REFORMING INSURANCE LAW: - Law Commission

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person not to do the act or to avoid the omission, under s 54(5) the insurers may not refuse to pay the claim by reason only of the act or omission. (6) Whatever the nature of the breach, insurers have the right to give notice of cancellation under ss 59 and 60. Act or omissions 7.6 General meaning. The initial question is to decide whether the act or omission specified by the policy, and whatever its form, 323 is capable of causing or contributing to a loss. 324 If it is not so capable, s 54(1) applies; if it is so capable, s 54(2)-(4) apply. An act or omission will not be capable of causing or contributing to a loss if it is one of two types. 7.7 First, claims provisions will generally fall within s 54(1), because by the time a claim is made the loss will already have occurred and the assured’s conduct cannot contribute to it let alone cause it. 325 Failure by the assured to obtain the consent of the insurers for the incurring of defence costs falls within s 54(1). 326 7.8 Secondly, procedural obligations arising from the assured’s use of the insured subject matter will normally be within s 54(1). It was held in Ferrcom Pty Ltd v Commercial Union Assurance Co of Aust Ltd 327 that the assured’s failure to notify the registration of a mobile crane as a motor vehicle, contrary to a term requiring notice of change of use, could not have contributed to any loss. It was similarly held in Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd 328 that failure to notify the insurers of an increase of risk by change of use did not affect the prospects of loss. The notes to the Draft Bill 1982 provide the illustration of a motor policy which requires the assured to have a driving licence: this is regarded as a s 54(1) case. It has also been held that a compromise agreement under which the assured surrenders subrogation rights is not an act capable of causing or contributing to a loss. 329 7.9 By contrast, provisions which relate to the risk itself are within s 54(2). Thus it was recognised in Gibbs that the act of increasing the risk would have been capable of causing a loss 323 But see Stapleton v ATI Ltd [2002] QDC 204 where it was held that risk definition was outside s 54. The policy excluded liability for damage to the assured’s vehicle while it was engaged on a journey that would take it more than 450 kms from the assured’s home base. It was damaged while on such a journey, albeit it was within the 450 km limit at the time. The court held that s 54 was inapplicable. A better analysis would be that the limit was one which was capable of causing or contributing to a loss, and that the loss had been caused by the fact that the vehicle was on the prohibited journey so that s 54(3) denied recovery. Were it otherwise, it would be possible to sidestep s 54 by drafting obligations as situations in which there was no cover. 324 Sutton has suggested that this is a “reasonable insurer” test: Sutton, para 8.28. 325 Jones v Vero Insurance Ltd & Gibbs (Home Building) [2005] NSWCTTT 534. There may be an exception in the case of liability insurance (and reinsurance), where a failure to allow (re)insurers to participate in the settlement process following a third party claim may affect their ultimate liability and thus the “loss” under the policy. See infra, 326 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; Manufacturers Mutual Insurance Ltd v Murray River North Pty Ltd [2004] WASCA 276. 327 (1993) 176 CLR 332. 328 [2002] 1 Qd R 17. 329 Yeoh v Vero Insurance Ltd & Tannous (Home Building) [2005] NSWCTTT 74. 63
had that been the conduct prohibited by the policy. 330 Equally, s 54(2) is engaged where the assured drives an insured vehicle while under the influence of alcohol, 331 where the assured modifies the insured vehicle without requesting the permission required of the insurers 332 or where the assured fails to set an alarm as required by the policy. 333 7.10 Omissions and inactions. Perhaps the key issue which has arisen under s 54 is whether the assured’s failure to exercise an option that would entitle him to cover had he exercised it can be classified as an “omission” and thus subject to the saving provisions of s 54, or whether there is simply “inaction” not amounting to omission. The main context of the question is the right of the assured under a liability policy to give notice to the insurers of circumstances likely to give rise to a claim so that he is thereby entitled to treat any subsequent claims made against him after the policy has expired as backdated to the notification of those circumstances . As will be seen below in the discussion of liability insurance, it is now settled, after a good deal of confusion, that an assured who fails to exercise a contractual option can be said to have been guilty of an omission which triggers s 54, 334 although this particular rule is likely to be reversed by legislation in due course. 335 In the same way, an assured who fails to seek the permission of liability insurers to incur defence costs falls within s 54, given that an omission includes a failure to exercise a right or choice. 336 The distinction between an option and an obligation at first sight appears to be an obvious one, but further reflection – as is demonstrated by the case law – indicates that any provision can be framed in either way. A condition precedent providing for a claim to be made as soon as reasonably practicable could equally be drafted as a clause which permits the assured to make a claim if he notifies the insurers as soon as is reasonably practicable; in the same way, the option to notify circumstances likely to give rise to a loss could be an obligation to notify circumstances which may (the more common form of wording) or are likely to give rise to a loss in order to trigger coverage. The Australian courts have, it is suggested, been correct in rejecting form and focusing on substance. There is a wider question as to whether a typical London market claims made policy should be treated in some special way, so that failure to notify circumstances is not something which can be disregarded. This is considered below. 7.11 Extension of cover. An additional situation in which the distinction between option and obligation comes to the fore is under a declaration policy or other form of cover under which the risk may be extended if the assured so wishes. If the policy is obligatory in that any risk accepted by the assured is automatically binding on the insurers, then any obligation on the assured to notify would under the Australian system fall within s 54(1) because it cannot have any effect on 330 See also Austcan Investments Pty Ltd v Sun Alliance Insurance Ltd (1992) 7 ANZ Ins Cas 61-116. 331 Bunting v Australian Associated Motor Insurers Ltd February 1994, unreported, Tas Sup Ct. 332 Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61. 333 McNeill v O’Kane [2004] QSC 144. 334 The leading case affirming this distinction, FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89, held that it was justified by reference to the considerations that: (a) the assured had a choice but failed to exercise it; and (b) the assured, by failing to exercise his option, did not lose any pre-existing rights. The counter arguments, which subsequently prevailed, were that: (a) the distinction gives effect to form over substance; and (b) if there is a distinction between a failure to act and a decision not to act, the law would be introducing subjective intention as the relevant test. 335 See infra. 336 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652. 64
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REFORMING INSURANCE LAW: IS THERE A
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6 FRAUDULENT CLAIMS 6.1 Meaning of
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legislation as it relates to substa
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different fate. On 9 September 1976
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invaluable in that it was devised a
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in deciding whether or not to appro
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Page 48 and 49: utmost good faith. 218 The remedy i
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Page 86 and 87: which the need for each of the part
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Page 96 and 97: period. In addition, such policies
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REFORMING INSURANCE LAW: - Law Commission

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