What is this section of the Insurance Contracts Act all about and why does it seem to be mentioned so often in relation to certain disputed Insurance claims?
We try to cut through some of the myths and perceptions of what has become one of the most important sections of the Insurance Contracts Act which has been an important piece of legislation for more than 25 years.
There is no point discussing the importance of this section unless we have an actual look at the actual wording and seek to analyse its intent. This is the current version in the Act
54 Insurer may not refuse to pay claims in certain circumstances
(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
(2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.
(3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.
(4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.
(a) the act was necessary to protect the safety of a person or to preserve property; or
(b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act.
(6) A reference in this section to an act includes a reference to:
(a) an omission; and
(b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.
Section 54 of the Insurance Contracts Act was introduced to deal with the circumstances in which an insurer may refuse to pay a claim when an insured had breached a term of the insurance policy. The primary concern was if it was fair and reasonable to do so and if it was relevant to the actual claim matter. This determination is often why these claim disputes end up being determined by the Courts.
The Australian Law Reform Commission when proposing the Insurance Contracts Act legislation, wanted to cut through the legal technicalities and concentrate on the substance of the breach and provide an appropriate remedy.
The main parts were:
This rationale was embodied in s.54 of the Insurance Contracts Act. The crucial part to me is “the extent that the insurer has been prejudiced” is all they can refuse to pay in a claim.
Section 54 was introduced to reach a balance between the rights of the insurer and the insured. Insurers can no longer seek to get out of paying claims on the basis that is disproportionate to the insured’s breach of the policy. This is particularly so when there was no connection between the breach and the loss for which cover was taken.
An example of how this is applied is as follows. Something I regularly saw as an Insurer acting unreasonably. A Motor Claim where the Insured ran into the back of another vehicle. Their Insurer refused to pay the claim because the Loss Adjuster found that the vehicle had been fitted with Mag wheels which were non-standard to that make of vehicle. There was a clause in the policy requiring any non-standard items or modifications be declared to the insurer or cover was void.
While the Insured had breached this condition of cover, did it have anything to do with the accident? Did it contribute to the accident? Was the Insurer prejudiced by the modification to the vehicle?
The answer is no. In fact there is an argument that Mag wheels make a car safer. However in this case it neither contributed to the accident, and unless the wheels were also damaged, it should not affect how the claim was handled. Before Section 54 came along, insurers would rely on the clauses in the policy and refused to pay any of the claim. Thanks to Section 54, Insurers cannot rely on such terms or conditions unless they can demonstrate they have been prejudiced as a result of a breach of the term.
Section 54 has led to the development of fairer and more reasonable clauses in policy documents as they are pointless to have. Section 54 has made the Insurance policy and its application much fairer for the Insured.
Examples of claims that have ended up in Court and shaped the interpretation of this section are as follows:
However, it is not without its complications, particularly when it comes to “Claims Made” policies which is what we will discuss now.