What makes an insurance contract?

In The Owners – Units Plan No. 3115 v The Trustees of the Master Builders Fidelity Fund Scheme [2019] FCA 115, the Federal Court (Griffth J) considered, inter alia, whether fidelity certificates issued under a fidelity scheme approved pursuant to the Building Act 2004 (ACT) are contracts of insurance for the purposes of the Insurance Contracts Act 1984 (Cth). It concluded they were not, even though they covered the same risks as those covered under a residential building work insurance policy.

Claims upon the fidelity scheme were not brought within the time prescribed by the scheme and the Applicant attempted to circumvent that issue by asserting reliance on s 54(1) of the Insurance Contracts Act 1984 (Cth) (IC Act).

In obiter, Griffith J set out the following well established elements for a contract of insurance:

  1. the contract must provide that the assured will become entitled to something on the occurrence of some event, which entitlement reflects an obligation on the insurer to give some benefit to the assured;
  2. the event must be one which involves some element of uncertainty; and
  3. the assured must have an insurable interest in the subject matter of the contract.

Confirming Sir Robert Megarry VC’s comments in Medical Defence Union Ltd v Department of Trade [1980] Ch 82, these three elements may not be exhaustive or comprehensive, but the presence of all three supports the existence of a contract of insurance whilst the absence of any one of them suggests a contract of insurance is contra-indicated.

Griffiths J found, with respect to the fidelity certificates under examination, the trustees had discretion on whether to pay any amount at all and the amount which might be paid. Accordingly, the first element for the existence of an insurance policy was not satisfied.

At the core of a contract of insurance is a promise to pay a sum of money or provide some benefit upon the happening of a specified event. The fidelity certificates in this instance did not include a promise and as such were not contracts of insurance.