If the High Court's signal in Highway Hauliers was not clear enough, the Full Court of the Federal Court has further affirmed the pervasive remedial nature of section 54 of the Australian Insurance Contracts Act 1984 (ICA).
Watkins Syndicate v Pantaenius concerned an appeal from a decision handed down in January this year. In dismissing the appeal, the Full Court reaffirmed the general position that s 54 may apply provided that a restriction or limitation is not inherent in the claim and observed that this requires an analysis of the essential character of the policy.
A claim on the rocks
Watkins concerned a luxury yacht which sank off the coast of Cape Talbot, WA, while returning to its home port following completion of the Fremantle to Bali yacht rally.
The yacht was insured under two policies. The first was held with, Pantaenius Australia Pty Ltd (Pantaenius Policy). The second was underwritten by the Appellant, Nautilus Marine Agency Pty Ltd (Nautilus Policy).
The Pantaenius Policy responded to the loss, but the Nautilus Policy excluded losses occurring outside a defined geographical zone, being 250 nautical miles off the Australian mainland or Tasmania. Under this exclusion, coverage was suspended from the time the yacht cleared Australian Customs on its outward voyage until it cleared Customs on its return.
At the time the yacht sank it was within 250 nautical miles of the Australian mainland but had not cleared Australian Customs following its return from Bali.
Pantaenius made a claim for contribution on Nautilus, arguing s 54(1) nullified Nautilus' exclusion clause. Justice Foster, at first instance upheld the application and ordered contribution.
Was s 54 engaged?
On appeal, the first issue was determination of whether s 54 was engaged. Following a close examination of the relevant High Court authorities, the Full Court concluded this task involves identifying the nature and limits of the risks that are intended to be accepted, paid for, and covered under the policy. The Full Court observed:
"The process of understanding what are the restrictions or limitations that are inherent in the claim is one that involves the construction of the policy, not merely as to what its constituent words mean, but in a broad sense so as to characterise as a matter of substance what is the essential character of the policy. Once that essential character is decided upon, the restrictions or limitations that necessarily inhere in any claim under such a policy (to which s 54 does not apply) and the restrictions or limitations that do not necessarily inhere in any claim under such a policy (to which s 54 may apply) can be ascertained."
Perhaps unsurprisingly, their Honours held that the essential character of the Nautilus Policy was to provide coverage for damage occurring while the yacht was within 250 nautical miles of mainland Australia or Tasmania. As the insured's yacht was within this geographical limit at the time it sunk, the insured's claim necessarily incorporated a physical dimension that was part of the essential character of the policy. The suspensory limitation created by the particular wording of the exclusion clause (i.e. the requirement to clear and re-clear Australian Customs) was therefore a qualification on, or collateral to, the policy's essential character. As such, s 54 was engaged.
Did s 54 prevent refusal of the claim?
Having determined that s 54 was engaged, the Full Court found that cover was suspended due to an "act" of the insured (either the insured's act of clearing Australian Customs on the outward journey or the omission of not having cleared customs upon return from Bali). Therefore, as the relevant "act" did not cause or contribute to the loss suffered, Nautilus could not refuse Pantaenius' claim.
Can an insurer rely on the remedial benefit of s 54?
Finally, the Full Court confirmed that an insurer can rely on s 54 and the remedial benefit of s 54 is not reserved solely for insureds. Nautilus' argument that s 54's use of the word "claim" referred only to claims made by the insured was rejected.
Going forward
As the Full Court noted, the approach taken in Watkins represents the gradual distillation of jurisprudence on s 54 over nearly 20 years of litigation. This high-water mark in judicial interpretation, in what has previously been a difficult area to navigate, sends a clear signal to insurers. Close and careful attention must be paid to defining the limits of a policy to ensure that the scope accurately reflects the risk intended to be covered. Undue reliance should not be placed on technical exclusion or limitation clauses to remedy what is otherwise a broad or vaguely defined policy.
