I

THE EFFECT OF SECTION 54 INSURANCE CONTRACTS

ACT 1984 UPON CLAIMS FOR CONTRIBUTION BETWEEN INSURERS

INTRODUCTION

The Acts Interpretation Act s.l5AB(2)(b) provides that any

relevant report of, inter alia, the Law Reform Commission

may be considered in order to ascertain the purpose or

object of the particular Act. The Law Reform Commission in

its report on Insurance Contracts1 has stated that while

many of its recommendations were designed to improve the

operation of the insurance market with respect to

prospective insureds, others were designed to provide a "set

of rules that were fairer in the context of present day

insurance than the rules developed in an earlier and far

different time". 2 Such an objective seems to have been

i-n <:ontemplat ion a~d have been achieved in SeQ·t'l'on 54 of the

Insurance Contracts Act 1984 (the Act). ~e ~eeti&R

pr8\'ir.i&&:

, I

r-f/This article will consider whether s.54 may be construed, consistently with the policy objectives referred to above, to apply to claims between insurers for contribution.~

DOUBLE INSU~CE

Professor Sutton3 outlines three requirements which must

be met in order for double insurance to arise. Firstly,

I i

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each policy must cover the same risk. Secondly, each policy

must cover the same interest in the same subject matter.

Thirdly, each policy must be in force at the time of the

loss and must be legally binding. An extension of this

third element was identified in Albion Insurance Company

Limited -v- Government Insurance Office of New South

Wales. 4

"There is no double insurance unless each insurer is liable under his policy to indemnify the insured in whole or in part against the happening which has given rise to the insured's loss or liability."

Once double insurance has been established each co-insurer

has a right of contribution from the other. The principle

is, with respect, neatly stated by Lord Low in The Sickness

and Accident Assurance Association Limited -v- The General

Accident Assurance Corporation Limited.5

"A rule which has been long recognised is that when the insured has recovered to the full · extent of his loss under one policy, the insurer under that policy can recover from other underwriters who have insu~ed ' the same interest against the same risks a rateable sum by way of contribution. The foundation of the rule is that a contract of Marine Insl:lrance: is one of indemnity, and that the insured, whatever the amount of his insurance or the number of underwriters with whom he has contracted, can never recover more than is required to indemnify him. The different policies being all with the same person, and against the same risk, are therefore regarded as truly one insurance, and if one of the underwriters is compelled to meet the whole claim, he is entitled to claim contribution from the other underwriters, just as a surety or cautioner who pays the whole debt is entitled to claim rateable relief against his co-sureties or co-cautioners."

This rule, although first enunciated in relation to Marine

Insurance has been applied to many other types of insurance

and Lord Low expressed the opinion that it applied to all

classes of indemnity insurance. The right of contribution

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is a principle of natural justice equally applicable in law

and equity and although it does not arise from contract it

may be affected by the terms of the relevant contract of

insurance. 6

THE ELEMENTS OF THE SECTION

Four concepts emerge from this section to be addressed in

the assessment of its application to double insurance.

Firstly, what is the meaning of the word "claim"? does it

include claims between insurers? Secondly, what is the

meaning of the term "acts" (which by Section 54(6) includes

omissions), of the insured or other person by reason of

which the claim could otherwise be avoided in the context of

double insurance? Thirdly, it is necessary to consider the

existence of a "contract of insurance" between the insured

and each of the insurers? Lastly, "the prejudice" which may

or may not result from the act or omission requires comment

from the stanqpoint of the insurers.

(i) "Claim"

A claim for contribution by one insurer against another

insurer who has covered the same risk on behalf of the same

insured is common enough. As Section 54 itself does not

attempt to qualify the type of claim comprehended by the

Section there is little reason for denying the term "claim"

its full and ordinary meaning and little reason, on the face

of things, to suppose that the term does not inc lude a claim

between insurers. Unlike Section 56, for example, which

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• applies to claims "under a contract of insurance" or claims

"made under this Act", the word "claim" in Section 54 is

unqualified. The only requirement of the section seems to

be that it must be a claim of the kind which, but for the

Section, could be refused by the insurer by virtue of the

effect of an act or omission in relation to a contract of

insurance. In fact, in this respect, the Section could

equally apply to a claim brought directly by a third party

against an insurer under Section 51 of the Insurance

Contracts Act 1984.

