Exclusion clauses in insurance contracts: how the Insurance Contracts Act protects you

Pantaenius Australia Pty Ltd -v- Watkins Syndicate 0457 at Lloyds [2016] FCA 1

This case note examines a recent decision of the Australian Federal Court in which an insurer was prevented from relying on an exclusion clause. The case highlights and reinforces the Court’s general interpretation of Section 54 of the Insurance Contracts Act in favour of the insured person.

A yacht ran aground in Australian waters off the coast of Western Australia while returning from the Fremantle to Bali Yacht race.

At the time of the incident, the yacht was insured under 2 insurance policies, one of which contained an exclusion where the vessel had been involved in a race of more than 100 nautical miles and had not yet returned to Australia. Whether the vessel had 'returned to Australia' was defined in the policy by reference to whether the vessel had cleared Australian customs. 

One of the insurers (underwritten by Pantaenius) admitted the claim in full; the other insurer (underwritten by Lloyds) sought to rely on the exclusion clause to refuse liability. Pantaenius argued that Lloyds should be required to contribute to the owner's claim.

The Court decided against Lloyd based on section 54 of the Insurance Contracts Act 1984. That section requires an insurer who refuses to pay a claim based on an act or omission of an insured person to prove a causal link between the act and the loss. 

The Court found that in this case the geographical location of the yacht had not caused or increased the risk of the grounding - although the Court did mention that the result might have been different had the incident occurred in international or Indonesian waters.

Please click here to read the full decision. 

Other cases about section 54 of the Insurance Contracts Act 1984

• Where an insurer refused a claim for damage to 2 trucks operated by a trucking company on the basis that the drivers did not hold a particular certification. The High Court confirmed the Court of Appeal's decision obliging the insurer to pay - Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33 click here to read. 
• Where an insurer refused a claim based on the insured's failure to notify it of relevant events under the policy. The Court found that the insurer was not entitled to refuse the claim, but was able to reduce the amount paid to the extent of the prejudice it suffered because of the failure to notify (FAI Insurance Limited v Aust Hospital Care Pty Ltd [2001] HCA 38 click here to read.

Points to take home

• Generally an insurer must be able to prove a connection between the act which falls within the exclusion clause and the loss in respect of which the insured person is claiming.
• Insurers are often incorrect to deny claims based on exclusion clauses in policies. The Insurance Contracts Act exists to improve the power imbalance between insurers and insureds.