Prosperity Advisers Pty Limited v Secure Enterprises Pty Limited t/a Strathearn Insurance Brokers  – NSWCA 19
The NSW Court of Appeal recently considered the relevant principles to be applied in loss of chance cases and in particular the essential requirement to prove causation.
In mid January 2005, Prosperity Advisers Pty Limited (Prosperity), a company which provided accounting and financial services, asked its broker, Strathearn Insurance Brokers (Strathearn) to arrange a renewal of professional indemnity insurance. Strathearn obtained a number of quotes including one from QBE, which offered cover for Prosperity’s accounting and financial planning services. The limit of indemnity was $2 million for any one claim and $6 million in the aggregate and a $40,000 deductible per claim.
The QBE quotation was offered on the basis of its standard liability wording subject to certain amendments. The standard wording provided that, where a single act gave rise to more than one Claim (as defined), all such Claims shall constitute one Claim under the policy and only one Deductible shall be applicable.
The quotation amended the standard wording specifically modifying the application of the deductible. It was proposed that Application of the Deductible clause be replaced with the following:
Where a single act, error or omission gives rise to more than one Claim, all such Claim(s) shall jointly constitute one Claim under the Policy. A separate Deductible will apply in respect of each and every party to such Claim(s) that makes a demand to the Insured for compensation. The aggregate deductible for any single act, error or omission shall not exceed $120,000. (our emphasis)
The standard QBE aggregation clause was to aggregate claims made against an insured so that multiple claims arising from causally connected or interrelated acts, errors or omissions would be treated as one claim for the purpose of applying the deductible and limit of indemnity. The amendment to that clause operated to impose a separate deductible in respect of each claim by a different person or entity up to a maximum of three. The revised clause essentially narrowed the circumstances in which the claims would be aggregated for the purpose of the deductible.
On being provided with QBE’s quotation, Prosperity became concerned whether under the terms of the QBE policy, multiple claims arising from a single failed investment product recommended by Prosperity would be aggregated and treated as one claim. Prosperity’s evidence, which was ultimately accepted by the trial judge, was that it was told by Strathearn that the multiple claims would be treated as one claim, and that the aggregate deductible of $120,000 would apply. Prosperity said on the basis of the advice, it agreed to take out the QBE policy the following day.
Subsequently, Prosperity received claims from its investor clients arising out of the Westpoint Group failures. Prosperity sought indemnify from QBE, who granted indemnity but took the view that the claims against Prosperity were based on alleged negligent recommendations to individual clients such that the negligent advice tailored to a particular client’s needs was not causally connected or interrelated to the advice given to another client (as required by the aggregation clause). This was notwithstanding that the same investment was recommended in each case. It followed that that the claims were not aggregated under this clause and QBE applied a separate deductible for each individual claim against Prosperity. The total amount of the deductibles was $2.5 million. Prosperity ultimately reached a settlement with QBE. Under its terms QBE contributed $4.25 million and Prosperity contributed $800,000 to a pool to be used to pay legal costs and to be divided amongst Prosperity’s clients in settlement of their claims.
Prosperity sued its broker Strathearn alleging negligence, breach of contract and misleading or deceptive conduct in respect of the advice about the effect of the application of the deductible clause. Prosperity alleged that if Strathearn had provided proper advice about the potential implications of the aggregation clause, it would have sought to negotiate a different policy with QBE or another insurer. The claim against Strathearn was for $680,000, being the difference between the $800,000 Prosperity contributed to the settlement pool and the $120,000 maximum Strathearn had advised it would be required to pay for a single failed investment.
First instance decision
The trial judge found that Strathearn did not properly advise Prosperity about the potential for multiple deductibles to be applied even for a single failed investment. However he ultimately found that the possibility of Prosperity getting the cover that it wanted was “merely speculative” and that it had not suffered a loss as a consequence of Strathearn’s breach. He noted that although Dexta Corporation had provided cover to Prosperity for 2007/2008 on terms that involved an amendment to Dexta’s standard form aggregation clause, this cover was offered on the basis that claims arising from mezannine finance investments (the type involved in Westpoint) were excluded. Therefore if the cover provided to Prosperity in 2005 had contained such an exclusion, it was to have had no cover in respect of the Westpoint claims irrespective of the terms of the aggregation clause. He also noted that there was no evidence of whether another insurer would have offered Prosperity cover in 2005 and on what terms.
On appeal Prosperity argued that the trial judge had failed to identify the opportunity lost by Prosperity to instruct Strathearn to re-enter the market to negotiate with underwriters and in concluding that its chances were ‘speculative’, he failed to assess whether a 1% or more chance existed for Prosperity to secure the cover it sought. It relied on the High Court decision in Malec v JC Hutton Pty Ltd  HCA 20 (Malec) to submit a chance was only ‘speculative’ if it was less than 1%.
The NSW Court of Appeal upheld the trial judge’s finding. Tobias AJ considered that the trial judge had considered the totality of the factual evidence and concluded that Prosperity had failed to establish it would have had “a substantial prospect of acquiring” a policy on more favourable terms than offered by QBE. In respect of the High Court’s decision in Malec, he noted that the High Court justices had not been “laying down some form of standard”. Rather it was clear from Malec and later Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1, that Prosperity needed to prove on the balance of probabilities that it has sustained “some” loss or damage or in the case of a commercial transaction the loss of a commercial opportunity which had some value which was not negligible.
In loss of chance claims the burden is on the plaintiff to establish that the probability that the loss of chance was more than speculative. The plaintiff’s evidence in the subject proceeding on causation was inadequate. To establish loss of a chance in the circumstances of this matter evidence was required about what Prosperity would have done had it known that the QBE policy did not offer cover in the terms Prosperity wanted and, importantly that cover was or at least may have been available on those terms elsewhere. The problem for Prosperity was that it failed to prove the alternate cover was available at a price and terms which it would have been prepared to pay and accept. It failed to demonstrate the value of the chance it lost as a result of Strathearn’s conduct.
It is not permissible for a court to speculate on the possibility that the cover would have been available: the evidence must establish there was a substantial prospect of its availability. That standard of proof was not satisfied.