Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor
(2012) 17 ANZ Insurance Cases 61-930
In Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor
(2012) 17 ANZ Insurance Cases 61-930, a broker was held liable for
the total amount of his client's loss for failing to make
reasonable enquiries with regards to a risk relevant to the insurer
when obtaining coverage for the client.
The plaintiff (Kotku) operated a bakery in
Capalaba, Queensland. On 19 August 2010, a fire destroyed its
premises. Kotku claimed indemnity for destruction and damage to its
fixtures, fittings, equipment and stock under its insurance policy
with the first defendant, Vero. Vero estimated the loss at
The claim was denied by Vero pursuant to s 28 of the
Insurance Contracts Act 1984 (Cth) (the
Act) on the basis that the answer by the second
defendant (Osman Insurance Brokers (OIB)),
Kotku's insurance broker, to one of the questions of the online
application form conveyed a misrepresentation about the quantity of
Expanded Polystyrene (EPS), a highly flammable
material, in the walls of Kotku's premises.
The risks of EPS are well known in the insurance industry. It
was Vero's underwriting policy to decline risks where EPS
represented more than 33 per cent of internal construction.
Vero claimed that, when asked about the percentage of EPS in the
internal construction of the building, OIB selected "Zero
Percent" out of three possible choices ("Zero
Percent", "1 to 33 Percent" and "Over 33
Percent"). In fact, the internal walls comprised 67 per cent
Kotku denied that OIB was ever asked about the quantity of EPS
in the walls or that it responded in the way alleged by Vero. As
such, Kotku asserted that Vero was not entitled to deny indemnity.
Alternatively, should any misrepresentation be established by Vero,
Kotku claimed that OIB failed to discharge its contractual and
general law duties by answering the question the way it did, and by
failing to enquire about the quantity of EPS in the walls of the
In the Supreme Court of Queensland, Applegarth J determined that
there had been no problems with regards to the operation of
Vero's online system, that the EPS question had been asked (as
the proposal could not have been submitted without answering it)
and that OIB had selected "Zero Percent" out of the three
possible choices. Furthermore, because the correct answer was
"Over 33 Percent", OIB's incorrect answer constituted
misrepresentation which allowed Vero to reduce its liability to nil
pursuant to s 28(3) of the Act.
OIB was held to have breached its contractual duties and its
duty of care owed to Kotku by responding in the manner it did to
the questionnaire. In addition, it also breached its duties to
Kotku by failing to enquire about the internal construction of the
Indeed, OIB had an obligation to advise Kotku that the presence
of EPS was a matter of concern to an insurer and to enquire about
the content of the walls of the premises. In reality, OIB did
little to ascertain the internal construction of the building. Not
only did it not enquire about the construction of the walls, it
also failed to request plans of the building, which would have
revealed the existence of EPS.
Importantly, his Honour also held that the fact that information
with regards to the composition of the walls had been previously
transmitted to Suncorp-Metway Insurance (which subsequently
acquired Vero) a few years earlier by another broker acting for
Kotku, did not mean that Vero had the knowledge of that
information. Indeed, an insurer could not be expected to undertake
costly internal searches through its archives to locate information
obtained years ago.
On that basis, OIB was ordered to indemnify Kotku for
Kotku's loss of $2,716,300.00 plus interest. From that amount,
$10,000.00 was deducted to take into account the higher premium
that Kotku would had been required to pay for an alternative cover
with a different insurer due to the high level of EPS in the
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Whereas most insurance policies exclude liability arising under contract, insurers can
positively benefit where an insured has limited or excluded its liability under contract.
This usually arises where the insured's contract has a limitation or exclusion of liability clause in the insured's favour.