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Broker Left Without Professional Liability Cover
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IAG have successfully appealed an earlier decision not to strike out an insurance broker's claim for cover under his professional liability cover.
The broker had failed to place cover for his client homeowners, but made a number of assurances to them that cover was in place. The homeowners were left uninsured for subsequent earthquake damage to their house. The homeowners were successful in their claim against the broker for their loss.
The broker's policy excluded him for cover for any liability in connection with a dishonest act. The question was whether the broker's actions were dishonest.
The broker was certainly negligent, but argued that his conduct was not dishonest and that his failure to place cover was due to inadvertence and repeated oversight, exacerbated by poor health.
The Court of Appeal held that dishonesty need not be motivated by an intention to deceive. While dishonesty is a subjective state of mind, the law uses an objective standard to measure it. This means whether or not conduct is dishonest needs to be assessed in the light of normally accepted standards. The Court held that by deliberately making false assurances to his clients about cover, the broker acted dishonestly. This dishonesty meant the homeowners did not secure insurance cover. This caused the homeowners loss, and connected the broker's dishonesty to his liability.
Most professional liability policies will exclude liability because of dishonest or fraudulent behaviour. It is important to be clear that in this case the broker's dishonesty was his false assurances, not his failure to place cover. This will be of some comfort to professionals - it wasn't the bad mistake that excluded cover, but the deliberate attempts to cover up that mistake.
The case is a timely reminder for professional liability policyholders of the need to expose and remedy errors as soon as they are discovered, no matter how hard to swallow. Do not deliberately sweep errors under the carpet in the hope they will go away. Doing so could come back to bite when you find yourself without cover.
As a post-script, the news doesn't get any better for the broker. The High Court awarded the homeowners over $2.6m against the broker, being the estimated full replacement cost of their house.
Unfortunately for the homeowners, without the broker's cover, they will be unlikely to recover this amount.
IAG New Zealand Limited v Jackson
, 15 July 2013, Court of Appeal, CA274/2012,  NZCA 302.
Refer to our earlier article:
Marchand v Jackson
, 11 July 2013, High Court, Christchurch, Kós J, CIV-2011-409-810,  NZHC 175
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