An insurer can deny your claim for any number of reasons, which can be a devastating blow to your business or personal finances. Often it is due to a failure to comply with certain conditions in your contract such as notifying your insurer immediately when an incident occurs, maintaining certain safety standards or updating your insurer on changes to your circumstances. Insurers used to be allowed to draft their insurance contracts to give them a right to terminate the contract for even minor breaches of contract or breaches which didn’t cause the loss or any prejudice to the insurer. However, since the introduction of the Insurance Contracts Act 1984 (Cth), insured’s have been granted some significant protections which were intended to more fairly balance the interests of both parties. One of the most controversial sections in this respect is section 54.
What is section 54?
Section 54 provides that an insurer cannot refuse to pay a claim outright, if the only reason for that refusal was an act or omission on part of the insured or another party which couldn’t reasonably be regarded as being capable of causing or contributing to the loss claimed for. For example, an insurer could not refuse to indemnify an insured whose house has burnt down on the basis that they ‘omitted’ to have a valuation as required by their insurance contract. Failing to have a valuation could not possibly have caused or contributed to the fire.
If the breach could reasonably have caused or contributed to the loss, then it will be up to the insured to prove the breach did not actually cause the whole or part of the loss. For example, the act of storing flammable materials on the property in breach of a condition of the contract could reasonably have caused or contributed to the fire. The insured could get around this if they proved the flammable liquids did not start the fire and were stored in a part of the property that was unaffected by the fire.
Even if the breach did cause or contribute to the loss, the insured may also be excused if they can show the act was necessary to protect the safety of a person or property or it was not reasonably possible for the insured or other not to do the act. For example, if a home and contents policy forbids DIY renovations, an insured may be excused if they can show the home-made constructions were an emergency stopgap to prevent the roof from collapsing until a professional could attend to the repairs.
What recourse do insurers have?
This section in no way means you no longer have to comply with your insurance contracts. Although insurers may not be able to terminate a contract outright for these breaches, they are still allowed to reduce the amount they are required to pay the insured, in proportion to the prejudice they suffered due to the breach.
For example, if an insured delayed in notifying the insurer of a worker’s compensation claim, the insurer may be able to argue they were significantly prejudiced because the delay meant they had no opportunity to conduct their own investigations into the workers injury.
Some insurers have argued that this remedy is unhelpful to them, as the ‘prejudice suffered’ can often be difficult to prove or quantify. On the other hand, there have been cases were the prejudice has been found to be so great, that the court reduced the claim to zero. Therefore, this can be a powerful remedy if an insurer is able to prove a measureable amount of prejudice suffered.
While s 54 is undoubtedly a powerful tool for insureds, it cannot be regarded as a cure all for any breaches of an insurance contract. There are many limitations on the types of acts or omissions that will invoke s 54. It will only assist an insured in very specific circumstances and sometimes not at all. We would advise that you always strive to comply with your insurance contract as closely as possible. It would be very unwise, for example, to intentionally fail to comply with the insurance contract in an attempt to save money, assuming that if you later have to make a claim you can rely on s 54 to excuse your breach. Section 54 should only ever be considered as a port of last call.
If you require any assistance in challenging denied insurance claims, please do not hesitate to contact us.