The ability to insure against certain unavoidable risks provides an invaluable financial safety net in our society. However, insurance companies are profit-based and will not hesitate to refuse your claim if they are entitled. One of the most common ways this occurs is due to the operation of exclusion clauses. Many an unwary customer has been stung because they didn't fully understand what they were covered for and what obligations they had to comply with to ensure they would be insured.
What are exclusion clauses?
An insurance contract will generally contain three main things. There will be an insuring clause which will describe the broad type of cover and its scope. Then there will be conditions which will set out any responsibilities the insured has to comply and finally, there will be exclusions.
Exclusion clauses will identify any specific circumstances, events or types of losses that will absolve the insurer of their obligation to indemnify the insured. Some common exclusion clauses are:
- Motor vehicle insurance – exclusion when car is not maintained in a roadworthy condition or driver is intoxicated.
- Health insurance – exclusion where pre-existing illnesses known to the insured were not disclosed to the insurer at the time of entering into the policy.
- Travel insurance – exclusion for personal injury suffered on holiday caused by riding a motorcycle.
- Property damage – exclusions for flood and other natural disasters.
However, there are many types of exclusion clauses, some of which will be specific to your policy. There is no alternative but to carefully read through all exclusion clauses. It is often possible to have certain exclusions removed but this will probably result in paying a higher premium as the insurance company has to undertake more risk.
How are exclusion clauses interpreted?
Generally, courts will interpret exclusions clauses according to the ordinary and natural meanings of the words read in light of the contract as a whole, if possible giving effect to the commercial intent or purpose of the policy. Be aware that some words may be specifically defined in a ‘definitions’ section of the policy, in which case the words will accord with that definition. If the words of the clause clearly and unambiguously exclude liability, the insurer will not have pay out the claim.
If there is ambiguity in the interpretation of the exclusion clause, courts will interpret exclusion clauses in favour of the insured. This does not mean, however, that the courts will tolerate parties attempting to manufacture ambiguity in a clause where none exists.
Limitations on Exclusion Clauses
Exclusion clauses may be void if in interpreting their ordinary and natural meaning, their literal construction creates and absurd result or defeats the whole purpose of the contract. For example, an exclusion clause in a motor vehicle insurance policy which excludes the insurer’s liability for any damage caused to the car, would render the policy worthless and thus would not be tolerated.
There are also some statutory limitations which can temper the harshness of some exclusion clauses to a certain extent. Section 54 of the Insurance Contracts Act 1984 (Cth) prevents an insurer from refusing to pay out a claim which is otherwise within the scope of the policy purely on the basis of an act or omission of the insured which did not cause or contribute to the loss. The insurer will only be able to reduce the claim in proportion to the extent that their interests were prejudiced as a result of the act or omission.
For example, if a driver has a car accident and forgot to renew their licence the day before, the insurer could exclude the claim on the basis of an exclusion clause for unlicensed drivers. Under s54, the driver forgetting to renew his licence the day before would constitution an omission which hasn’t actually caused the accident, thus preventing the insurer from refusing to pay out the claim on this basis.
Due to the potentially large amounts of money they potentially have to pay out, it is understandable that insurers will always be vigilant in looking for reasons to refuse to pay a claim. Therefore, it is vital before entering an insurance to consider what you want covered and ensure the exclusion clauses don’t omit those circumstances. You also need to be aware of what obligations you have and ensure that you comply with those obligations so that your claims will not be excluded. This could include continuous compliance with any law or regulations, the way in which you report your claims or an obligation to disclose relevant circumstances to your insurer as they arise. By fully understanding how your policy operates, you put yourself in the best possible position if the unavoidable does occur.
If you require any assistance with insurance contracts, please do not hesitate to contact us.