REFORMING INSURANCE LAW: - Law Commission

7.20 Treasury Review I, 2003, found that s 54 was generally welcomed and that there were no
calls for its general abolition or modification, despite its overcautious rejection by ALRC for
marine insurance purposes. The beauty of the Australian non-marine approach is that it removes
all distinctions between classes of terms and is concerned only with the relationship between the
operation of the provision and the loss suffered by the assured. The initial classification of terms
into those whose breach are capable of causing or contributing to a loss and those which are not
so capable is not without its difficulties, many of which do not arise in England because of the
use of “claims made” rather than “claims made and notified” policies in this jurisdiction, but the
section operates logically thereafter, subject to the possible need to modify the section so that it
no longer condones notification of circumstances under a claims made policy where the policy
has expired. Notice and other provisions which are not capable of causing or contributing to loss
are analysed purely in terms of the prejudice suffered by the insurers following their “breach”, 368
a process familiar to the English courts in the case of innominate terms. The English courts have
been very slow to find that insurers have suffered prejudice sufficient to remove some or all of
their liability, but in fairness insurers in England have rarely claimed damages for breach of
policy terms. The damages test seems to work well. In late notification cases the English courts
have doubted whether insurers have suffered any prejudice at all, 369 whereas in a case where the
assured failed to notify insurers of an increase of risk, the assured was held to have caused
prejudice to the insurers in that they had been denied the opportunity to insist upon increased
security measures so that the assured’s damages were reduced by 50%. 370 Had these cases arisen
in Australia, the result under s 54(1) of the Insurance Contracts Act 1984 would in all probability
have been the same in each of them.
7.21 The causation test under s 54(2)-(4) for acts or omissions capable of giving rise to losses is
again something which English law could readily endorse. The need for a causation test was
mooted by Lord Griffiths in Forsakrings Vesta v Butcher 371 in 1989, and the Australian approach
– with some essential tidying up of the wording to confirm that apportionment is involved rather
than a strict all or nothing causation test – is logical. However, one matter which domestic
legislation must address is exactly how apportionment is to work where the assured is shown to
have caused his own loss in part. Thus, if the assured is using the insured subject matter in a
manner which is prohibited by the policy, and suffers a loss from an independent source, exactly
what proportion of the policy proceeds should be deducted? Australian law does not give a clear
answer. If a vehicle is only to be used for social, domestic or pleasure purposes, and suffers an
accident while being used for business purposes, then the assured’s act is one which is capable of
causing or contributing to a loss so that s 54(3)-(4) are engaged. The assured would then, in order
to recover, be required to show that no part of the loss was caused by the breach. If he could do
that, then the insurers would be entitled to damages under s 54(1) representing the prejudice
caused to them by reason of the assured’s act or omission. This permits the court to effect an
apportionment based on causation, and it is arguable that their liability could be anything from
368
Not the correct word for a clause framed as a part of the risk or as an exclusion, but it will suffice as shorthand
for present purposes.
369
K/S Merc-Skandia XXXXII v Lloyd’s Underwriters [2001] Lloyd’s Rep IR 802; Friends Provident v Sirius [2006]
Lloyd’s Rep IR 45.
370
Hussain v Brown (No 2) 1996, unreported.
371 [1989] AC 852.
71