Introduction

In the recent case of Hamcor Pty Ltd & Anor v State of Queensland & Ors [2014] QSC 224 the Supreme Court of Queensland refused to accept that a duty of care to obtain appropriate insurance existed between an insurance broker and a non-client third party.

Background

Hamcor owned industrial property in Queensland. Binary, the leasee, operated a chemical factory from the property. Binary and Hamcor were related entities, sharing the same controlling minds.

In August 2005 the factory was destroyed by fire. Large amounts of water applied to fight the fire by the Queensland Fire and Rescue Service (QFRS) became mixed with chemicals emanating from the factory, contaminating Hamcor’s land and that surrounding it. Hamcor was required by the Environmental Protection Act 1994 (Qld) to remediate the contaminated land at a cost of $9 million.

Hamcor received $3 million in proceeds from a property insurance policy taken out in its name covering the circumstances of the fire, however an uninsured exposure of $6 million remained.

Hamcor commenced proceedings against QFRS for its allegedly negligent attempts to extinguish the fire, and against two insurance broking firms, Marsh and Otago1 (Brokers), who had arranged liability insurance for Binary. That latter claim is the focus of the present discussion, in which Hamcor alleged that:

  1. The Brokers knew, or ought to have made sufficient enquiries to discover, that Hamcor owned the property from which Binary operated the factory, and should have had it named as an insured (or interested party) on Binary’s liability policy;
  2. Alternatively, the Brokers should have obtained an Industrial Special Risks policy for Hamcor.

Decision

The proceeding against the Brokers raised three key issues for determination:

  1. Whether the Brokers, whose retainer was limited to one on behalf of Binary, owed Hamcor (a third party) a duty of care;
  2. Whether Hamcor would have purchased any additional insurance had it been recommended;
  3. Whether such insurance would have covered Hamcor’s uninsured losses.

In finding for the Brokers, Justice Dalton determined all three issues against Hamcor.

Regarding the existence of a duty of care, the evidence before the court was that up until around 2003 Hamcor and Binary used the same insurance broker to provide their respective insurance needs for the property, as owner and leasee respectively. The existing broker was known to, but not affiliated with, the Brokers.

That position changed from 2003, when Binary’s then insurer refused to renew its public liability cover. Following a series of exchanges between Binary and the Brokers throughout 2003, the Brokers were able to place Binary’s public liability insurance with an alternative insurer. As part of that process, Binary and the Brokers entered a Services Agreement for the provision of those services. Binary’s remaining insurance needs, as well as those of Hamcor, remained with the existing broker.

Hamcor cast its case in particularly wide terms, alleging the Brokers owed it a duty to:

Investigate the relationship between Binary and Hamcor;

Investigate the existing insurances that had been arranged on behalf of both entities;

Realise those existing insurances were inadequate to respond to a situation in which Hamcor became subject to an obligation to remediate its land if contaminated.

Dalton J acknowledged that the Brokers were aware of Hamcor’s existence, and that the prevailing circumstances could reasonably have indicated to the Brokers that there was some relatively close relationship between Binary and Hamcor, however this alone was not enough.

Hamcor’s claim against the Brokers was one for pure economic loss, her Honour referring to the seminal case of Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515.2 Her Honour was not satisfied that the special circumstances espoused in Woolcock for the imposition of a duty of care – reliance, assumption of responsibility and vulnerability – could be established, noting the following:

  1. The Brokers had a defined retainer, which was limited to placing Binary’s public liability cover;
  2. The Brokers were not engaged to ensure that all of Binary’s (let alone Hamcor’s) insurance needs were met, and knew that another broker retained this responsibility;
  3. Binary rejected the Brokers’ attempts to assume a wider role in offering other forms of insurance.

Justice Dalton therefore found the Brokers did not owe Hamcor the duty of care alleged, and the claim failed on this basis.

In a further blow to Hamcor however, her Honour went on to consider the remaining two issues in obiter, making the following remarks:

  1. Having regard to the available objective evidence - including Binary’s dilatory attitude towards matters of insurance, and the fact Hamcor did not take out additional insurance in respect of a similar property it owned in Western Australia after the fire, even though existing insurance proved to be inadequate – it could not be established Hamcor would have taken out any additional insurance had it been recommended;
  2. Hamcor failed to prove that it could have been named as either an insured or an interested party on Binary’s liability policy, or that an insurer would have provided Hamcor with separate ISR cover had it been inclined to buy it. The evidence before the Court was that the prevailing insurance market for the petrochemical industry at the time was a difficult one (which perhaps explained why Binary’s renewal was refused in the first place, and the time taken to obtain appropriate alternative insurance);
  3. The policies which Hamcor say ought to have been obtained – an interest in Binary’s liability policy or its own ISR policy - would not have provided cover for Hamcor’s costs of remediating its own land in any event. Those costs could not be said to be a ‘liability to pay compensation’ as a result of claim against Hamcor so as to bring it within Binary’s liability policy, and were not costs associated with the remediation of physical property as contemplated by the ISR policy but the land itself (which was excluded from cover).

The existence of a duty of care aside, Hamcor therefore also failed to establish the alleged breaches were causative of its loss, on the basis it neither would nor could have obtained appropriative cover against its uninsured losses.

Comment

The decision should come as a comfort to brokers and other professional service providers, reiterating that the scope of a professional’s obligations are to be determined largely by reference to the retainer with a client.

At the same time it is a timely reminder for professionals to ensure that a clearly defined retainer is put in place at the outset of any engagement, in order to avoid the potential for disputes down the track.

Professionals should always seek to ensure that:

  1. The retainer is recorded in writing;
  2. The parties to the retainer, the services that are/are not to be provided, and when and how the retainer is to commence and conclude, are properly identified;
  3. The retainer is duly executed (or as a fall-back, that it permits acceptance via conduct, such as the provision of instructions by the client to proceed with the services to be performed under the retainer); and
  4. The retainer is kept current throughout the life of the agreement, with any changes (for instance to the identity of the parties or the scope of the services) being appropriately recorded and countersigned.