REFORMING INSURANCE LAW: - Law Commission

personal injury claim failure by the assured to inform the insurers in due time will only be
regarded as having caused prejudice if the insurers can show that they would have undertaken an
examination of the assured and that this might have affected the outcome of the claim. 360 By
contrast, if the insurers have been denied an opportunity to investigate a claim properly and they
would otherwise have been able to recover from a third party, the claim may be reduced by that
amount. 361
Act or omission capable of causing or contributing to a loss: causation
7.17 The starting point is that an act or omission of the assured in breach of policy terms which
is capable of causing or contributing to a loss gives the insurers a defence (s 54(2)). However,
this is subject to a causation test. Under s 54(3), if the assured can prove that no part of the loss
was caused by the act or omission and that the loss arose from a completely separate source even
though the assured was in breach of his policy obligations at the time, the insurers are liable for
the full amount of the claim. It is to be noted that s 54(3) is concerned with the loss itself and not
with the potential for a loss: if the act or omission does not have the potential to give rise to a
loss, then the matter is dealt with under s 54(1), whereas if it does have that potential then the
question under s 54(3) is whether the act or omission actually caused the loss. Thus if a vehicle is
warranted to be roadworthy, and is stolen while parked and not in use, the roadworthiness
provision attracts s 54(2) because its breach is capable of causing a loss, but the assured will
recover under s 54(3) because his breach did not cause the loss. The fact that it may have
contributed to the loss does not prevent the operation of s 54(3). The test under s 54(3) is
“caused”, so that the assured can recover if the proximate cause of the loss was something other
than the act or event and he cannot recover if the loss was proximately caused by the act or
event. If there are two causes of the loss, one the assured’s act or omission and one a cause
beyond the assured’s control, ordinary causation principles would indicate that the exclusion
takes priority and that there is no recovery at all. 362 It would seem, however, that even if the
assured can prove that his conduct did not cause the loss so as to bring himself within s 54(3), the
insurers are still entitled to damages under s 54(1) based on the prejudice that they have suffered
by reason of the assured’s conduct. 363 Sutton has explained the point in the following way. If the
act is capable of causing or contributing to a loss, s 54(2) applies and the insurers may refuse to
pay the claim, although the assured is entitled to recover under s 54(3) if he can prove that his
conduct did not cause the loss. The effect of the assured establishing that the loss was not caused
by his conduct is, however, to disapply s 54(2), because the operation of s 54(2) is expressly
stated to be subject to s 54(3) – that means that s 54(2) ceases to be relevant and the matter is to
be dealt with under s 54(1), where the insurers are entitled to damages for any prejudice suffered
by them by reason of the assured’s act or omission (ie, causation). 364 Whatever the correct
explanation of apportionment might be, it is plainly right –as commented by Sutton – that “the
360 QBE Insurance Ltd v Moltoni Corporation Pty Ltd (2000) ANZ Ins Cas 61-468.
361 Jones v Vero Insurance Ltd & Gibbs (Home Building) [2005] NSWCTTT 534.
362 Wayne Tank & Pump Co v Employers’ Liability Assurance Corp Ltd [1973] 2 Lloyd’s Rep 237
363 The notes to the Draft Bill give the example of an assured who warrants that his vehicle will be maintained in a
roadworthy condition, and it is damaged in a collision for which a third party is 50% responsible: the assured is
entitled to recover 50% of the policy moneys.
364 Sutton, para 8.30, citing Australian Associated Motor Insurers Ltd v Ellis and Ellis (1990) 54 SASR 61.
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