Law of Insurance Warranties, The

Alastair Owen

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CHAPTER 10 Stress testing the regimes for insurance warranties in Australia, New Zealand and the UK

Stress testing the Australian regime with the facts of historic cases from other jurisdictions

10.1 This volume has already critically examined a number of cases where s54 has been applied. As we have seen,1 the Australian regime comprises a dual track approach made up of (i) s54 of the Insurance Contracts Act, covering, for the purposes of this text, non-marine commercial insurance and (ii) the Marine Insurance Act 1909. In this chapter it will be assumed that the dual track approach has been retained and that the Marine Insurance Act has been amended in line with the recommendations of ALRC 91.2 However the likely outcome under the status quo (where the recommendations of ALRC 91 have yet to be implemented) will also be reviewed. ALRC 91 of course has no relevance in non-marine cases. 10.2 De Hahn v Hartley3 In a maritime policy a warranty required the vessel to sail with at least 50 crew members, but it actually left port with only 44. The shortfall was soon made up, but when the vessel was subsequently lost the insurer still escaped liability because of the breach of warranty. As Australia has retained a separate regime for maritime policies, it is assumed these facts would be considered under Australia’s Marine Insurance Act 1909. Let us assume that the recommendations of ALRC 91 have been implemented. Accordingly, as ALRC recommended the abolition of warranties, it is assumed that the warranty would be replaced by an express term on similar lines. As the breach was remedied prior to the loss of the vessel, under the recommendations of ALRC 91, the insured would be obliged to indemnify the assured for the loss incurred. This would reverse the original decision and would be an outcome welcomed by this author. Of course in reality, the recommendations of ALRC 91 have yet to be implemented. As a result the governing regime would be essentially the same as when the case was originally heard (i.e. the Marine Insurance Act) and this text submits that it is hard to see why the outcome, on the facts (and ignoring for these purposes the likelihood of held covered clauses being included in a modern day policy), would be any different from the original case. This flags a clear disadvantage, and in the view of this author, a critical failing, with the Australian regime as it currently stands. It is possible that the court would view the provision as a condition precedent to the attachment of risk. Were this to be the case then, whether ALRC 91 had been implemented or not, the policy would never have come on risk and the insurer would escape liability. 10.3

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In Forsakringsaktielselskapet Vesta v Butcher4 it was held that the failure of the assured to comply with a warranty that a 24-hour watch would be maintained on the assured’s fish farm was fatal to his claim for loss from storm damage, notwithstanding that it was acknowledged that the presence of a watch would not have had any impact whatsoever on the nature or extent of the loss incurred. If assessed under the Insurance Contracts Act, this author believes that it is clear that the omission to post a watch falls within s54. The question is then, could the omission reasonably be regarded as capable of causing or contributing to the loss under s54(2)? This volume would submit that s54(2) would have no application on these facts. As it is clear that the breach/omission did not cause the loss incurred (or any part thereof), this text would further submit that neither s54(3) nor 54(4) would apply and that accordingly the insurer, having suffered no prejudice as a result of the breach, would be liable to indemnify the loss under s54(1). This volume would welcome this outcome. 10.4 In Hibbert v Pigou5 a ship was warranted to sail with a convoy, but failed to do so and was lost in a storm. The underwriters were held not liable for the loss. Again under the Australian regime it is assumed this case would fall to be considered under the Marine Insurance Act 1909. Assuming the recommendations of ALRC 91 had been implemented, this text submits that as the breach is not capable of remedy, the burden of showing that the breach was not the proximate cause of the loss would be borne by the assured (recommendation 19, ALRC 91). This volume assumes that the assured would be able to meet this burden and that accordingly the insurer would be obliged to indemnify the loss. This would represent a reasonable outcome on the facts. However, as noted previously, ALRC has not yet been implemented, so in reality the likely outcome with these facts would be the same as in the original case. This text believes this is hard to support in the modern era. 10.5 New Zealand Insurance Co Ltd v Harris6 In this case the policy ‘warranted’ that the tractor that was the subject of the policy would not be let out on hire for commercial purposes. This provision was breached and the tractor destroyed in fire. A key question under s54 (or any alternate regime) would be whether the use of the tractor for commercial purposes was outside the scope of cover under the policy. As we have seen, this volume has concerns about the potential for s54 to be interpreted in a way that erodes the clarity that might otherwise exist in relation to issues of scope. The original New Zealand court found the facts to be within the scope of cover and it is assumed a similar finding would be made in Australia. This text believes that an important issue under a s54 evaluation would be whether the act of hiring the tractor for commercial purposes might fall foul of s54(2) and specifically whether doing so might be seen as an act which ‘could reasonably be regarded as being capable of causing or contributing’ to a loss in respect of which cover is provided. As we have seen, this is subject to the insured being able to prove that no part of the loss was caused by the breach (s54(3)). This volume suggests that an Australian court would likely take a similar view to that of its New Zealand counterparty that ‘refined analysis in terms of metaphysical inquiries into causation should be eschewed.’7 Accordingly, it is

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argued that an Australian court would likely rule that s54(2) did not apply to these facts. Could it be argued that the insurer has suffered prejudice (s54(1)), possibly in the form of unrealised premium that it would have charged had it known the tractor would be let out for commercial use? This seems possible on the basis of the definition of prejudice used in the Fercomm case:

the existence of a liability which, in whole or in part, would not have been borne by the insurer if the act had not been done or the omission had not been made or in the non-receipt of an additional premium to which the insurer would have been entitled by reason of the doing of the act or the making of the omission.8

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