In considering whether the word "claim" should be given its

full, natural meaning or whether it should be confined to

claims under a contract of insurance regard should be had,

of course, to the rules of statutory interpretation. Isaacs

J. in The Proprietors of the Daily News Limited -v­

Australian Journalists Association7 noted that, if, of

two possible constructions, the words are fairly open to the

broader constr.uction which will mitigate the evil and

advance the remedy, that construction ought to operate.

Griffi~h CJ in Bennett -v- Minister for Public Works (New

South Wales)a enunciated the first and most important

rule in the intrepretation of statutes when he said:

"We have to look at the language of the legislature, and where we find that the legislature has expressed itself in clear and unmistakable language, we must give effect to that language, although we may conjecture that it was used through inadvertence."

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It is fundamental that each word should be given its

ordinary and grammatical meaning and as far as possible its

full meaning.9

There does not seem to be any reason of policy underlying

Insurance Contracts Act which would militate against

application of s.54 to claims for contribution between

insurers as well as to claims between the insured and his

insurer. There is, of course, the general proposition that

the Act has in its contemplation the protection of consumer

qua insurers rather than of insurers inter se but it would

seem anomalous for one insurer as against another to be

permitted to refuse a claim by reliance on a breach when,

had the claim been made by the insured, it would have been

bound to accept liability. A construction of "claim" in

this Section to include a claim between co-insurers for

contribution seems consistent with the ordinary meaning of

the Section and at least not at odds with the policy of the

act itself.

(ii) Act or Omission

The scope of the words "act or omission", as with the term

"claim", does not seem to have been restricted by the

language of the section, indeed it has been extended

specifically to include acts or omissions by "some other

person" apart from the insured. The tern "persons" must be

taken to include companies and, so construed, these words

may be argued to include such omissions as a failure to

endorse particulars of a preceding policy upon the policy of

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a second insurer in accordance with the requirements of a

condition in the second policy or a failure by an insured to

give notice of other insurance.

( i i i ) Contract of Insurance

A question which arises in relation to this concept is

whether, where a policy contains an "other insurance" claim,

there is ever a contract of insurance in respect of the

second policy. The Courts at times, with respect, appear to

have taken conflicting or contradictory courses in an effort

to uphold one or other or both of the contracts of insurance

where one or both policies seek to limit or exclude

liability in the event of there being other insurance.

Section 54 will have operation only where it is the effect

of a contract of insurance that, but for the Section, the

insurer would be entitled to refuse to pay a claim. Thus,

while the claim rs not limited to one arising under a

contract of insura~ce, the right to refuse such a claim must

be provided by a contract of insurance. Where one or both

insura~ce contracts contain "other insurance" clauses which

in some way seek to make the existence of the contract

dependent upon the question whether there is another policy,

the question in s.54 terms will then be whether a contract

of insurance does exist under which the claim but for s.54

could be refused or whether, on the other hand the claim

might be refused on the short ground that there is no

contract of insurance. If the insurer resisting

contribution can show that there was no contract of

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insurance with the insured then Section 54 cannot operate to

compel payment of the claim in the absence of prejudice.

Section 45 of the Act goes some way towards solving this

difficulty in that it prevents the use of contractual terms

which limit or exclude liability on the basis that the

insured has entered into another contract of insurance.

Section 45(1) provides:

"Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void."

This Section would seem to make inoperative such clauses as

or

"This policy shall ipso facto cease to be in force if the insured shall be any time during the continuance of this policy insure agybnst accident or sickness with any other company."

"This policy does not cover liability which forms the subject of insurance by any other policy and this policy shall not be dryyn into contribution with such other insurance."

