Broker did not fail to advise or make inquiries of the plaintiffs about including an increased declaration of Gross Sales Turnover for purposes of business interruption renewal.

In Issue

  • Whether broker breached its duty to client
  • Whether broker’s explanation was ambiguous or adequate
  • Principles relating to the assessment of damage where there has been a prior settlement.

Background

The plaintiffs were part of the SKM Group (SKM) and carried on recycling businesses.

Australian Reliance Pty Ltd (Reliance) was SKM’s insurance broker. Reliance arranged an ISR policy for SKM with Vero Insurance Ltd (Vero) for the period 20 November 2008 to 31 March 2009.

During early 2009 Reliance assisted SKM with policy renewal. Reliance consulted with SKM’s business manager and company accountant about the risk to be insured, and obtained an independent report on the terms of the proposed business interruption section of the policy. SKM informed Reliance it was not expecting significant business growth in the following 12 months.

During March 2010 Reliance again assisted SKM with policy renewal. SKM signed declarations that the estimated figures it supplied for metrics including gross profit and gross sales turnover reflected its reasonable expectations for the following policy period. The gross profit figure provided for a growth trend of 10%. This reflected SKM’s expanding business activities, specifically in glass recovery and recycling for municipal councils, about which it had informed Reliance during 2009.

On 5 November 2010, a fire extensively damaged one of SKM’s premises. SKM claimed under the policy and Vero made an indemnity payment of $24.69M. SKM claimed it was entitled to a further $8.75M. Vero subsequently offered $5.40M to settle the claim, which SKM accepted. SKM then commenced proceedings against Reliance to recover the balance.

The decision

The parties agreed that Reliance owed SKM a duty to “exercise the reasonable care and skill of a competent insurance broker in advising with respect to effecting insurance for [SKM] so as to avoid economic loss”.

Reliance admitted it negligently failed to apply the 10% per annum expected trend increase in SKM’s Insured Gross Profit to each of three relevant periods and was thereby responsible for reducing SKM’s indemnity entitlement under the policy’s business interruption section by $1.70M.

However, Reliance argued that SKM’s claim was extinguished or reduced by its settlement with Vero as the settlement was properly attributable to the claim under the policy’s business interruption section. The court rejected Reliance’s arguments.

SKM alleged Reliance’s Calculation Form in its Insurance Renewal Questionnaire was “sufficiently unclear to be negligent”, that Reliance should have been put on enquiry by SKM’s 2009 communications to it about SKM’s expanding activities and by a March 2010 statement by SKM’s company accountant about compound increases to SKM’s Expected Trend Increase Percentage of Insured Gross Profit.

The court rejected SKM’s claim. It found the wording of Reliance’s Calculation Form was not ambiguous taking into account all the circumstances. These included evidence that SKM understood the purpose of the business interruption section of the policy, the importance of providing Reliance accurate figures, that increases in its projected Insurable Gross Profit would increase its insurance premium, and that SKM’s company accountant had signed the financial declaration provided to Vero. SKM was also found to have received documents emphasising the importance of informing Reliance about any changes in circumstances.

The court also decided Reliance was not required to query SKM’s projected Insurable Gross Profit figures because SKM did not provide sufficient information about its business expansion to enable Reliance to assess its impact. Reliance was also entitled to conclude SKM’s calculations were accurate. The court was also not satisfied that even if Reliance had provided further or different advice that SKM would have amended its projected Insurable Gross Profit calculations and provided different figures.

Reliance was therefore only liable to SKM in the amount of $1.70M.

Implications for you

Although each case will turn on its own facts, this decision highlights that if a broker is to satisfy its duty of care to an insured the broker must take reasonable steps to understand the insured’s instructions for insurance, advise their clients accordingly, and arrange insurance as instructed.

In so doing, a reasonable broker may take into account all relevant circumstances. These include the insured’s commercial sophistication, whether the particular insurance advice has been previously given to the insured, whether the broker has assumed responsibility to perform calculations required for the insured’s insurance application or renewal questionnaire, and whether the broker has reason to suspect the insured has provided inaccurate information.

Brokers should also carefully consider policy renewal documentation to ensure it contains all appropriate warnings and explanations about the information an insured should provide regarding any change to their business circumstances or operations