Section 54 has proven to be one of the most controversial and heavily litigated sections of the Insurance Contracts Act 1984. In addition, certain types of insurance policy have felt the sting of s54 more acutely, specifically the ‘claims made and notified’ policy. Its application to these types of policies has sent shockwaves through the insurance industry leading to many legislative reviews and calls for reform. As of yet, it still remains in its original form and continues to be a thorn in the side of insurers. Please refer to our previous articles for a more general look at the effect of s54.
Claims made and notified policies
A claims made and notified policy will continue to indemnify an insured for a claim after the policy has expired, so long as the demand on the insured was made and notified to the insurer within the policy period.
- For example, if a doctor is sued by a patient during the policy period, they will continue to be covered by the insurer if the claim is not settled until after the expiration of the policy, so long as the doctor notified their insurer they were being sued during the period of cover.
A similar policy is the claims and occurrence notified policy, where the insurer agrees to cover the insured for a third party demand made outside of a policy, if the insured notified the insurer during the policy of circumstances which may give rise to a third party claim.
- For example, if a doctor believes they treated someone negligently which may later come back to haunt them, they will be continue to be covered after the expiration of their policy so long as they notified the insurer of those circumstances during the period of cover.
What is section 54?
Section 54 provides that an insurer cannot refuse to pay a claim, if the only reason for that refusal was an act or omission on part of the insured or another party which didn’t cause or contribute to the loss.
The concept of an ‘omission’ has, in particular, caused much judicial hand-wringing. Whilst an ‘act’ which has caused a problem can generally easily be identified, there are a myriad of things an insured could have ‘omitted’ to do. Obviously, there has to be some way to limit what constitutes an ‘omission’ for the purposes of s 54.
How Section 54 applies to breaches of claims made and notified policies
Since its introduction, section 54 has been given a broad interpretation, which has produced many controversial decisions, usually in relation to claims made and notified policies. There is still no conclusive test.
When considering whether a failure to act or do something constitutes an ‘omission’ for the purposes of s 54, the general approach is to ask whether the effect of the contract of insurance is that the insurer may refuse to pay a claim on the basis of that omission.
- For example, a third party sues the insured during their period of cover but the insured doesn’t notify the insurer until after the period of cover has ended. The effect of the contract is that the insurer can refuse to pay the claim by reason of the failure to notify during the policy period. Therefore, the failure to notify during the policy period is an ‘omission’ which can be cured by s 54.
However, the section will not relieve the insured of restrictions or limitations inherent in the claim or extend the scope of the insurance cover.
- For example, the core element of a claims made and notified policy is that a third party demand is made on the insured during the period of cover. Therefore, s54 will not assist if the claim is made after the insurance has ended. The insured did not ‘omit’ to notify the insurer of the claim because it was not made until after the policy ended.
- Another example could be a policy insuring specific pieces of valuable jewellery which are listed for the insurer. If a different piece of jewellery was stolen, the insured could not argue they ‘omitted’ to put this piece of jewellery on the list. The stolen jewellery is simply not within the scope of cover and thus s54 cannot apply.
If you feel confused after reading this, please don’t worry. Section 54 is an incredibly complex and difficult section which the legal profession continues to grapple with and disagree about. If you have an issue with a claims made and notified policy, it is prudent to get legal advice to help you understand whether you may have recourse to this challenging remedy.
If your require assistance, please do not hesitate to contact us.