Four recent decisions of the Queensland and New South Wales Supreme Courts have examined the duties imposed upon insurance brokers and the issues surrounding causation and loss. In each decision the broker was found to have breached the obligations they owed, however, in only two of the cases was the broker’s breach held to have been causative of loss.

As in most professional indemnity cases, whether there is relevant loss or damage is the first question to ask as it can save a lot of time in exploring and canvassing the murky grey boundaries of liability.

Kotku Bread Pty Ltd –v- Vero Insurance Ltd [2012] QSC 109

In Kotku Justice Applegarth stated that a broker is not under a general duty to ensure that his/her client “is impervious to loss or risk of loss though the absence of insurance” but that the duty imposed is to be consistent with the exercise of reasonable care and skill in the circumstances of the case. The Court held that in carrying out its retainer in respect of the placement of insurance, the broker had a duty to inquire about matters in respect of which it had not made adequate inquiry in previous years. This extended to a duty to inquire about the internal construction of Kotku’s bakery and, if necessary, to inspect the premises. The failure by the broker to make proper inquiries with a view to ascertaining the internal construction of the bakery was considered so rudimentary that expert evidence of broker practice was considered unnecessary and the broker was held to have breached its contractual and tortious duties to Kotku.

The Court held that had the appropriate enquiries been made and the relevant proposal form been completed correctly, the insurer (Vero), would have declined to issue the requested policy, but that the broker would have been able to obtain appropriate cover from an alternate insurer. The broker was held liable for the full sum of the uninsured loss.

Strategic Property Holdings No. 3 Pty Ltd –v- Austbrokers RWA Pty Ltd [2012] NSWSC 1570

In Strategic the Court examined the broker’s actions by assessing how a reasonable broker in his position, looking forward (i.e., not with the benefit of hindsight), would have acted. The expert broking evidence submitted to the Court (relevant to the issues in dispute) was:  

  1. Insurance brokers are required to provide assistance to their clients in determining policy requirements and providing advice which is appropriate to their client’s needs;
  2. Insurance brokers are required to undertake continuous education to maintain their licences; and that the National Insurance Brokers Association handbook demonstrates the expected educational standard of a reasonably careful and skilled broker; and the courses run by the Association place a high emphasis on the advice role of the broker;
  3. Reasonably careful and skilled insurance brokers would explain the need for insurance cover, explain the areas of exposure and uninsurable exposure, discuss major exclusions and cover restrictions and explain sub-limits; and
  4. A reasonably careful and skilled insurance broker would not simply accept the sub-limits contained in policy they inherited when they took over the account, but would consider those sub-limits personally.

The Court held that in order to discharge the contractual and tortious duties owed to Strategic, the Broker had a duty to advise that the effect of the applicable Sub-Limit on the policy was that if “accidental damage” of the kind defined in the Policy occurred, then despite the fact that the “declared value” of the subject land and buildings was $22 million, the Insurer (Suncorp)’s liability under the Policy would be only $200,000. The broker did not give this advice and such failure represented a breach of the implied terms of the retainer and a breach of the Broker’s duty of care to Strategic.

The Court accepted that higher sub-limits for accidental damage were available and if proper advice had been given, Strategic would have requested, and paid for, additional accidental damage that would have covered the uninsured losses. However, as there was “no detailed consideration” of the evidence on loss placed before the Court, Stevenson J. directed the parties to attempt to agree on quantum.

Prosperity Advisers Pty Ltd –v- Secure Enterprises Pty Ltd (t/as Strathearn Insurance Brokers) [2012] NSWCA 192

Prosperity was an appeal from the finding of the judge at first instance that although Prosperity had established negligence, breach of contract and deceptive and misleading conduct against the broker, Prosperity had failed to establish that the broker’s breach had caused its loss.

In considering the issue on appeal, the Court concluded that:  

  1. Prosperity must prove on the balance of probabilities that it has sustained some loss or damage although in a case such as the present, it may do so by demonstrating that, on the evidence, the broker’s conduct caused the loss of a commercial opportunity which had some value which was not negligible;
  2. Thus there must be evidence as to what Prosperity would have done had it known that the QBE policy did not offer cover on the terms it wanted and, further, that cover was or at least may have been available on those terms elsewhere;
  3. Upon the assumption that Prosperity proved that had it known that the QBE policy would not provide it with the cover it sought, it would have proceeded through its broker into the market to seek such cover, it must still prove as a matter of probability or possibility that such cover would have been available and provided to it at a price and on the terms which it was prepared to pay and accept; in other words, it must elicit evidence as to the value of the chance which it alleges it lost as a result of the broker’s conduct; and
  4. It is thus impermissible, in the absence of evidence, to speculate on the possibility that such cover would have been obtainable, Rather, the evidence must establish that there was a substantial, and not merely a speculative, prospect of its availability. Prosperity cannot merely argue for a possibility by refraining from adducing evidence to support the probability or possibility that the cover sought was not only available but could be obtained on reasonable terms.

The Court held that the issue of causation should be approached upon the basis of proof upon the balance of probabilities, with the qualification that an assessment of whether the chance which is said to have been lost had a value is to be made upon the possibilities or probabilities of the case. Accordingly, it was appropriate to consider initially the question whether a chance was lost as a consequence of the breaches of duty alleged, and in the event that an affirmative answer was given to that question, to defer consideration of the value issue to be dealt with in determining whether, and if so what, damages were payable.

The Court ultimately found that Prosperity had failed to prove what it would have done had it known of the limitations of the policy in place and further, that the cover that would have insured it for its losses was, on the balance of probabilities, available. Prosperity’s appeal was dismissed.

Hamcor Pty Ltd & Anor v The State of Queensland & Ors [2013] QSC 9

Hamcor concerned an application by an insurance broker and its representative (the Second and Third Defendants) for the determination of an issue said to arise out of the proceedings instituted by the Plaintiffs against the Defendants (which also included the State of Queensland) claiming damages for negligence.

The question for determination was whether the costs incurred by the Plaintiffs in remediating their own land in response to statutory notices and court orders, were capable of being the subject of indemnity under certain specified policies of insurance.

In the proceedings the Plaintiffs claimed against the broker and its representative that they owed a duty of care in obtaining appropriate policies of insurance, which duty was breached, and that but for the breach the Plaintiffs would have been able to secure, for their benefit, appropriate insurance cover for pollution and environmental risks associated with the land in an amount of not less than $10 million by either becoming insured or interested parties on specified policies.

The Court found that the losses alleged by the Plaintiffs were not covered by the policies the subject of the proceedings. As such, even if the Plaintiffs had been named in the policies, the Plaintiffs would not have been entitled to indemnity under any of the policies for the costs incurred in remediating the Plaintiffs’ own land.

By succeeding on the application, the broker and its representative appear to have also defeated the claim in the proceedings. It is, however, possible that the Plaintiffs’ claim may be reformulated to allege that cover (in respect of the losses incurred) was available and if not specifically requested, ought to have been the subject of recommendations by the broker/its representative. Such a reformulation would bring the allegations in line with those analysed above.

Conclusion

Whilst it is one thing to establish the broker failed to give proper and adequate advice, such that the broker is likely to be found to have breached its contractual, tortious and statutory duties, the issue of causation must not be overlooked. Even if it is argued that appropriate cover would have been requested and taken out, that cover must, on the balance of probabilities, have been available at the time of the loss.