Insurance Contract Law Issues Paper 2 Warranties - Law Commission

6.33 An added twist to these difficulties is that under section 40 of the Insurance
Contracts Act 1982 a “claims made policy” is deemed to be a “a claims made and
notified policy”. The statute states that the insurer must pay where the insured
gave notice in writing to an insurer of the facts that might give rise to the claim.
Section 54 goes one step further by opening up the possibility that claims must
be paid even if the facts are not notified. The combined effect of sections 40 and
54 has made it difficult for professional indemnity insurers to limit their liability for
long-tailed claims, and there have been extensive calls for reform. 15
6.34 That said, it is possible to exaggerate the difficulties associated with section 54.
First, even if the section applies, it does not necessarily require that the claim is
paid. The claim may be reduced by an amount which “fairly represents the extent
to which the insurer’s interests were prejudiced” as a result of the act or omission.
In Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia, the High
Court found that the prejudice to the insurer was equivalent to its entire liability. 16
The owners of a mobile crane had failed to notify the insurer that there had been
a change of circumstances, and that the crane was now registered to be driven
on public roads. The court found that if the insurer had been told it would have
exercised its right to cancel the policy and would not have been liable to meet
any subsequent claim.
6.35 Secondly, in 2003 the Commonwealth Treasury Review of the section
commented that “not a single stakeholder has sought the removal of section
54”. 17 It found that the section worked satisfactorily in relation to the vast majority
of occurrence insurance, and “the prominent message from meetings and
submissions is that the operation of section 54 in relation to ‘occurrence’ policies
should remain unchanged”. 18 The review recommended reform only in relation to
“claims made” and “claims made and notified” policies.
THE ALRC REVIEW OF MARINE INSURANCE
6.36 The 1982 Act did not cover marine insurance. In 2001, the ALRC considered
whether similar reforms should be introduced for marine insurance. 19 The
Commission concluded that as currently drafted, section 54 went too far to be
suitable to the marine area. In important respects, its practical effect was “to allow
the insured to unilaterally alter the bargain made by the parties, arguably to the
extent of fundamentally changing the scope of the insurance”. 20 The degree of
discretion involved in assessing the extent of prejudice the insurer had suffered
allowed too much room for dispute.
15
16
It is unlikely that the same issues would arise in the UK, where business is more usually
written on a “claims made” rather than a “claims made and notified” basis, and where
section 40 does not apply.
(1993) 176 CLR 332.
17 A Cameron and N Milne, Review of the Insurance Contracts Act 1984: Report into the
Operation of Section 54 (2003), Commonwealth of Australia, p 9.
18 As above.
19 ALRC, Review of the Marine Insurance Act 1909 (2001) No 91;
http://www.austlii.edu.au/au/other/alrc/publications/reports/91/ch9.html
20 Above, at para 9.120.
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