Nevertheless, Section 45 only makes void those provisions

which ~eek to avoid liability by reason that the insured

hasentered into other insurance. It does not seem to affect

the position where a clause in a contract of insurance

provides, for example, that notice is to be given of such

"other insurance" in default of which no contract of

insurance shall come into existence or all liability under

the policy shall cease. That is to say s.45 of the Act only

affects provisions which exclude or limit liability by

reason of the entry into other insurance but not those

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provisions which exclude or limit liability for some other

reason such as the failure by the insured to give notice of

"other insurance". If such a failure occurs, would there

be a contract of insurance which would entitle the insurer,

but for Section 54, to refuse the claim, or would the

contract be terminated or made void ab initio by the failure

to fulfil the condition? The matter cannot be

comprehensively discussed in abstract terms because of the

importance of the terms of the contract. It may be

observed, however, that some of the difficulty in

understanding the cases on the point seems to stem from a

confusion between the concepts of breach of a condition

precedent to the formation of a contract on the other hand

and a breach of a term in an existing contract recited to be

a condition precedent to liability arising.

Some guidance may, be gained by considering the approach

taken by the courts in applying Section 18 of the Insurance

Act New South .Wales 1902. Section 18 provides

"In . any proceedings taken in a Court in respect of a difference or .dispute arising out of the contract of insurance if it appears to the Court that a failure by the insured to observe or perform a term or condition of the contract of insurance may reasonably be excused on the grounds that the insurer was not prejudiced by the failure, the Court may order that the failure be excused."

Section 18(2)

"Where an order of the nature referred to in sub-section 1 has been made, the rights and liabilities of all persons in respect of the contract of insurance concerned shall be determined as if the failure the subject of the order had not occurred."

This provision while similar to Section 54 is much more

restricted in its scope, notably in the limitation of its

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operation to proceedings in court in respect of a

"difference or dispute arising out of the contract of

insurance".

In Thimm -v- Commercial Union Assurance Company12 the

insured took out two policies of insurance with two

different insurers. The policies contained identical

conditions in the following terms:

Condition 3 - "The insured shall give notice in writing to the company of any insurance or insurances already effected, or which may subsequently be effected covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in or indorsed on this policy by or on behalf of the company before the occurrence of any loss or damage, all benefit under this policy shall be forfeited."

Condition 10 - "If at the time of any destruction or damage to any property hereby insured there be any other subsisting insurance or insurances whether effected by the insured or by any other person or persons covering any of the property, the company shall not be liable to pay or contribute more that its ratable proportion of such destruction or damage •.•• "

The insured sued the first insurer claiming indemnity for

loss sustained when the insured's hotel caught fire. The

first insurer joined the second insurer as a

cross-defendant. The trial judge held that by vir t ue of the

terms of Condition 3 of the second policy no insurance was

"effected" under that policy and the insured was therefore

not in breach of Condition 3 of the first policy but was

entitled to indemnity by the first insurer. The first

insurer could then only succeed in its claim for

contribution against the second insurer if Sec tion 18 of the

Insurance Act New South Wales 1902 was held to operate on

the failure of the insured to give notice to the second

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insurer of the insurance effected with the first insurer.

The Court had to consider two questions:

"Was the policy with the second insurer a contract of insurance having regard to Condition 3 of that policy? Secondly, could an application be made under Section 18 by someone who is not a party to the contract of insurance, that is by a co-insurer for the purpose of obtaining contribution?"

This second question will be addressed at a later point in

this article. Yeldham J. in considering the first question

had regard to the reasoning of Walsh J in Steadfast

Insurance Company Limited -v- F & B Trading Company Pty

Ltd13. Walsh J. addressing the question whether insurance

had been effected, had expressed the opinion that the fact

that a policy of insurance contained conditions which might

allow an insurer to escape liability did not mean that no

insurance has been effected. In his Honour's opinion the

words of the clause and their relationship to the

circumstances had to be considered. He said:

"If there is a condition expressed in such terms that .it ·operates upon the facts whi ch exists at the time tha~ the contrac t is made and upon the facts which continue to exist up to the time that a loss occurs in: such a way that the company is at no point of time liable to indemnify the insured, then in my opinion the making of a contract containing such a condition does not constitute the effec ting of an insurance within the meaning of Condition 3."14

This passage draws the distinction between a contrac t which,

while it exists per se is not operative because of a breach

of a term and a contrac t which is effec tive to provide

indemnity. In both instances there is a contrac t of

insurance but the wording of Condition 3 above introduced an

additional requirement of "effectiveness" (not required by

s. 54 of the Act ) wh ich had not been met .

