Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor (2012) 17 ANZ Insurance Cases 61-930
In Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor (2012) 17 ANZ Insurance Cases 61-930, a broker was held liable for the total amount of his client’s loss for failing to make reasonable enquiries with regards to a risk relevant to the insurer when obtaining coverage for the client.
The plaintiff (Kotku) operated a bakery in Capalaba, Queensland. On 19 August 2010, a fire destroyed its premises. Kotku claimed indemnity for destruction and damage to its fixtures, fittings, equipment and stock under its insurance policy with the first defendant, Vero. Vero estimated the loss at $2,716,300.
The claim was denied by Vero pursuant to s 28 of the Insurance Contracts Act 1984 (Cth) (the Act) on the basis that the answer by the second defendant (Osman Insurance Brokers (OIB)), Kotku’s insurance broker, to one of the questions of the online application form conveyed a misrepresentation about the quantity of Expanded Polystyrene (EPS), a highly flammable material, in the walls of Kotku’s premises.
The risks of EPS are well known in the insurance industry. It was Vero’s underwriting policy to decline risks where EPS represented more than 33 per cent of internal construction.
Vero claimed that, when asked about the percentage of EPS in the internal construction of the building, OIB selected “Zero Percent” out of three possible choices (“Zero Percent”, “1 to 33 Percent” and “Over 33 Percent”). In fact, the internal walls comprised 67 per cent of EPS.
Kotku denied that OIB was ever asked about the quantity of EPS in the walls or that it responded in the way alleged by Vero. As such, Kotku asserted that Vero was not entitled to deny indemnity. Alternatively, should any misrepresentation be established by Vero, Kotku claimed that OIB failed to discharge its contractual and general law duties by answering the question the way it did, and by failing to enquire about the quantity of EPS in the walls of the premises.
In the Supreme Court of Queensland, Applegarth J determined that there had been no problems with regards to the operation of Vero’s online system, that the EPS question had been asked (as the proposal could not have been submitted without answering it) and that OIB had selected “Zero Percent” out of the three possible choices. Furthermore, because the correct answer was “Over 33 Percent”, OIB’s incorrect answer constituted misrepresentation which allowed Vero to reduce its liability to nil pursuant to s 28(3) of the Act.
OIB was held to have breached its contractual duties and its duty of care owed to Kotku by responding in the manner it did to the questionnaire. In addition, it also breached its duties to Kotku by failing to enquire about the internal construction of the building.
Indeed, OIB had an obligation to advise Kotku that the presence of EPS was a matter of concern to an insurer and to enquire about the content of the walls of the premises. In reality, OIB did little to ascertain the internal construction of the building. Not only did it not enquire about the construction of the walls, it also failed to request plans of the building, which would have revealed the existence of EPS.
Importantly, his Honour also held that the fact that information with regards to the composition of the walls had been previously transmitted to Suncorp-Metway Insurance (which subsequently acquired Vero) a few years earlier by another broker acting for Kotku, did not mean that Vero had the knowledge of that information. Indeed, an insurer could not be expected to undertake costly internal searches through its archives to locate information obtained years ago.
On that basis, OIB was ordered to indemnify Kotku for Kotku’s loss of $2,716,300.00 plus interest. From that amount, $10,000.00 was deducted to take into account the higher premium that Kotku would had been required to pay for an alternative cover with a different insurer due to the high level of EPS in the walls.