Australia: Insurers beware – exemption clause applicable, but insurer required to indemnify for jet ski accident

The recent decision of Whittington v Smeaton [2016] ACTSC 76 held that an insurer has no power to refuse to pay a claim on the basis of an act by the insured, if the act is not reasonably regarded as being capable of causing or contributing to the loss.

"the Court found that... whether or not the Second Defendant had obtained a Queensland licence would not have made any difference to the loss suffered by the Plaintiff."

Nathan Whittington ("the Plaintiff") was an passenger and observer on a jet ski being operated by Scott Smeaton ("the Second Defendant) while it was being used to tow Todd Smeaton ("the First Defendant"), the owner of the jet ski and the brother of the Second Defendant, as he water skied. The First Defendant fell off the water ski and the Second Defendant turned the jet ski around at a high speed to collect him. As the Plaintiff was reaching forward to take the slack of the tow rope, as earlier instructed by the First Defendant, the jet ski encountered a boat's wake. The wake led the jet ski to become unstable and the Plaintiff to fall into the water and his leg became entangled in the tow rope, traumatically amputating the Plaintiff's foot.

The Plaintiff sought $800,000 damages against the Defendants before the Supreme Court of the Australian Capital Territory. As the incident occurred in Queensland, the First Defendant and the Second Defendant argued that they were afforded a complete defence under sections 18 and 19 of the Civil Liability Act 2002 (Qld) ("CLA") because the accident arose from an "obvious risk" in the course of a "dangerous recreational activity". The First Defendant had an insurance policy with Allianz Insurance Australia Limited ("Allianz"), who were joined to the claim as a third party. Allianz submitted that it could refuse to pay on the First Defendant's claim for indemnity because the Second Defendant, who was driving the jet ski, was doing so without a personal watercraft licence (PWC) as required under Queensland legislation.

Expert evidence before the Court established that performing the role of an observer on a jet ski did not carry an obvious or significant risk. Therefore, the Court ruled that the Plaintiff was not engaged in a dangerous recreational activity and, consequently, the defence under the CLA was not open to the First and the Second Defendants.

In determining whether Allianz was required to pay the claim, the Court considered the First Defendant's Club Marine policy with Allianz. This contained a clause indemnifying Allianz from paying on claims where the driver of the jet ski was unlicensed. The Second Defendant possessed a boat licence, but did not hold a PWC licence. However, section 54(3) of the Insurance Contracts Act 1984 (Qld) ("ICA") provides that an insurer may not refuse to pay a claim if the insured can prove that the injury was not caused by the act justifying the refusal. The act in this case was the driver's act of not possessing the correct licence.

In determining whether section 54(3) applied, the Court considered the process of obtaining a PWC licence in both Queensland and New South Wales as well as the Second Defendant's skill and prior experience of operating jet skis. The Second Defendant had operated jet skis hundreds of times before the incident in a variety of conditions. Additionally, the Queensland licensing regime involved the undertaking of a two hour training course that did not cover pillion or water skiing safety. His Honour attributed the Plaintiff's loss to the 40 centimetre wake created by the other boat and rejected that the injury turned solely around whether or not the Second Defendant was licensed. Ultimately, the Court found that, on the balance of probability, whether or not the Second Defendant had obtained a Queensland licence would not have made any difference to the loss suffered by the Plaintiff.

The court ordered that judgement be entered for the Defendants against Allianz in the sum of $800,000.

This decision reminds insurers of the application of section 54 of the ICA. Insurers must be aware that coverage cannot be denied because of an act of the insured if the loss that gave rise to the claim was not caused by that act.

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