

The owner conceded it did not know the true position and did not call any evidence in rebuttal. Mrs Johnson gave evidence about the existence of a second log book but could not say what it contained. It was similarly not produced.

The trial judge found the insurer had not discharged its onus of proof and consequently could not rely on the exclusion clause. The trial judge also accepted there was a second log book and, as the first log book was out of date, he inferred the second log book was more recent. The insurer appealed.

Appeal

The appeal court overturned the trial judge's finding and said the only sensible inference from the available evidence was that the log book recovered from the aircraft was the pilot's current log book and, as it did not record a flight review in the preceding two years, the insurer was entitled to invoke the exclusion clause. Consequently, the insurer was able to deny indemnity for the claim unless section 54 of the Insurance Contracts Act precluded that result.

Materially, section 54 provides that if an insurer could refuse to pay a claim by reason of some act (or omission) of the insured or some other person after the policy was entered into, then the insurer may not refuse to pay the claim unless the act (or omission) could be regarded as the cause of the loss.

The owner argued that the pilot's failure to satisfactorily complete a flight review was an omission within the meaning of section 54 and therefore the insurer was precluded from denying indemnity for the claim.

The appeal court found that section 54 did not apply for the following reasons:

• The pilot's failure to comply with the regulation was not an omission within the meaning of section 54 because satisfactory completion of the flight test was not within the pilot's control but was dependent upon the instructor's assessment of his performance in a flight review. As a result, it was not something the pilot could omit to do under section 54.
• As the failure triggered an exclusion in the policy, there was simply no cover available. It was therefore an omission that was relied on by the owner to give rise to a claim that the owner could not otherwise make. Section 54 does not operate to relieve the insured of restrictions or limitations that are inherent in the claim but requires a claim for which the policy responds and an act or omission that founds the insurer's refusal to pay the claim.

The appeal court said that if the above analysis was wrong, the omission was capable of causing or contributing to the loss and therefore entitled the insurer to deny indemnity.

The trial judge's decision was therefore set aside.

Comment

The appeal court's decision can be questioned on the following bases.

First, the exclusion clause requires the aircraft to be operated in circumstances where the pilot has not satisfactorily completed a flight review. The trigger for the exclusion is the positive act of operating the aircraft in those circumstances rather than an omission by the pilot to obtain the review.

Second, the essence of the insurer's promise was to indemnify the insured for all sums it became legally liable to pay for bodily injury to passengers whilst on board the aircraft. It is arguable that the exclusion clause did not go to the essence or core of that promise (that is, an inherent restriction or limitation to the claim) but was simply the reason for the insurer's refusal to pay an otherwise valid claim.

Third, in finding that the failure to satisfactorily complete a flight review in the previous two years was the cause of the accident ignores the evidence that the pilot had only operated the aircraft for six weeks, had not previously used the aircraft on a gravel airstrip, and appeared stressed at the time of takeoff.

It remains to be seen how the implications of this decision in relation to the operation of section 54 are addressed in future.

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