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In Equitable Fire and Accident Office Ltd. -v- The Ching Wo

Hong15 the Court had occasion consider the meaning of an

"effective" policy of insurance. It was held that in order

to show that insurance has been "effected" it is not enough

to show that a policy had been executed and issued.

Arguably though this would be sufficient under s.54 of the

Act to show the existence of a contract of insurance.

Yeldham J recognised this distinction in Thimm's case in

observing that the question of whether there was effective

insurance was different from the question of whether there

was a contract of insurance.

In Panorama Plant Hire -v- Mercantile Mutua116 Yeldham J

again considered the application of Section 18 Insurance Act

New South Wales 1902 but unlike the previous case it was the

insured who sought to invoke this Section to remedy a breach

of a condition in a policy which required notice in writing

of any accident damage or loss as soon as possible after the

occurrence. The insured succeeded in his claim and by . '

virtue of Section ·18(2) the claim for contribution by a

co-insurer was also successful. Interestingly, both

policies provided cover only in the event that the insured

was not "otherwise insured" (a provision which by virtue of

s.45 of the Act would now be held void). Both policies also

provided that the insurer would, "not be liable for more

than a rateable proportion of any sums payable" . Both

policies were held to be operative and therefore presumably

contracts of insurance within the meaning of Section 18(1)

and (2). Roche EJ in Gale -v- Motor Union Insurance

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Company17 said "Not otherwise insured" should be read

"Provided there is no other insurance ••• under which the

insured might secure an indemnity, meaning full and complete

indemnity in the existing circumstances." 18 This

reasoning allowed the Court to avoid the injustice of the

policies cancelling out each another and leaving the insured

without cover.

The Court in GRE Insurance Limited -v- QBE Insurance

Limited19 was faced with another case of double insurance

in which both policies contained a condition requiring

notice to be given of other insurance in lieu of which all

benefit under the policy would be forfeited. The clauses

were identical to those considered in Thimm's case.

However, a different approach was taken by the majority in

that Section 27 Instruments Ac t 1958 (Victoria) was held to

remedy the failure by the insured to give notice. Section

27 provides

"If by reason of accident mistake or other reasonabLe cause any insured fails to give any noti ce or make any claim in the manner and within the time required by the contract of insurance such failure shall not be a bar to the maintenance of any proceedings (whether legal proceedings or arbitration proc eedings) upon the contract by the insured unless the Court or the Arbitrator or Umpire (as the case may be) considers that the insurer has been so prejudiced by such failure that it would be inequitable if such failure were not a bar to the maintenance of such proceedings."

Anderson J in his dissenting judgment followed the reasoning

outlined in Steadfast Insurance Company Limited - v- F & B

Trading Company Pty Ltd20 and found that the first policy

was the only effective policy. In his opinio n the contrac t

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of insurance was effected subject to the terms and

conditions of the policy which had two requirements, namely

1. Notice to be given of other insurance; and

2. The other insurance to be indorsed on the policy.

His Honour said that when both requirements were fulfilled

then insurance would be "effected". Section 27 Instruments

Act 1958 (Victoria) in His Honour's opinion did not apply to

a contract of insurance under which insurance had not been

"effected" and thus liability had not arisen by reason of

the failure to give notice of the other insurance. He

continued

"The Section (Section 27) is designed to cope with the failure to give notice of matters or t~ings incidental to a policy in full operation."

His Honour's approval seems to require the existence

"effective insurance" before s.27 can be applied but the

section itself refers only to a "contract of insurance".

