Focus: Insurance broker's advice half-baked
17 May 2012
In brief: The Supreme Court of Queensland recently considered the scope of an insurance broker's duty to its client and found that it extends to the exercise of reasonable care and skill. This, however, is to be judged with reference to the terms of the relevant broker's services contract and the circumstances of the case. Partner Michael Quinlan , Senior Associate Gareth Horne and Law Graduate David Rountree report.
How does it affect you?
- An insurance broker's duty will ordinarily extend to making enquiries of its client(s) about matters that the broker knows to be relevant to the insurer's decision of whether to accept the risk, even if the insurer has not made those enquiries itself.
- An insurer cannot be regarded as having relevant 'knowledge' of every document it, or its parent company, has ever received. In this case, an insurer was found not to have 'knowledge' of information that should have been disclosed to it, even though that information had previously been provided to its parent company in a policy proposal that it did not accept.
Kotku Bread Pty Ltd (Kotku) operated a bakery business in Brisbane and was insured by Vero Insurance Limited (Vero). The walls at Kotku's business premises had been constructed using a large quantity of highly flammable 'Expanded Polystyrene' (EPS). In 2010, the premises were destroyed by fire and Kotku made a claim under its Vero policy (the claim).
Kotku had previously been insured by Suncorp. In 2009, Suncorp transferred its small to medium enterprise policies to its subsidiary, Vero. As part of that process, Kotku's insurance broker (the broker) used an online system, which had been created by Suncorp/Vero, to provide the underwriting information necessary for Vero to assess the risk and determine whether to issue a new policy to Kotku.
The online form included a question relevant to the use of EPS in the internal construction of Kotku's business premises. The broker selected 'zero percent' as the answer which indicated that the premises had no EPS component. In fact, more than two-thirds of Kotku's premises comprised EPS. Vero denied the claim on the grounds of a relevant non-disclosure and/or misrepresentation. Kotku commenced proceedings against Vero seeking indemnity under the policy, and against the broker for negligence and breach of contract.1
Justice Applegarth found that Kotku's answer to the EPS question amounted to a relevant non-disclosure and misrepresentation with the effect that Vero was entitled to reduce its liability under the policy to nil. His Honour also found that the broker had breached its duty of care to, and contractual retainer with, Kotku.
The decision turned on the facts which were, in many respects, quite unique. In particular, there was a threshold dispute as to whether or not the question about EPS had in fact been asked as part of the online questionnaire, and, if so, what answer had been given by the broker on behalf of Kotku. It was ultimately determined on the balance of probabilities that the question had been asked as part of the online form, and that the response was 'zero percent'.
A further issue arose as to whether Vero had knowledge of the existence of the EPS material at Kotku's premises in circumstances where that information had been provided to Suncorp by a different broker acting for Kotku a number of years earlier, and before Suncorp had acquired Vero. His Honour determined that the fact that information is held within an insurance company does not necessarily mean that it has 'knowledge' of those matters that ought to be disclosed by the insured. He added that an insurer should not be expected, as part of its underwriting processes, to undertake costly searches of its entire archives to locate information obtained years ago, in respect of a transaction that never eventuated.
On the question of whether the broker breached its duty of care and contractual retainer, his Honour held that the presence or otherwise of EPS material was a matter known within the insurance industry to be relevant to whether cover would be offered. However, the importance of that matter to underwriters was not known by Kotku. On the facts of this case, the broker's failure to make enquiries about the presence of EPS, or to inspect Kotku's premises, constituted a breach of the broker's duty. The court held that, even if the EPS question had not been asked as part of the underwriting process, the broker still would have breached its duty of care and contractual obligations to Kotku because the importance of EPS risks was so well-known in the insurance industry.
The decision confirms that the scope of an insurance broker's duty of care will usually extend to making enquiries of its clients about risks that are known to be relevant to underwriters, even if underwriters have not asked specific questions about those risks.
The decision also represents a pragmatic approach to dealing with underwriting issues by drawing a distinction between information provided to an insurer in satisfaction of an insured's duty of disclosure, and relevant information previously provided to an insurer for an unrelated purpose and that is not readily accessible to underwriters.
- Louise JenkinsPartner,
Ph: +61 3 9613 8785
- Jamie WellsPartner,
Ph: +61 7 3334 3268