On the road (or highway) to clarifying section 54

Insurance Update (Australia)

Last week’s decision of Highway Hauliers Pty Ltd v Maxwell [2012] WASC 53 (Highway Hauliers) has gone some way to clarify the ‘controversy’ and ‘mischief’ surrounding the judgment of Johnson v Triple C Furniture & Electrical Pty Ltd [2010] QCA 282 (Johnson). In Johnson, the Queensland Court of Appeal held that a third-party pilot’s failure to undergo and pass a skills review was not regarded as an act or omission to which section 54 of the Insurance Contracts Act 1984 (Cth) applied. Rather, the loss was simply excluded under the policy. In Highway Hauliers, the insured’s authorisation of third parties to drive trucks in circumstances where those drivers had failed to achieve a minimum score on a driving test was regarded as an act to which s 54 applied, and the insured was entitled to indemnity. 

Johnson
In Johnson, the insured owned an aircraft that crashed due to pilot error. In fact, it was said that the pilot had many faults as a pilot and had these been detected, he ‘would have been grounded’. The insurer of the plane refused to indemnify the insured because the aircraft was being flown by a pilot who had not satisfactorily completed a flight review in the two years prior to the crash (such circumstances being expressed to be excluded under the policy). 

The court ultimately upheld the exclusion and found that the insured was not entitled to indemnity. It considered that the pilot’s failure to have satisfactorily completed a flight review was not an ‘omission’ to which s 54(1) could apply, such that s 54 was irrelevant. That was because the satisfactory completion of the flight review was not a mere formality, but rather required a thorough investigation of the pilot’s theoretical knowledge and practical skills, and was dependent upon the instructor’s assessment of the pilot’s performance. Whilst the pilot may have omitted to undergo the review, what was required was that he complete the review to someone else’s satisfaction and if he did not, the insured did not have cover under the policy.

The court went on to say that if that analysis was wrong, s 54 in any event would not have remedied the breach. Had the pilot undergone the review, his faults should have been detected and if not corrected, the pilot would have been prevented from flying. As such, his omission to undergo the review would be regarded as a causative/contributing factor to the crash and s 54 (if it applied) could not remedy the breach. This alternative reasoning is consistent with the decision in Highway Hauliers, even though the outcomes are entirely different because of the facts.

Highway Hauliers
In Highway Hauliers, the insured sought indemnity for damage sustained to its trucks in two separate accidents. The insurer refused indemnity on the basis that, amongst other things, the drivers of the trucks at the time of the accidents had not achieved a minimum score on a driver test known as the People and Quality Solutions (PaQS) test (such circumstances being expressed to be excluded under the policy). The insurer urged the court to follow Johnson and uphold the exclusion, arguing that s 54 had no role to play. 

However, the court effectively characterised the exclusion as a policy condition that the truck drivers obtain minimum scores on their PaQS tests. Once so characterised, s 54 applied. The court found that the relevant ‘act’, for the purposes of s 54, was the insured allowing the operation of the trucks with drivers who had not attained the minimum PaQS score, which could be remedied by the operation of s 54. In circumstances where the insurer conceded that the driver's failure to attain the minimum PaQS score could not reasonably be regarded as being capable of causing or contributing to the losses, the court was not required to consider the potential operation of ss 54(2), (3) and/or (4). The court therefore found that the insurer was obliged to extend indemnity.
 
Although it was suggested that the court was bound by the decision in Johnson, the court noted that the decision in Johnson was not a conclusion about the proper construction of s 54. Indeed, what constitutes the relevant act or omission for the purpose of s 54(1) will depend on the particular circumstances of the case. In Highway Hauliers, the fact that the drivers concerned had not attained the minimum PaQS score was not, by itself, the reason why the insurer was entitled to reject the claims. Relevantly, the policy was more concerned with the use of the vehicles involved in the accidents rather than the attributes of the drivers involved. Consequently, the act of the insured in operating the vehicles with drivers who did not satisfy the requirements of the policy was clearly an act with respect to which s 54(1) could apply. 

Conclusion
Notwithstanding the significant factual similarities between Johnson and Highway Hauliers, there are stark differences in the respective courts’ approaches. The insurer was not obliged to indemnify the insured in Johnson because (in part) it was alleged that the relevant ‘omission’ was that of the pilot to satisfactorily complete the flight review – something that was not within his power to do. However, the insurer was obliged to indemnify the insured in Highway Hauliers because (in part) it was alleged that the relevant ‘act’ was that of the insured in allowing the operation of the trucks in circumstances where the drivers had not satisfactorily completed the PaQS test – something that was within its power to do. This is a salient reminder for insureds to properly characterise the facts giving rise to the relevant ‘act’ or ‘omission’ when seeking relief via s 54.