Part of His Honou~~ s reasoning appears to have been based on

the erroneous belief that Section 27, if given its full

meaning, would have the effect of making the second insurer

liable to make a contribution where it would not have been

liable to the insured. Such a view, with respect, appears

to overlook that Section 27 if given its full effect, would

make the second insurer liable to its insured (had the

insured sought to invoke the Section in making a claim) as

well as making the insurer liable to make a contribution to

a co-insurer. In addition, His Honour's criticism that the

policy would be given "posthumous and retrospective efficacy

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by reason of the fact that an action is subsequently brought

on it ..• and a right which never existed before is brought

into being" 22 is with respect not a good reason for

denying the full scope of Section 27 of the Instruments Act

1958 as that section (as with Section 54 of the Insurance

Contracts Act 1984) as between an insured and insurer could

bring about this same result . The same also could be said

of any such remedial section if invoked during proceedings.

The majority in this case took the view that Sec tion 27 of

the Instruments Act 1958 operated to prevent the failure of

the insured to give the appropriate notice rendering the

policy ineffective. The insurance was therefore effective

until such time as a Court decided to bar the maintenance of

proceedings under the policy because the prejudice of the

insurer made it inequitable for the section to operate.

Although there is no clear authority in point the effect of

Section 45 of the Insurance Contracts Act 1984 seems to be,

the, that a contra~t of insurance in existence despite its '

being inoperative, is such that it would seem that a

contraGt of insurance (subject to the construc tion of its

actual terms) may come into existence even if the insured

fails to carry out a condition of that contract and no

insurance is effected nor effective.

(iv) Prejudice

S.54 allows an insurer to deny a claim where an act or

omission of the insured or any other person gives rise to a

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right under a contract of insurance to do so but only if

such act or omission has prejudiced the interest of the

insurer or if there is only partial prejudice then only to

the extent of that prejudice. The existence of prejudice is

purely a question of fact to be ascertained upon looking at

all the circumstances -of a given case.

Few examples of the way in which prejudice to a co-insurer's

interest arises occur in the cases. Anderson J in GRE

Insurance Limited -v- QBE Insurance Limited23 while

observing that the question of prejudice did not arise in

that case went on to express the view that if the contract

of insurance entitled an insurer to deny liability then

application of the section which gave relief to the insured,

would clearly prejudice the insurer as it would have the

effect of making the insurer liable where it was not liable

before. With respect, this would always be the case,

whenever the section is applied and this is really an

example of prejudice caused by application of the Section

and not prejudice ~rising from the act or omission. In any

event Section 54 refers to "prejudice as a result of that

act" dqubtless referring to the act which would otherwise

have entitled the insurer to deny the claim. Section 27 of

the Instruments Act 1958 (Victoria), under consideration by

Anderson J, similarly refers to "prejudice by such failure"

which it is submitted does not allow for the interpretation

adopted by his Honour.

The Court in Panorama Plant Hire -v- Mercantile Mutual 24

in deciding whether Section 18 of the Insurance Act (New

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South Wales) 1902 should be applied to remedy a breach of

the contract of insurance by the insured, had occasion to

consider whether the failure by the insured to give notice

of the loss had caused prejudice to the insurer. In this

case the insured failed to give notice in writing of an

accident until after judgment was entered against it for

damages for negligence. In normal circumstances one could

imagine that such a scenario may have caused prejudice to an

insurer by precluding it from being involved in the

litigation so that it was unable to protect its interests.

In this case, however, the insurer also happened to be the

insurer of the other defendant in the action and had granted

indemnity to that defendant and had, by its solicitors,

conducted the proceedings on behalf of that insured. The

Trial Judge found that as the present insured had been

represented by "extremely experienced" and "competent"

solicitors and as they had been in communication with the

solicitors for the other defendant appointed by the insurers

and as only one ·insurer could have had the conduct of the

litigation, the pr?ceedings had therefore been "properly

investigated and adequately defended" and the insurer had

not been prejudiced.25

The operation of Section 54 will undoubtedly depend upon the

circumstances of particular cases, but it is submitted that

the requirement of prejudice is not an element which would

tend to militate against the construction that s.54 will

apply to claims for contribution between insurers.

