The recent $2.7 million Supreme Court decision in Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor [2012] QSC 109 confirms that an insurance broker owes a duty of care to its client to not only take reasonable steps to inquire as to the property to be insured, but to not misrepresent the property to a third party.

On 19 August 2010, the plaintiff's bakery was destroyed by fire. He claimed against his insurance policy with Vero, which had been arranged by his insurance broker. The plaintiff's previous insurance was held with Suncorp-Metway Insurance (Suncorp), which had insured the plaintiff's business for several years. Suncorp acquired Vero in 2007 and certain information held by Suncorp was 'pre-populated' into Vero's computer system.

Vero asserted that the way in which the broker had completed the online insurance application form conveyed a misrepresentation under section 28 of the Insurance Contracts Act 1984 (Act) about the amount of expanded polystyrene (EPS) in the internal walls. Vero claimed that if it had known the true amount of EPS, it would not have insured the premises.

Vero alleged that its system asked a specific question about EPS, to which the the broker's employee selected zero percent when the correct answer was more than 33 percent.

The broker argued that because Vero was a Suncorp subsidiary, it knew (or should have known) the true extent of EPS through Suncorp's records. Alternatively, the broker submitted that if the true extent of EPS was not known to Vero, the scope of a broker's duty did not oblige the broker to conduct investigations. At its highest, the scope of the broker's duty was to advise the plaintiff that the extent of EPS was a fact that might affect Vero's decision.

The court held that the broker had a duty to inform itself about the construction of the building. The answer of zero percent was a misrepresentation and it amounted to a breach of the plaintiff's duty of disclosure.

Although the broker submitted that the information provided pertained to an existing client, Suncorp had no reason at the time of the automated transition of pre-populated data to Vero to believe this, because it was told it was a new business and neither Suncorp nor Vero could not have been expected to find archived information in the ordinary course of business.

Vero was entitled pursuant to section 28(3) of the Act to reduce its liability to nil. The court affirmed that a broker is not under a general duty to ensure that its client is impervious to loss or risk of loss through the absence of insurance. However, the broker had a duty to inquire about matters in respect of which it had not made adequate inquiries in previous years.

Reminders to the plaintiff about its duty of disclosure under the Act, coupled with the plaintiff's knowledge of the building's internal construction, did not relieve the broker of the duty to advise the plaintiff of something that the broker knew but the plaintiff did not. The broker owed the plaintiff a duty to inquire about these things.

In giving the answer 'zero percent', the broker failed to discharge its contractual duties to the plaintiff and also breached its duty of care under general law, leading to judgment for the plaintiff for more than $2.7 million, plus interest.

Winner - EOWA Employer of Choice for Women Citation 2009, 2010 and 2011
Winner - Australasian Law Awards Gold Employer of Choice 2011
Finalist - ALB Australasian Law Awards 2008, 2010 and 2011 (Best Brisbane Firm)
Winner - BRW Client Choice Awards 2009 and 2010 - Best Australian Law Firm (revenue less than $50m)

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.