Section 54 – Insurance Contracts Act 1984

Section 54 – Overview

(i)     Operates as shield for insured parties to prevent Insurers from denying claims based on minor breaches of the insurance policy.

(ii)    Does not ordinarily grant a right of action to Third Parties – limited usefulness in recovery.

Section 54 (1)

• 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.
• Previously, a breach of policy conditions would allow an Insurer to refuse payment of the claim.
• Section 54 prevents the Insurer from refusing to pay the claim.
• Claim may still be reduced by the Insurer – the question is what monetary prejudice has been caused by the act?

Example

• A has a policy that covers him only while driving with a licence.
• A drives unlicensed and is involved in an accident with B.
• The accident was 100% the fault of B and was in no way connected with A driving unlicensed.
• The Insurer is not able to deny coverage to A because he was driving unlicensed and will not be able to reduce the amount paid out.

Section 54(2)

• (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.

Section 54(3) and (4)

• (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.

Sections 54(2) – (4)

• Briefly:

– If the act COULD cause the loss to arise, the claim may be refused.

– The Insured may still prove that the act DID NOT cause the loss to arise, and if they do, then the claim cannot be refused.

– Otherwise, the Insured may prove that the act only CONTRIBUTED to the loss, and if they do, then the claim cannot be refused, but can be reduced (potentially to nil).

Example

• A has an insurance policy that covers him only while driving in a sober state. A drives his car while drunk. He is involved in an accident with B.
• B was also drunk and the accident was 50% his fault and 50% the fault of A due to his drunkenness. This is the finding at a final hearing by a magistrate.
• The Insurer in not able to fully deny the claim, but would be able to reduce the payout by 50%.

Example 2

• Driver “A” has an insurance policy for a work truck. The policy stipulates that he is not allowed to carry flammable materials.
• A sees a gap in the market and begins transporting highly flammable gas canisters.
• A’s truck’s engine catches fire one day and the whole truck, loaded with flammable gas is destroyed.
• At Hearing, if A manages to prove that the truck would have been destroyed regardless of the gas it was carrying.
• The Insurer would not be able to refuse the claim, or even reduce it in this instance.

Example 2 – Twist

• What if A had been required to notify his Insurer if he was undertaking in activities outside of the insurance policy (such as carrying flammable material) but had not done so?
• The claim still could not be refused.
• May be reduced to nil. Insurer was denied the opportunity to collect higher premiums, or deny the policy outright if the risk was too great.
• The operation of section 54 will always depend on the wording of the insurance policy.

Excess Clauses

• Provide a monetary value which the Insured must bear on each claim.
• Exist to:

– Clear Insurer’s books of small claims

– Create an incentive for people to manage their own risk/ disincentive to claim.

• Do not exist to:

– Allow the Insurer to escape paying claims of Insured’s who are bankrupt or insolvent.

Excess Clauses – Cont.

• Generally, the Insurer in a regular contract of insurance cannot require payment of an excess as a precondition for accepting liability for the claim.
• Even if it was a precondition, section 54 would operate to prevent the claim being refused.
• However – in practice with motor vehicle claims – Insurers use excess clauses as a ‘stonewall’ to avoid paying claims when their Insured’s cannot pay the excess.

Usage of Section 54 in Recoveries

• Generally, only the Insured or a beneficiary of the policy party can invoke section 54.
• Section 54 gives no right of action to third parties.

– Note, in NSW, an Insurer may be proceeded against directly with leave of the court. This has proven difficult to obtain.

What can be done in the situation of unpaid excess?

• Request can be made to Insurer to settle the claim less the excess.
• Insured third party may be coached/ educated into making the request themselves.

Requesting the Insurer pay under S 54

• Advantages

– Cheap – no harm in asking.

• Disadvantages

– Ineffective – many Insurers will refuse/ ignore.

– No legal recourse if they do refuse.

– Even if they are willing, they may still need to discuss with their Insured before doing so and must be able to contact them.

Author: Shan Auliff, Senior Associate

Published: May 2015