Australia: Aggregation clauses – more aggravation. Clarification of "loss of a chance" damages

Prosperity Advisors Pty Limited v Secure Enterprises Pty Limited¹

The NSW Court of Appeal recently reviewed (and upheld) a first instance decision of Justice Michael Ball in a case:

• which arose out of the application of an aggregation clause in an insurance policy – in a fashion adverse to an insured investment advisor
• in the context of the investment advisor's professional negligence claim against its insurance broker.

Background:

• the aim of an aggregation clause is to regulate the circumstances in which multiple claims, or claims of multiple claimants, will be treated as a single claim for the purposes of the insurance policy
• in the context of a single claim for policy purposes, only one excess/deductible applies and only one limit of indemnity is available
• the financial advising industry is a forum in which a single recommendation, circulated to multiple clients, has the potential to generate a large number of claims against the financial advisor
• against this background, specific aggregation clauses have been devised for that industry, with a view to limiting an insurer's overall exposure.

The Prosperity Advisors decision engaged all of these issues in the context of a dispute between a financial advisor and its insurance broker.

Prior to policy inception, the financial advisor had sought advice from its insurance broker about the operation and extent of an aggregation clause in a professional indemnity policy which the insurance broker was recommending to the financial advisor.

By the time the matter reached the Court of Appeal, it was accepted that:

• the broker's advice concerning the operation of the aggregation clause had been wrong, and negligently so
• the insured financial advisor had (independently) given negligent advice to clients (about investment in some of the "Westpoint" financial facilities)
• the insured financial advisor had been subjected to a large number of substantial claims by multiple clients
• the policy aggregation clause reduced all of those claims to a single limit of indemnity under the professional indemnity policy
• because of this, the financial advisor did not have adequate insurance to meet all of the claims – and it suffered loss
• the financial advisor was suing its broker for damages.

The question which was agitated before the Court of Appeal was whether the financial advisor could establish that it had suffered any loss as a result of the broker's conduct.

The essential issue was an investigation of a hypothetical – if the financial advisor had received accurate advice about the operation of the aggregation clause, could the financial advisor have obtained an insurance policy on better terms – being an insurance policy which would have avoided the losses ultimately sustained by the financial advisor.

These issues required the Court of Appeal to review (and clarify) the correct principles of law in "loss of a chance" damages cases. Damages issues concerning "loss of a chance" principles have previously been the subject of some uncertainty and controversy.

Many readers will be familiar with the High Court's decision in Gates v CML² and Tabet v Gett³

The Court of Appeal clarified the governing principles in "loss of a chance" cases as follows:

• a claimant must prove on the balance of probabilities that it sustained some loss or damage
• a claimant may do so, by demonstrating that, on the evidence, the defendant's conduct caused the loss of a commercial opportunity which had some value which was not negligible
• in many cases, there must be evidence as to what the claimant would have done – had it not been misled, or, had it known the correct facts (the counterfactual)
• a claimant must prove, as a matter of probability or possibility, that the counterfactual could have been available and would have been beneficial to the claimant
• it is impermissible, in the absence of evidence, to speculate on the possibility of the counterfactual occurring; rather, the evidence must establish that there was a substantial, and not merely a speculative, prospect of its availability
• the issue of "causation" should be approached upon the basis of proof upon the balance of probabilities – with the qualification that an assessment of whether the chance which is said to have been lost had a value is to be made upon the "possibilities or probabilities" of the case
• damages are assessed according to the degree of probability that the counterfactual would have occurred, provided the probability is not so low as to be speculative, or so high as to be practically certain
• the court approaches the hypothetical counterfactual in terms of the degree of probability of it occurring. The court takes the chance of that happening into account, even if it falls below 50%, so long as it is not "so low as to be regarded as speculative".

Despite the clarification of the legal principles, it is likely that the application of these principles to specific factual situations will continue to cause uncertainty and dispute.

Footnotes

¹[2012] NSWCA 192

²160 CLR 1

³ HCA 12

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.