Australia's much-litigated section 54 of the Insurance Contracts Act 1984 (Cth) is an example of a common class of statutory provision, designed to moderate the harsh effect of an insurance contract where, because of the insured's failure to comply strictly with a term, cover can be refused notwithstanding that the failure may have had nothing to do with the loss and did not prejudice the insurer's position to any material degree. Warranties and conditions precedent can have this effect under the common law of insurance.
Section 54 deals with this by providing, essentially, that the insurer's remedy is limited to the equivalent of damages for breach of the contract. If the insured's failure is one which might have caused or contributed to the covered loss, the insurer may refuse to pay and it is for the insured to prove that some or all of the loss was not in fact caused by it. If it can, it can recover that portion. If, however, the insured's failure was not causally related to its claimed loss, for example a failure to give timely notice to the insurer of the loss occurrence, then the insurer may not refuse the claim by reason only of the insured's breach but may reduce the claim by the monetary equivalent of whatever prejudice the insurer can prove it has suffered, as a result of it.
The challenge for the courts in interpreting and applying a provision such as this is to resolve the inherent tension, which is at the heart of all such remedial provisions, between ensuring that the remedial purpose of preventing insureds from losing the benefit of their insurance due to conduct which is irrelevant to the covered risk, is given full effect however the contract may be drafted, while not allowing the statute to alter the fundamental nature of the policy by enlarging the class of insured perils and losses to which it responds.
It is necessary to identify the insurer's "core promise", the true description of the class of risks and interests to which the policy responds, and to distinguish them from elements such as operational provisions which may have been drafted so as purportedly to form part of the description of risk, but which are not really within it. The point is that provisions such as section 54 must operate upon the claim as made under the policy as written. They ought not be used to expand the scope of cover under the policy to losses which are simply outside it, even where that is the case because of some failure on the part of the insured in relation to the insurance.
In other words, the remedial effect of the statute is not to be frustrated by drafting techniques, such as including notification requirements and other operational provisions in the definition of risk or disguising them as exclusions. Neither is the statute to be used to extend the policy to risks which the insured may have omitted, or which the underwriter did not intend, to have covered.
This tension is perfectly illustrated by a case from Western Australia: Highway Hauliers Pty Ltd v Matthew Maxwell  WASC 53,  WASCA 115. Highway Hauliers operated a fleet of trucks and trailers, transporting freight between Western Australia and the eastern states. It insured these under a Lloyds Policy, the schedule to which provided that there was "no cover under the policy for drivers doing east-west/west-east cartage who do not have a PAQS driver profile score of at least 36". The Policy also excluded claims involving any drivers in respect of whom the Underwriters had not received a driver declaration at the time of an occurrence, unless they subsequently chose to accept one.
Two prime movers and their trailers were damaged in separate accidents during the period of insurance. Neither driver had undertaken a PAQS test or was the subject of an accepted driver declaration. Underwriters refused indemnity on the basis that the claims were excluded, upon both grounds. The case was virtually a text book example for the purposes of exploring the limits of a provision such as section 54 since:
1. The insured did not dispute the drivers' status or that the requirements of the policy had not been complied with and it accepted that, unless the statute intervened, it could not claim; and
1. Underwriters, for their part, acknowledged that the drivers' status had nothing to do with the causes of their respective accidents and, if the statute did apply, Underwriters had not sustained any prejudice.
It boiled down, therefore, to the question of what was the insurers' "core promise": the essential nature of the coverage. Was the policy insuring against loss of or damage to the insured's vehicles and third party liabilities arising out of the use of them, with an ancillary requirement that drivers meet the PAQS score and be the subject of an accepted declaration; or was it insuring only against loss of or damage to vehicles and third party liabilities arising out of the use of them whilst they were being operated by such drivers?
Corboy J, of the Supreme Court of Western Australia, analysed the distinction as being between a "state of affairs" which meant that the loss was never within the scope of the insurance contract, as opposed to an act or omission of the insured which took it outside that contract. He recognised that the arguments that a claim falls outside the scope of coverage under the policy, or that what is in issue is a state of affairs to which the policy does not respond, are really just two ways of saying the same thing. The point really being made is that the effect of the contract of insurance is that the insurer may refuse to pay the claim not because of some act or omission, as contemplated by section 54, but because it was no claim to begin with.
In simple terms, for the insurer to be able to refuse to pay a claim there must first be a claim and you cannot claim for what the policy does not cover. Only in this manner can sensible limits be set to the operation of provisions such as section 54, however, one is still left with the fundamental task of identifying the essential elements of the coverage, to determine whether there is or is not a claim.
In this case, Corboy J found that the Underwriters' core promise was to insure against loss of or damage to vehicles and third party liabilities arising out of the use of them, occurring during the period of insurance due to multiple perils, which were not confined to the risks of accidental damage caused by a driver. So much was evident from the language of the policy. On that basis he concluded that:
The PAQS endorsement conditioned the insurers' obligation to meet a particular claim that otherwise fell within the scope of cover; it did not form part of the way in which the scope of the policy was defined.
This finding was upheld by the Western Australian Court of Appeal and the case is now before the High Court of Australia. The High Court must determine, perhaps incrementally from the reasoning in its own previous judgement in FAI General Insurance Co Limited v Australian Hospital Care Pty Ltd (2001) 204 CLR 641, the principles to be applied in a case such as this in order to identify the elements of the insurer's core promise of indemnity, the so-called "scope of coverage" of the policy, and distinguish it from matters with which the insured or somebody else must comply in order to recover a claim under it.
It is not merely a matter of deciding whether there has or has not been an "act or omission", as opposed to a "state of affairs". Most states of affairs come about as a result of somebody or other's acts or omissions and to frame the question in this manner merely begs it. The question is down to just how "fundamental" is fundamental to the contract and that can only be determined by reference to the nature of the policy. It is doubtful, therefore, whether a touchstone can be formulated which would apply across all classes of policy to which the Insurance Contracts Act 1984 (Cth) applies. Watch this space!