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Who would have thought it ?

After years of seeking unsuccessfully to curtail the scope of Section 54(1) of the Insurance Contracts Act, along comes a case which demonstrates how insurers can use that Section to their benefit.  

In 2013 there was a yacht race from Fremantle to Bali. The Froia II, owned and skippered by Mr Arthur Phillips, participated in that race.

On 4 May 2013, Mr Phillips cleared Australian Customs in Fremantle. Later  that day the Froia II, with Mr Phillips behind the wheel, departed the Fremantle yacht club bound for Bali.

The Froia II left Australian waters about a week later.

On 17 June 2013, Mr Phillips cleared Indonesian Customs for the trip back to Australia. The Froia II set off for Darwin. There it intended to clear Australian Customs.

On 20 June 2013, the Froia II re-entered Australian waters. It ran aground off Cape Talbot WA on 22 June 2013.

Mr Phillips held two policies in case this very sort of thing happened.

He held  a Pantaenius Sail and Motor Yacht Insurance Policy issued by Pantaenius Australia Pty Ltd on behalf of various insurers. He also held a Nautilus Marine Boat Insurance Policy issued by Nautilus Marine Agency Pty Ltd.

The policies were different in a critical aspect. The Pantaenius policy covered the Froia II for the yacht race. The Nautilus policy purported not to. Its terms provided that its cover was suspended upon the Froia II clearing Australian Customs in Fremantle until it cleared Australian Customs upon its return to Australia.

Pantaenius agreed to indemnify Mr Phillips in respect of the loss of the Froia II in the sum of $341,179.51. Nautilus, however denied Mr Phillips indemnity pointing to the fact that at the time the Froia II ran aground, the Nautilus policy was suspended. Mr Phillips had not cleared Australian Customs.

Pantaenius commenced proceedings in the Federal Court of Australia against Nautilus seeking contribution towards the amount which it had paid Mr Phillips. Nautilus responded by pointing to the terms upon which it had denied Mr Phillips indemnity. Pantaenius argued that Section 54(1) of the Insurance Contracts Act prevented Nautilus from denying Mr Phillips indemnity (and therefore contributing to the amount paid to Mr Phillips).

In very broad terms, Section 54(1) prevents an insurer from denying an insured indemnity in respect of acts or omissions by the insured or some other person after the inception of the policy. In those circumstances an insurer's remedy is limited to the prejudice it has suffered as a result of the relevant act or omission.

In its judgment handed down on 5 January 2016, the Federal Court of Australia accepted Pantaenius’s position.

In particular:-

  • It accepted that the scope of the Nautilus policy was to cover any damage to or loss of the Froia II in Australian waters during the relevant period of insurance;

  • It accepted that the suspension of cover upon clearing customs was an exclusion to the scope of the policy and, as such, amenable to Section 54(1) of the Insurance Contracts Act;

  • It accepted that for the purposes of Section 54(1), clearing customs constituted the act by Mr Phillips after the inception of the Nautilus policy which entitled to Nautilus to deny indemnity; and

  • It rejected Nautilus’ argument that Mr Phillips’ clearance of customs had caused the Froia II to run aground.

But Nautilus had one more argument in its locker.

Nautilus argued that an insurer was not entitled to rely upon Section 54(1) in the course of pursuing contribution from another insurer. Only insured could use the Section.

The Court rejected that argument also. In so doing it said:

"The whole purpose of s54(1) is to strike a fair balance between the interests of an insured person and that person's insurer when the strict application of the relevant policy terms and conditions might work an unfairness. 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 s54(1) in favour of that insurer's insured."

Maybe Section 54 is not so bad after all.

The name of the case ? Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds [2016] FCA 1.

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