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STATUTORY INTERPRETATION AND GENERAL CONSIDERATIONS

Adopting the tests propounded by Gibbs CJ in K & S Lake City

Freighters Pty Ltd -v- Gordon & Gotch Limited26 it seems

that Section 54 of the Insurance Contracts Act 1984 when

read in the context of the Act as a whole does not reveal

any inconsistency with any other provision. While it could

be said that the broader interpretation of Section 54 goes

beyond the purpose of some of the other provisions it does

not contradict or render those provisions in any way less

effective. The result of the proposed construction it is

submitted could not be described as inconvenient, improbable

or unjust and still less as absurd or irrational.

Accordingly, it may be argued that when read in the light of

the context of the Act as a whole "The meaning of the

Section is literally clear and unambiguous, (and) nothing

remains but to give effect to the unqualified words."27

Starke J in National Mutual Fire Insurance Co Limited -v­

Insurance Commissioner28 said that where the words are

clear and unambigu~us there is no warrant for reading

restri~ting words into the Section and the words should be

given their full effect.

Another rule of statutory interpretation referred to by the

Court in Khoury -v- Government Insurance Office (New South

Wales) 29 is that a remedial provision is to be

beneficially construed so as to provide the most complete

remedy of the situation with which it is intended to deal

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provided the actual words used by the Section are "fairly

open to such a construction".

Turning to more general considerations it would seem that

while the foregoing is arguably sufficient evidence to show

that the major elements of this Section are equally

applicable to a claim between co-insurers for contribution

as they are to a claim between insured and insurer the

arguments against this broad interpretation must be

considered.

An appropriate starting point is the report of the Law

Reform Commission on Insurance Contracts3° the terms of

reference of which deal primarily with the insurance

contract and the relationship between insured and insurer.

It is difficult to find more than a fleeting reference to

the rights of co-insurers and certainly no concern can be

found for the protection of their rights per se. Indeed,

even the reasoning behind the drafting of Section 45 of the

Insurance Contracts Act 1984 which prevents the exclusion or

limiting of liability by reason of the existence of other

insura~ce, stems purely from a concern for the insured. But

is the fact that the wider interpretation of Section 54 was

never considered, sufficient reason for limiting the effect

of the Section? Fullager J in National Mutual Fire

Insurance Co Limited -v- Insurance Commissioner3 1 in

considering the scope of Section 40(l)(a) of the Motor Car

Act 1958 (Victoria) and whether that Section included

liability to pay workers' compensation said

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"Once one has observed the plain ordinary meaning of the words used, it is no reason for withholding from the words their full and ordinary ambit that Parliament may not have averted to some of the consequences, provided, of course, that they are not consequences so absurd that they could not have been intended."

His Honour amplified this point by saying that it could not

be said that if Parliament's attention had been drawn to the

wider interpretation of that Section during the third

reading of the Bill that "The Minister would have thrown up

his hands and would have withdrawn the Bill for

amendment."3 2 In fact, in the present case it could be

said that this proposed construction of Section 54 is merely

an extension of the policy of the entire act or at the very

least is compatible with the protections afforded to the

insured. It would be iather incongruous for Parliament on

the one hand to prevent an insurer from denying a claim by

its insured in the absence of prejudice and on the other

allowing the same insurer to refuse the claim on the basis

of the same breach if it was made by a co-insurer.

Another difficulty: arises in relation to Section 54(3) which

provides

"Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of that act."

This provision seems to indicate that only the insured may

seek to show that the breach did not prejudice the interests

of the insurer. An answer, however, may be found in an

insurer's right of subrogation but the cases seem to agree

that the insurer's right of contribution does not arise from

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the right of subrogation. In fact Murray J in GRE Insurance

Limited -v- QBE Insurance Limited33 said he did not think

the doctrine of subrogation applied where there was double

insurance. Nevertheless, Sholl J in Dawson -v- Bankers &

Traders Insurance Co Limited3 4 stated

It appears to me that the right (of contribution) is not the same as the right of subrogation, but that the presence or absence of the latter right may in some cases be relevant in considering and working out wh35her there is or is not a right of contribution."

