Insurance Contract Law Issues Paper 2 Warranties - Law Commission

(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
reasons only of the act.
(5) Where –
(a) The act was necessary to protect the safety of a person or
to preserve property; or
(b) It was not reasonably possible for the insured or other
person not to do the act,
the insurer may not refuse to pay the claim by reason only of the act.
(6) A reference in this section to an act includes a reference to –
(a) An omission; and
(b) An act or omission that has the effect of altering the state or
condition of the subject-matter of the contract or of allowing
the state or condition of that subject matter to alter.
SECTION 54 IN PRACTICE
6.28 This section has caused considerable litigation. 9 The main difficulty lies in the
ALRC’s desire to extend protection beyond clauses which impose obligations on
policyholders, to those which limit the scope of the cover (as in the example
where cover is granted only “in respect of the roadworthy car”). This has led to
considerable debate about how far section 54 can be used to extend policies to
cover risks outside the scope of the policy the insurer had written.
6.29 An example is Kelly v New Zealand Insurance Co Ltd, which concerned a home
and contents policy. 10 Here the insured could have extended their cover by
providing the insurer with a list of specified items, but chose not to do so. The
question was whether this amounted to an omission within the terms of section
54(6), which (but for the section) would permit the insurer to refuse to pay. The
Supreme Court of Western Australia drew a distinction between an “omission”
and an “inaction”. This, they said, was an inaction, whereby the insured exercised
their right not to expand the scope of the cover. Therefore the section did not
apply.
9 For accounts of the case law see, ALRC, Review of the Marine Insurance Act 1909 (2001)
No 91; and A Cameron and N Milne, Review of the Insurance Contracts Act 1984: Report
into the Operation of Section 54 (2003), Commonwealth of Australia. See also Michele
Muscillo, “The Lesser of Two Evils: FAI General Insurance Co Ltd v Australian Hospital
Care Pty Ltd” (2001) 1 QUT Law and Justice Journal 304.
10
(1996) 9 ANZ Ins Cas 61-317.
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