Federal Court applies s 54 broadly (again)
Pantaenius Australia Pty Ltd v Watkins Syndicate 0467 at Lloyds  FCA 1
In Pantaenius Australia Pty Ltd v Watkins Syndicate 0467 at Lloyds  FCA 1 Foster J considered whether one insurer (‘Pantaenius’) could claim contribution from another insurer (‘Nautilus’) regarding damage to a yacht.
The case demonstrates that the courts continue to interpret the scope of s 54 of the Insurance Contracts Act 1984 (Cth) (‘ICA’) broadly, and beneficially to insureds. The case also confirms that a co-insurer can rely on s 54 to establish double insurance for the purpose of obtaining contribution.
Mr Phillips held a policy with Nautilus for the period 4.00pm on 1 December 2012 to 4pm on 1 December 2013. The agreed sum insured was $250,000. In the Product Disclosure Statement under the heading ‘Geographic limits and period of insurance’ was the following:
‘Cover is only provided under the policy in relation to events causing loss damage or liability which occur:
- within the geographic limits specified on your Certificate of Insurance. All cover provided by the policy will be automatically suspended when your boat clears Australian Customs and Immigration for the purpose of leaving Australian waters and will recommence when it clears Australian Customs and Immigration on return; and
- during the period of insurance.
However we will provide cover in the following circumstances:
- if your boat goes beyond the geographic limits to reasonably respond to an unforeseen emergency;
- if your boat goes beyond the geographic limits because of circumstances beyond the reasonable control of the person in charge or control of your boat;
- if you advise us you will go beyond the geographic limits and we agree to extend cover in writing.’
The Certificate of Insurance specified that the geographic limits were ‘250 nautical miles off mainland Australia and Tasmania’.
Mr Phillips wanted to participate in the Fremantle to Bali yacht race, and enquired of Nautilus as to the premium required to extend cover. He decided not to take out the extended cover, but instead purchased separate cover under Pantaenius’s Policy, which specifically covered the yacht not only during the Fremantle to Bali yacht race, but also for the return journey to Australia.
On 22 June 2013 Mr Phillips’ yacht struck a reef at Cape Talbot near Darwin during the return journey from Bali, and was badly damaged.
Pantaenius accepted indemnity under its Policy. Nautilus on the other hand denied indemnity on the basis that cover had been suspended when the yacht cleared Australian Customs on its voyage to Bali, and had not yet cleared Australian Customs on its return journey when the incident occurred.
Mr Phillips sought an internal review of Nautilus’ refusal of indemnity, and did not issue proceedings when that review was unfavourable to him. Consequently Pantaenius claimed contribution from Nautilus for its liability to Mr Phillips.
Finding regarding s 54’s application
The primary issue for determination was whether s 54 of the ICA applied to Nautilus’ refusal of indemnity.
It will be recalled that s 54 prevents an insurer from refusing to pay a claim by reason of some act or omission of an insured after the contract was entered into, unless and only to the extent that such act caused or contributed to the loss the subject of insurance cover.
Nautilus argued that cover had been suspended when the yacht had cleared customs when exiting Australia and the yacht had not yet cleared customs on its return when the incident occurred; the Policy was therefore not re-enlivened, and there was no act or omission that occurred during the period of cover that could trigger the operation of s 54.
Pantaenius argued that the obligation to clear customs on the return journey amounted to an exclusion under Nautilus’ Policy, and the failure to clear customs on return was thus an act or omission within the purview of s 54. The problem with that argument is that, according to Nautilus, cover was already suspended when the yacht left Australian waters, and it was impossible for it to enter Customs until it arrived in Darwin.
Foster J reviewed the oft cited authorities dealing with s 54, including FAI v Australian Hospital Care Pty Ltd (‘FAI’), where McHugh, Gummow and Hayne said:
‘ [T]he distinction between “cover” on the one hand, and “condition or exclusion” on the other, is a distinction that depends on the form of the contract and not on its substantive effect. No distinction can be made, for the purposes of s 54, between provisions of a contract which define the scope of cover, and those provisions which are conditions affecting an entitlement to claim. The substantive effect of the contract can be determined only by examination of he contract as a whole.’
His Honour held that the geographic limits of the Policy were set out in the Certificate of Insurance, namely 250 kilometres off mainland Australia and Tasmania. The incident occurred during the period of insurance, and within the geographic limits of the Policy. On the other hand:
‘[…] the provision suspending cover when the insured vessel cleared Australian Customs for the purpose of leaving Australian waters was almost always going to come into effect well before the insured vessel actually left Australian waters. Usually, as was the case here, Fremantle WA. The suspension provision was in the nature of an exclusion and did not operate as one of the contractually prescribed elements of the geographical limits on the scope of cover itself.
‘[…] It follows that, in my judgment, the suspension provision is amenable to the beneficial operation of the [ICA].’
His Honour reasoned that the ‘act’ triggering the operation of s 54 was clearing Australian Customs in Fremantle. Absent that act, Nautilus’ Policy would have covered the vessel until departure from Australian waters by virtue of the prescribed geographic limit. Regrettably for Nautilus, this was not the approach Pantaenius had pursued, who had focused on the return journey. In any event, the logic implicit in his Honour’s reasoning was that the yacht could not be within the Policy’s geographical limit 5 minutes before customs clearance, but then be outside its geographical limit 5 minutes after customs clearance, even though it is in precisely the same location, unless the clause dealing with customs clearance operated as an exclusion.
Foster J considered that there was no evidence to suggest that the departure from and return to Australian waters caused or contributed to the vessel’s grounding at Port Talbot. Nautilus possibly did not provide such evidence because at trial neither party had considered the clearance of customs in Fremantle as act of omission relevant for s 54 purposes.
S 54’s application to co-insurers’ claims for contribution
Nautilus argued that it was not the purpose of s 54 to benefit one insured in claiming contribution from another, but was intended solely to benefit insureds.
Foster J found that there was no reason why Pantaenius should be denied the benefit of s 54:
‘[…] The intention of the legislature is to stop insurers from relying upon certain contractual provisions to refuse to pay a claim. There is no reason to deny to an insurer claiming contribution the benefit of the consequences of the correct application of s 54(1) in favour of that insurer’s insured.’
Relevance of decision
The decision confirms that the courts are prepared to take a wide view as to the operation of s 54, beneficially to insureds.
This is the first decision of which I am aware that applies s 54 to contribution and double insurance where the insured is not a party. However, it is consistent with previous authority where the insured is a party. Drayton v Martin (1996) 67 FCR 1 (‘Drayton’) (not referred to by Foster J) is such a case. In Drayton, Sackville J held that an insurer can indeed rely on s 54 to claim contribution, because the ICA should be read as ‘intended to operate within an existing commercial and legal network of insurance relationships’, including ‘the entitlement of an insurer who has paid an indemnity to claim contribution from another insurer who is freed from liability to the insured by reason of the first insurer’s payment’.
As yet there is no appellate court jurisprudence on the application of s 54 to double insurance. It remains to be seen whether Nautilus takes the opportunity to create some.
 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641
 FAI at .
 At 
 At 
 Drayton at p 31, referring to GRE Insurance Ltd v QBE Insurance Ltd  VR 83 at pp 98-99