Prosperity Advisers Ltd v Secure Enterprises Pty Ltd T/As Strathearn Insurance Brokers Pty Ltd  NSWSC 35 illustrates aggregation issues in a professional indemnity claim by a financial planner, and how the relevant facts and precise words of the policy are always determinative of whether claims may be aggregated so a single deductible (rather than multiple deductibles) applies.
The case highlights the importance of an intending insured understanding the legal consequences of aggregation clauses and the need to seek legal advice. The case also considers an alternative “loss of a chance” argument in seeking to recover compensation from an insurance broker.
The case followed a dispute between a firm of financial planners, Prosperity Advisers (Prosperity), and its professional indemnity insurer, QBE. Prosperity gave investment advice to clients before 2006 and some investors suffered losses (following the Westpoint Group collapse) in acting upon that advice to invest in the same failed investment (unsecured promissory notes issued in respect of specific real estate developments undertaken by the Westpoint Group, known as “mezzanine finance investments”) (the investment advice). Like many financial planners, Prosperity only recommended to its clients investments that were on an approved list agreed by its investment committee. Indeed, under an endorsement to the QBE policy, Prosperity was not covered in relation to claims arising from investments not on its approved list.
Approximately 160 clients who collectively lost approximately $17 million sued Prosperity alleging it was negligent in providing the investment advice.
Policy response and aggregation
QBE rejected the view Prosperity had been provided with by its insurance broker that multiple claims arising from a single failed mezzanine finance investments instrument recommended by Prosperity could be aggregated and treated as one claim (with a single $40,000 deductible applying to all the claims). Prosperity had purchased the PI insurance relying on the insurance broker’s advice in this regard.
In fact the policy provided that:
- multiple claims would be treated as one claim (requiring payment of a single deductible of $40,000) if they arose out of “a single act, error or omission”; and
- a separate deductible would apply in respect of each and every party to such claim(s), subject to a maximum (aggregate deductible) of $120,000. The policy also provided that “all causally connected or interrelated acts, errors or omissions shall jointly constitute a single act, error or omission…”.
As the investment advice was specifically tailored and provided to each client individually in accordance with their specific investment profile, it could not be said that the advice arose from a single act or that it was causally connected or interrelated, so a $40,000 deductible applied to each investor’s claim (totalling approximately $2.5 million).
Prosperity settled its claim for indemnity with QBE at a discount, and it and the insurer both contributed to a ‘settlement pool’ for investors.
The claim against the insurance broker
Prosperity then sued its insurance broker alleging it had been negligent in advising it and was in breach of section 52 of the Trade Practices Act (misleading or deceptive conduct), and that in the alternative it had lost the opportunity to obtain other insurance cover and that it should be compensated for that lost opportunity. This is unusual in a negligence claim because, if on the balance of probabilities one can prove a broker’s negligence caused loss, damages will usually refund any losses in full. Prosperity sought to recover all but one of the deductibles paid to QBE, stating that but for the broker’s advice it would have obtained a different PI policy for the same premium that (on the facts) would have aggregated the claims and applied a single deductible.
Although the broker was found to have breached its duty of care to Prosperity, Prosperity’s claim did not succeed as it could not show an alternative PI policy was available from the market at the relevant time for the same premium that would have resulted in the claims being aggregated as a single claim (with a single deductible applying).
Further, in relation to damages for loss of a chance or lost opportunity, it was unable to show “a substantial prospect of acquiring” a policy of the requisite type. Whilst courts will attempt to assess loss of a chance “even if the chance is less than 50 per cent and even if the task is difficult and some guess work is involved”, in this case the Court found on the evidence that the possibility of Prosperity finding the insurance cover it sought was at best speculative and did not satisfy the threshold needed to assess its damages as a loss of a chance. Indeed, Prosperity’s expert broking evidence did not provide that there was a policy available in 2005 that had the effect sought by it, or that another PI insurer would have been persuaded to provide the cover sought.