Focus: Broking advice by the dashboard light
8 April 2011
In brief: A recent decision of the New South Wales Supreme Court has highlighted the pitfalls for insurance brokers who give unqualified advice on the legal effect of policy provisions. Partner John Edmond and Senior Associate Philip Hopley report.
How does it affect you?
- This case demonstrates that brokers should always be cautious about expressing unqualified opinions to their clients about the effect of policy provisions, and should also be mindful of discharging their obligation to secure cover that meets their clients' needs, if available.
- This is one of the first reported negligence cases where a court has considered a 'loss of chance' argument by an insured to recover a proportion of compensation from its broker as an alternative to seeking its losses in full.
The dispute in this case arose out of advice given by an insurance broker to a firm of financial planners, Prosperity Advisers, in the course of arranging its professional indemnity insurance cover.1
In order to avoid undermining the commercial purpose of this type of insurance, it is common for insurers to provide that one excess (or deductible) will apply where a single act, error or omission on the insured's part affects many of its clients and leads to multiple claims against it. Whether or not claims have a single, unifying factor and can be aggregated together in this way is a question of fact to determine in each case. This is frequently not an easy or straightforward process to resolve and legal disputes concerning this issue often arise.
Here, a quote given by one of the insurers approached by the broker drew specific attention to a variation to its standard terms regarding the application of the deductible to multiple claims. The effect of the relevant provision was that:
- a single act, error or omission that gave rise to multiple claims would be treated as one claim. As a result, one deductible of $40,000 would apply; and
- a separate deductible would apply for each party to such a claim although this was capped at $120,000.
One of Prosperity's directors was concerned to know whether multiple claims arising out of a single failed investment recommended by Prosperity would be treated as a single claim under this aggregate deductible provision. He contacted the broker, who was driving his car at the time, and put to him a hypothetical example of 100 clients who invested $40,000 each in an investment that went bad, and where Prosperity was found to be negligent – would this be seen to be one claim or 100 claims?
The broker replied that it would be regarded as one claim, although he later clarified in an email that the maximum deductible that could apply was $120,000. Prosperity purchased the insurance cover shortly afterwards.
Subsequently, around 160 clients of Prosperity sued it for negligently advising them to invest in mezzanine finance products that resulted in losses of around $17 million. When it came to make a claim for indemnity, Prosperity's insurer informed it that the claims could not be aggregated together because they arose out of specific, tailored advice given to each client. As a result, it asserted that the claims could not be said to arise out of a single act, error or omission by Prosperity, and that a $40,000 deductible should apply to each investor's claim.
Prosperity ultimately settled its claim for indemnity at a discount, with both it and the insurer contributing to a settlement pool for investors. Prosperity then sued its brokers in negligence for its contribution to this pool. Its main argument was that, had it received accurate advice, it would have obtained a different policy wording for the same premium that would have imposed a single deductible for losses arising from the failure of an investment product.
The broker argued that he had, in fact, appropriately qualified his advice in his conversation with the director to the effect that a causal link between all of the claims would be required in order to aggregate them.
Justice Ball accepted the director's evidence that there had been no such qualification to the broker's advice. This was consistent with the contemporaneous file note and email exchange that took place. It was also more plausible in the sense that this qualification, if made, would not have provided the comfort sought by the director and would have led to further discussions with the broker.
Despite this finding of breach of duty against the broker, Prosperity's claim in negligence did not succeed because it could not identify an alternative insurance cover available in the market at the time and for the same premium that would have imposed one deductible.
An alternative argument that Prosperity should be compensated to reflect its lost opportunity to obtain a policy of that type, which required evidence showing there was a substantial prospect of its acquisition even if this was less than the balance of probabilities, was also unsuccessful.
Justice Ball concluded that Prosperity's evidence here, as it was in relation to its principal argument on the loss suffered, was at best speculative. In particular, little weight could be attached to Prosperity's expert broking evidence because this assumed that a particular alternative insurer would have been persuaded to provide the desired policy wording when, in fact, it had been approached initially and had declined cover.
Although the broker emerged from this case with a judgment in his favour, this case is a reminder of the risks involved when a broker gives unqualified advice to a client on the legal effect of a policy provision that is later found to be wrong.
While brokers are not expected to advise on the legal pitfalls that arise in the normal course of effecting cover and in securing cover for the risk that meets their insured's disclosed or ascertained needs,2 they should always be careful not to place themselves in a position where they provide legal advice to their clients, especially since this may jeopardise their own insurance cover. If in doubt, a broker should always seek legal advice on the operation of a policy or direct its client to do so.
In this case, the fact that Prosperity may have had an unrealistic expectation of the cover that was available in the market for financial advisers did not prevent the broker from being in breach of his duty of care although it did prevent an award of damages being made. Clearly, it would have been preferable for this expectation to have been identified by the broker so that the limitations in the available cover could have been discussed with Prosperity.
This case is also noteworthy because it is a rare example of a negligence claim where an insured has sought to argue a 'loss of chance' case to recover compensation from its broker. Usually, if an insured believes that it has a better than 50 per cent prospect of proving that its broker's negligence caused it to suffer a loss then it will try to recover these losses in full. In such a situation, an insured will not want to take the risk of its damages award being reduced by claiming to the lower standard of proof involved in a loss of chance argument.
- Prosperity Advisers Ltd v Secure Enterprises Pty Ltd t/as Strathearn Insurance Brokers Pty Ltd  NSWSC 35.
- Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541.
- Louise JenkinsPartner,
Ph: +61 3 9613 8785
- Jamie WellsPartner,
Ph: +61 7 3334 3268