Appeal court holds firm on s 54 regarding jet ski accident
Feb 2017 |
An insurer has failed in its bid to decline cover based on an exclusion in its policy, with the ACT Court of Appeal hearing the matter of Allianz Australia Insurance Ltd v Smeaton1 regarding an injury caused by an unlicensed jet ski driver in 2010.
In April 2016, The Supreme Court of the ACT in Whittington v Smeaton2 held that Allianz Australia Insurance Ltd (Allianz) could not avoid covering the owner and driver of a jet ski under a Club Marine policy by relying on section 54(2) of the Insurance Contracts Act 1984 (Cth) (ICA).
Nathan Whittington suffered a serious injury resulting in the amputation of his left leg below the knee while acting as an observer on a jet ski owned by Todd Smeaton and driven at the time of the accident by his brother, Scott Smeaton.
At trial, the Smeatons were both found to have negligently caused Mr Whittington’s injury. A defence that it was a dangerous recreational activity was rejected and not pursued on appeal.
The liability provisions in the policy covered Scott Smeaton’s driving of the jet ski with his brother’s permission. However, Allianz declined cover to the Smeatons on the basis that Scott did not hold a licence to ride a jet ski (as is required in Queensland, where the incident occurred). This omission directly breached an exclusion in the terms of cover under the policy.
Allianz, in light of that exclusion, sought to rely on s 54(2) of the ICA which allows an insurer to refuse to pay a claim where an act by an insured could reasonably be regarded as being capable of causing or contributing to a loss in respect of the insurance cover.
However, if an insured can prove that no part of the loss for which coverage is being claimed was caused by the act, the insurer may not refuse to pay the claim based on the ICA (s 54(3)).
‘Section 54 – Insurer may not refuse to pay claims in certain circumstances
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.
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.
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.
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.’
Allianz relied on the unlicensed status of Scott Smeaton and the subsequent breach of the exclusion in its policy to refuse cover pursuant to s 54(2). It argued that the act of being unlicensed caused or contributed to the loss because the licencing test in Queensland would have provided some information which would have influenced the way in which he drove the jet ski (and reduced the likelihood that he would act negligently and cause Mr Whittington’s loss).
The New South Wales licencing process did not involve the provision of this information. There was some debate as to where Mr Smeaton would have obtained a licence, had he been licenced at the time of this incident. He later obtained a licence in New South Wales.
At trial, it was decided that Scott Smeaton would not have acted differently had he been licenced. Therefore, Allianz’s s 54(2) argument failed and it was ordered to indemnify the Smeatons for Mr Whittington’s loss.
On appeal, Allianz argued that the trial judge had erred in considering both the Queensland and New South Wales licencing process and that Scott Smeaton would have obtained his licence in Queensland had he been licenced, because he was stationed there at the time through his job in the armed forces. The court rejected that argument based on direct evidence given by Scott Smeaton at the trial that he needed to obtain his licence in New South Wales as he already held a boat licence in that jurisdiction.
It was concluded that, because the New South Wales licencing process would not have provided information to Scott Smeaton about the operation of a jet ski, it would not have altered his behaviour on the date of this incident so s 54(3) prevented Allianz from declining cover.
Interestingly, the Court of Appeal went on to state that it was not convinced that the result would have been any different had the Queensland licence requirements been applied because the information provided in the licencing process was not specific to the circumstances of the incident causing Mr Whittington’s injuries and the licencing process was designed to be very simple with a licence being easy to obtain.
Ultimately, the Court of Appeal concluded that the Smeatons had put forward sufficient evidence to establish the proof required by
s 54(4) so Allianz was prevented from declining cover based on the act of Scott Smeaton being unlicensed to operate the jet ski.
This case is an example of the need for a direct causal relationship between an act by an insured and the cause of the loss for which cover is sought. It reinforces that the requirements of s 54 will be applied very strictly against an insurer and strong evidence of a different outcome is required to put an insured’s policy coverage in jeopardy.
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1 [2016] ACTCA 59.
2 [2016] ACTSC 76.
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