Section 54 – An Avenue to Meddle with Insurance Claims?

The first judgment published by the Federal Court of Australia in 20161 dealt with the operation of section 54 of the Insurance Contracts Act and whether an insurer can seek to rely on the provision in defending a contribution claim.  Now, towards the end of 2016, the Full Court of the Federal Court has affirmed the judgment in Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd [2016] FCAFC 150.

What Was in Issue?

The Full Federal Court was required to answer three questions in the appeal:

  1. Whether, in the circumstances, section 54 of the Insurance Contracts Act was engaged?
  2. If it did, did its operation mean that the Appellant (Lloyds Syndicate) would not have been able to refuse to pay a claim made by the insured?
  3. Can the respondent insurer set up putative liability of the appellant to the insured as a basis for a claim for contribution by it?

To cut a long story short, the Full Federal Court answered yes to all the above questions and affirmed the judgment at first instance.

The real novel question to be addressed by the Court is the answer to question (3).  With respect to this question, it was argued by the appellant that an insurer could not rely on section 54 in a contribution claim as the remedial benefit of the section was for the insured; not their insurer.  The question was important because if section 54 did not operate, then contribution could be opposed on the basis of suspension of cover in the policy.

In answering this question, the Full Court relied on the equitable nature of contribution as between insurers to find that an insurer can seek to rely on section 54 in such circumstances.

A broadening of the Remedial Power under Section 54?

For insurers, the judgment could be considered a broadening of the remedial power provided by section 54; however, the judgment is only likely to provide an advantage in circumstances where there is a claim for contribution being sought by another insurer.2  It must be noted that the Full Court’s judgment says nothing about extending reliance on section 54 to third parties generally or outside of a claim for contribution.

It’s not unheard of for a third party to seek to meddle in the insurer/insured relationship.  Most often this occurs where a third party is seeking to obtain the benefit of an insurance policy, rather than alleging that a claim should not have been accepted;3 there are also circumstances where third parties (brokers) have sought to minimise any damages arising from negligence claims against them by alleging that the insurer would have denied the claim;4 however, there are limits to this meddling especially in circumstances where an insurer is seeking recovery from a third party pursuant to subrogated rights.   The two main limitations are:

  1. the doctrine of privity of contract; and
  2. the doctrine of subrogation.

The doctrine of privity of contract prevents a person, who is not a party to a contract, from seeking to enforce or take advantage of an obligation or term of the contract.5  On its face,  this prevents a third party from seeking to take advantage of an exclusion under the policy between the insured and insurer.

Second, more crucially and arising from the doctrine of subrogation is the principle from King v Victoria Insurance Co Ltd6 which states that where an insurer makes a payment under a policy of insurance in satisfaction of a claim, a third party cannot defend the subrogated claim by seeking to allege that the claim did not fall within the terms of the policy.7

Overall, the Full Court’s judgment provides an avenue for insurers involved in contribution disputes to seek to mitigate the amount of any contribution that they are required to pay through the use of section 54, assuming they can show that the loss and damage ought to be reduced (whether by way of s 54(1) or (2)).  However, beyond the area of contribution, it is unlikely that the judgment will provide:

  • a detriment to insurers in subrogated recovery actions; or
  • any benefit to insurers in defending subrogated claims

1 Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyds [2016] FCA 1; 19 ANZ Insurance Cases 62-090

2 Of course, whether it is truly a benefit for insurers will depend on which side of the contribution argument the insurer lies.

See most recently, the judgment of the High Court in CGU Insurance Ltd (ACN 004 478 371) v Blakeley and Ors [2016] HCA 2 and the associated litigation through the Victorian Supreme Court and Court of Appeal.  The Supreme Court litigation is still ongoing.

See for example: Cooper & Anor v. Don Kenyon Pty. Ltd. (1985) 3 ANZ Insurance Cases ~60-607

5 See for example: Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 and Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43

(1896) AC 250.

The insurer must have made the payment in good faith, honestly and the payment must have been made in satisfaction of a loss under the policy which the insurer believed that they were, or might have been liable.

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