When an insured suffers a loss and discovers that their insurance doesn’t cover it, this usually comes as an unpleasant surprise. In some cases, they may look to recover their loss from their broker.
We saw this occurring in the context of inadequate insurance for the 2010/2011 Christchurch Earthquakes: see IAG New Zealand v Jackson  NZCA 302 and we are aware of a number of other claims against brokers, which were settled without going to Court. This is an ongoing risk for brokers in situations where the insured faces a declinature from their insurer.
Two recent international cases provide a good reminder of what is required to meet a broker’s obligations of care skill and diligence when advising on insurance products.
PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty  FCA 137 (Australia)
In this case an insurance broker was found negligent for failing to identify that cover for copyright infringement should have been included in the suite of insurance policies put in place for PC Case Gear (PCCG), a computer sales business.
PCCG was in the business of selling computers but was also a “value added reseller”, which meant it took manufactured parts from third party suppliers and put them together as a package (including software installation), which it then sold to its clients. It also provided some IT consulting services.
PCCG engaged Instrat Insurance Brokers (Instrat) to place its insurance. The Instrat broker thought that PCCG was a retailer, on selling software, but didn’t appreciate that part of its business also involved altering/repacking software and IT consulting.
Each year at renewal Instrat prepared an annual insurance plan for PCCG, which included a heading “Major Recommendations” and also a heading “Uninsured Exposures”. Under the Uninsured Exposures heading Instrat noted that PCCG was not insured for copyright infringement. Critically, however, Instrat did not go through or discuss the Uninsured Exposures section with PCCG in person during their annual insurance meeting.
PCCG faced a claim by Microsoft for copyright infringement, which it settled. After discovering that it did not have any insurance cover for this loss, it sued Instrat.
The Court accepted that PCCG had never asked Instrat for cover in relation to copyright infringement and that the exclusion had been noted in the annual plan provided. However, it said that PCCG relied on Instrat to advise on the types of cover it should acquire. Given the nature of risks faced by the business, copyright infringement was an obvious one.
Instrat failed to:
- Make adequate enquiries to understand the nature of the risks to which PCCG was exposed;
- Sufficiently identify and characterise the exposure of PCCG to the risk of copyright infringement claims; and
- Directly raise with PCCG that it was not covered for the risk of copyright infringement.
Instrat argued that risk of copyright infringement liability would have been discussed in the parties’ meetings, despite there being no record as such and said that PCCG had just forgotten this, given the time that had passed. The Court disagreed: PCCG’s witness was credible and gave clear and unequivocal evidence that it was not discussed.
Further, the Court said that it was not enough just to list copyright infringement as an excluded item in the annual report. Instead, Instrat should have expressly draw PCCG’s attention to this exclusion as part of the parties’ discussions.
As policies which would have provided cover for copyright infringement were readily available in the market at the relevant time, the Court found Instrat liable to cover PCCG’s loss as a result of its settlement with Microsoft.
Dalamd Ltd v Butterworth Spengler  EWCH 2558 (England)
Here, the insured operated a waste management premises. A fire occurred and the insurer avoided the policy on grounds of non-disclosure and misrepresentation of material facts. The insured didn’t challenge the declinature but instead sued its broker to recover its loss.
Before the fire, the insured had gone into liquidation and had set up new phoenix company to continue trading. The broker was informed of this situation but, in its communications with the insurer, gave the impression that this was just a change in trading name. There was no mention of the liquidation or financial difficulties.
The insured argued that the broker was negligent in not passing on accurate information to the insurer, which led to the declinature. It also made a number of other claims against the broker around explanations of the policy terms and conditions.
Because good records existed the broker was able to successfully the defend the claims most of the claims. The Court found that:
- The broker hadn’t failed to explain the nature of the business interruption (BI) cover available. The evidence showed that it had adequately explained that the cover in place was less satisfactory than the more expensive gross profit BI cover.
- There was no obligation on the broker to reconsider BI cover after the company changed, because no such request was made and there was no possibility at that juncture to carry out a general review of the insured’s insurance needs.
- There was no failure to properly bring home to the insured the consequences of breach of an external storage condition. The evidence was that this had been discussed with the insured.
However, the Court considered that the broker’s email to the insurer about the change in company name was negligent because it was inaccurate and did not disclose the insolvency. Note that, in this case, the Court found that the broker was the agent of the insured rather than the insurer. In New Zealand, whether this was the case would turn on the application of s 10 of the Insurance Law Reform Act 1977.
This case is also important for its discussion of causation and the test required for proof loss suffered as a result of a broker’s negligence. This is beyond the scope of this article, except to say that the insured’s claim here faced insurmountable difficulties in proving causation due to its decision not to challenge the insurer’s declinature and instead focus only on the broker.
How to minimise the risk of a claim
Of course, a broker is not required to recommend or obtain for a client a “bullet proof policy”. The guiding principle is that the broker’s advice must enable client to make an informed decision
about what cover to put in place.
In our experience, most brokers make genuine efforts to achieve the required standard, but sometimes let themselves down by failing to ask enough questions or to keep full and clear records of discussions. We also sometimes see policy schedules in which the client’s business is not correctly described, which raises the question about whether the broker really has a good understanding of their client’s business. Claims arising from part of the business not falling within the defined “Business” will usually be declined.
These cases provide a reminder about the importance of:
- Making detailed enquiries about the nature of the insured’s business and asking additional questions when necessary. At renewal time, it is also important to find out whether the business has changed, rather than assuming that it has not. In New Zealand the obligation to make enquiries about changes in the business at renewal has been confirmed in Graham Strategic Ltd v Stratus Financial Services Ltd HC, Wellington, CIV-2008-485-2603, Simon France J; and
- Taking full notes of what was discussed at meetings with clients. If any problems do arise, this could be critical evidence to demonstrate that proper care was taken.
A failure to take these steps could led to a successful claim in negligence. It may also expose a broker to disciplinary action for breach of the new Code of Professional Conduct for Financial Advice Service, which is due to come into force next year.