On 19 February 2020 the Federal Court of Australia ruled in PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) that Instrat Insurance Brokers Pty Ltd (Instrat) breached the duties that it owed to PC Case Gear Pty Ltd (PCCG) in contract and in tort, to act with reasonable skill and care by failing to identify the risk of copyright infringement and failing to adequately address its mitigation in the insurance cover offered to PCCG.
The decision mirrors a hardening approach towards insurance brokers, requiring brokers to actively engage with their clients to clearly identify the risks clients face given the nature of their business.
The judgment also clearly states that in certain circumstances a broker can be held liable for failing to identify a client’s risk profile and thus exposing the client to an uninsured risk.
PCCG supplied computer hardware and software. Their business included selling computers with the Windows operating system pre-installed. In January 2016 the installed licences on the computers that PCCG sold were subject to a letter of demand from Microsoft alleging breach of copyright by PCCG in relation to the licences (the Microsoft Claim). PCCG settled the claim with Microsoft for $250,000 (the Settlement Sum). From 2009 to 2016 PCCG used Instrat as its insurance broker. The insurance recommended to PCCG by Instrat excluded cover for copyright infringement. Accordingly, PCCG was covered only for its defence costs in respect of the Microsoft claim, but not for the payment of the Settlement Sum to Microsoft. PCCG sued Instrat for breach of contract and in negligence alleging that Instrat failed to act with reasonable skill and care by failing to advise PCCG on the availability of cover for copyright infringement.
Anderson J ordered Instrat to pay the Settlement Sum and legal costs to PCCG. The court found that Instrat breached it duties towards PCCG and rejected Instrat’s denial of liability as well as its contention that any damages award should be reduced due to PCCG’s own contributory negligence.
The court ruled that Instrat breached its duties of an insurance broker in three ways, namely that it failed to:
- make adequate enquiries to understand the nature of the risks to which PCCG’s business was exposed;
- identify sufficiently PCCG’s risk of copyright infringement. According to the court, this risk would have been identified by an insurance broker that was exercising reasonable skill and care and that was aware of the specifics of PCCG’s business;
- raise with PCCG the fact that cover did not include the risk of copyright infringement.
The court considered that there is no obligation on the insurance broker to walk the insured through the list of exemptions from the cover; but ruled that the exact scope and nature of the insurance broker’s responsibility towards the insured is determined by the facts of each case. In this case, the court held that it was reasonable for PCCG to rely on Instrat’s advice, which also included the responsibility of Instrat to highlight the exemption of copyright infringement from the cover to PCCG.
The court rejected Instrat’s defences of liability. It was held that appropriate copyright infringement covers were available on the market at the time and that PCCG’s breach of the copyright rules was inadvertent. The court then reasoned that it followed that were it not for Instrat’s breach of retainer, PCCG would have obtained copyright infringement insurance elsewhere. Finally, the court was satisfied that the Settlement Sum was reasonable.
The court also rejected Instrat’s argument for any reduction in the damages to be paid to PCCG. The court did not find that PCCG failed to mitigate its loss by settling the claim with Microsoft; nor did it find PCCG guilty of contributory negligence by failing to highlight risks it was facing to Instrat when discussing the insurance cover.
This case highlights that the duty of insurance brokers to exercise reasonable skill and care also includes the duty to understand the business specific risks of their clients, which the offered insurance cover should clearly reflect. According to the judgment, in certain circumstances it is reasonable for the insured to rely on the broker to identify the risks the insured faces. This also includes the broker’s duty to advise on a more suitable insurance offer available elsewhere on the market.
As a matter of good commercial and legal practice, it is also the responsibility of the insurance broker to bring to the attention of their clients any onerous exclusions or limitations to the covers offered, especially those that could be reasonably relevant to the business risks of the client. Although this is an Australian judgment, it reflects the high standard of care attributable to insurance brokers.
Further reading: PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq)  FCA 137.
The authors would like to acknowledge the assistance of Jana Blahova, Trainee Solicitor, in preparing this article.