Section 54 of the Insurance Contracts Act takes a bit of time to digest. So, let’s look at section 54 through some examples.
Section 54 affects contracts of insurance which permit an insurer to refuse to payout a claim, either in whole or in part, because the insured has done some act or omission after the contract was entered into that has caused some prejudice to the insurer.
Section 54 aims to protect the insured’s claim from being rejected by the insurer in certain breach scenarios. But it also penalises the insured in proportion to the harm caused by the insured’s conduct. In essence, it creates a proportionality system.
Let’s have a look at some examples provided in Draft Insurance Contracts Bill 1982 on section 54:
Example 1:
A motor vehicle policy requires that the insured keep their vehicle maintained and in Roadworthy condition. The insured’s brakes fail and their vehicle collides into another vehicle. The driver of the other vehicle was 50% liable for the collision. The insured’s failure to keep the vehicle in Roadworthy state could reasonably supposed to cause or contribute to a loss (subcl 2). The insured is able to prove that he was only 50% liable for the collision. Hence the insurer is entitled to deduct only 50% of the claim (subcl 3).
Example 2:
If the unroadworthy vehicle was damaged while parked, the insured could recover the full amount of their loss (subcl 1)
Example 3:
A’s motor vehicle policy contains a term which excludes the insurer’s liability if the driver of the vehicle is unlicensed. While driving unlicensed, A is involved in a collision. He was unlicensed at time having forgotten to renew his licence which had only expired two weeks previously. A’s conduct could not reasonably be supposed to be of a type which could contribute to an accident, so subcl (1) only applies. Since the insurer could not have been prejudiced by A’s driving the car without a licence, it is liable for the full amount of the claim.
The test in section 54 is whether an act or omission could reasonably be regarded as being capable of causing or contributing to a loss for which cover is provided. If it can, then the act or omission is treated in accordance to s54(2) and ensuing subsections – the liability of the insurer is reduced to the extent of the prejudice they suffered and in accordance to the proportionality system. If it cannot, then the insured may be entitled to a full payout of their claim.
Note: This is a general guide only. Circumstances may vary and advice should be sought about your specific circumstances.
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