This would seem to be directly applicable to Section 54(3)

of the Insurance Contracts Act 1984 where in order to show

that there is a right of contribution, the insurer,

subrogated to the position of the insured, must first

establish that no part of the loss that gave rise to the

claim was caused by the act or omission of the insured.

Once that is established the insurer may proceed in

enforcing its right of contribution.

In considering . th~ possible approach of a Court to the

proposed construction of Section 54 some assistance may be

gained from the Court's approach to Section 18 of the

Insurance Act (New South Wales) 1902 when it was sought to

be applied to the case of a claim for contribution by a

co-insurer. Ye1dham J in Thimm -v- Commerc ial Union

Assurance36 remarked that he thought it unlikely that the

legislature when passing Section 18 of the Insurance Act had

in mind an action between two insurers for contribution. He

continued

"But the question is whether the plain words of this Section ~9u1d admit of its application to such a situation. "

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He concluded that the Section could not so apply as the

words "difference or dispute arising out of the contract",

limit the Section to matters between the parties to the

contract. Section 54 on the other hand is drafted more

widely as the claim itself need not arise out of the

contract of insurance only the potential basis for refusal

of such claim.

This aspect is more clearly discussed by the Full Court in

GRE Insurance Limited -v- QBE Insurance Limited38 in

relation to Section 27 of the Instruments Act 1958

(Victoria). This Section is narrower in construction than

Section 54 as it provides that a failure by the insured

under a contract of insurance shall not be a bar to the

maintenance of proceedings upon the contract by the insured

whereas Section 54 is arguably not limited to claims by the

insured under a contract of insurance. Nevertheless, the

Court held that Section 27 of the Insurance Act 1958 could

be invoked by one · insurer in claiming contribution from a

co-insurer, t ·o remedy a failure by the insured under a

contract of insurance with the insurer resisting

contribution. McGarvie J said in support of the decision

"Section 27 was not enacted in a commercial or legal vacuum. It was known that it would operate within a commercial and legal network of insurance relationship. Would Parliament have intended this Section to produce an insurance liability of the unique nature contended for by the appellant, or one which would fit easily and operate consistently with other commercial and legal relationships in the field of insurance? Would it have intended to create a liability which will materialise if the insured is plaintiff but fails to materialise if the plaintiff is an assignee of the thing in action under Section 134 of the Property Law Act 1958 or, perhaps, a trustee in bankruptcy? Parliament is

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unlikely to have intended to create an insurance liability, effective as between insured and insurer, but incapable of being passed on in the normal process of loss distribution in the insurance industry by way of contribution, re-insurance and the like. It is not likely to have been intended that the process of loss distribution could operate only if the insured first broug~9 proceedings and recovered indemnity."

Given that s.54 of the Act prima facie has application to

claims between co-insurers for contribution, the forceful

reasoning of His Honour in the passage above would arguably

be a sufficient invitation to a future Court when

considering this proposition, to liberally construe the

application of this section in favour of the insurer seeking

contribution.

EF128 as.2 030687

-24-

FOOTNOTES

1 Law Reform Commission Report 1982 .

2 Law Reform Commission Summary XXI.

3 As suggested by Mr Justice Derrington.

4 Prof. Sutton - Insurance Law in Australia and New

zealand (1980) at 446 and following

5 1969 121 CLR 342 at 346.

6 1892 19 R (Court of Session) 977 at p.980.

7 CCH Australia & New Zealand Insurance Reporter

27-100.

8 27 CLR 532 at p.543.

9 7 CLR 372 at p.378.

10 8 CLR 739 at 756.

11 1980 2 NSWLR p.663. . , '

12 South British Insurance Co. Ltd. - v- Nicol 1928

St.R. Q53.

13 Lloyds Policy.

14 1979 2 N.S.W . L.R. 847 .

15 1971 125 C.L.R. 578.

16 supra n.l4 p.587.

17 1907 Ac 96.

18 1980 2 N.S.W. L. R. 618.

19 1928 1 KB 35 9.

20 supra No. 18, p.363. ~

21 1985 VR 83.

22 121 C.L.R. 342.

23 supra n.20 p.91.

24 supra n.22

25 supra n.20.