REFORMING INSURANCE LAW: - Law Commission

(ii) within 28 days after that cover had expired. 353
Accordingly, if there is a contractual right to notify, any failure to exercise it either within the
policy period or within a new extended 28-day period removes the possibility of the courts
giving relief under s 54.
Act or omission not capable of causing or contributing to a loss: prejudice
7.16 Once it is established that the assured’s act or omission was not capable of causing or
contributing to a loss, the insurers have to pay the claim. They are, however, entitled to damages
which fairly represent the prejudice suffered to their interests. It is not possible to calculate
damages by reference to common law authorities, for the simple reason that at common law
breaches of conditions precedent and continuing warranties do not give rise to damages, so that
common law rules have to be applied by analogy. 354 Damages will generally take the form of
deduction from the sum payable under the policy, and the cases are consistent that, as in cases
under s 28, in appropriate circumstances deduction can reduce the sum payable to nil. The
authorities establish that there is a two-step test to determining prejudice: the insurers have to
prove that they would have relied upon the assured’s act or omission in order to defeat the claim;
and they have to prove that their inability to do so means that they have suffered monetary
prejudice. 355 In circumstances where the assured has broken a term which would have given the
insurers a complete defence, then on the face of things the insurers have lost their opportunity to
deny liability and the prejudice suffered by them is the full amount of the claim. Equally, if the
assured has not sought the insurers’ consent for a variation of the risk – whether it be the addition
of a named driver of a motor vehicle 356 or the incurring of defence costs 357 – and the insurers can
show that consent would have been refused or that they would have come off risk, their prejudice
is prima facie 100% of the assured’s claim. However, recovery is possible if the insurers cannot
show that they would have taken that opportunity. The general view taken by the courts is that if
the assured’s breach is not one which would have produced any different result then there is no
prejudice. Thus in the case of a liability policy, failure by the assured to give the insurers due
notice of a claim against him and which prevents them from defending the claim properly only
gives rise to prejudice if the insurers can show that their defence would have made a difference
to the outcome, 358 in the case of a property policy the insurers have not suffered any prejudice if
they cannot show that they would have refused their consent to a change of risk 359 and in a
353
The drafting is not perfect. Draft s 54A(1) states that the section applies only to policies within s 40, but this
reference appears to be erroneous, as the whole point is that s 40 applies only to policies which do not permit
notification of circumstances.
354
Ferrcom Pty Ltd v Commercial Union Assurance Co of Aust Ltd (1993) 176 CLR 332.
355
Ferrcom Pty Ltd v Commercial Union Assurance Co of Aust Ltd (1993) 176 CLR 332; Moltoni Corporation Pty
Ltd v QBE Insurance Ltd (2001) 205 CLR 149. See also Yeoh v Vero Insurance Ltd & Tannous (Home Building)
[2005] NSWCTTT 74 (loss of subrogation rights).
356
Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61. See also Gibbs Holdings Pty Ltd v
Mercantile Mutual Insurance (Australia) Ltd [2002] 1 Qd R 17.
357
Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652.
358
Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 (no prejudice); FAI General Insurance Ltd v
Jarvis (1999) 19 ANZ Ins Cas 61-426 (prejudice).
359
Ferrcom Pty Ltd v Commercial Union Assurance Co of Aust Ltd (1993) 176 CLR 332.
68