REFORMING INSURANCE LAW: - Law Commission

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