Australia: Online insurance quotes - risks for insurance brokers

In brief - Not all risks are suited to online insurance applications

Insurance brokers must be wary to make relevant enquiries that may affect an underwriting decision. This is particularly relevant when using online quoting systems that do not ask clear questions about certain risks.

Insurance brokers must not lose sight of their duties and obligations

The insurance broker is fundamentally the ambassador of the insurance industry to the consumer of insurance products. They have the widest knowledge of insurance market cycles, insurer appetite and consumer sentiment toward the industry.

As ambassadors of the industry for an array of service providers, it is important that brokers are supported when discharging their obligations and duties.

Online transactions increasingly common when obtaining insurance cover

The insurance industry continues to develop online consumer based transactional processes, allowing greater access for insureds and brokers to procure cover on the internet.

There are a number of reasons why application, quoting and binding processes have been moved online, but essentially efficiency is the key driver.

Online insurance procurement reduces overhead costs, which in turn enables costs reductions which are invariably passed on to insureds.

Brokers must make adequate enquiries regarding risk

The approach to transacting insurance online will vary depending on insurer appetite. However, generally online platforms are becoming the status quo when conducting "low risk" cover.

Where a broker uses such systems, it is not enough that they simply advise their client of its duty of disclosure: the broker's duty to the client remains that it must make adequate enquiries regarding the risk being presented to insurers.

The broker must provide underwriters with necessary information that is relevant to the risk being underwritten. This is the case even if an online quoting portal or any proposal for that matter, does not clearly ask a specific question of the insured.

The burden to make enquiries of such risk and disclose the existence of such risk increases where at industry level, such questions are normally a key factor in whether or not an insurer would write or accept a risk being presented to it.

Presence of expanded polystyrene (EPS) on applicant's property

These issues were recently brought to light in the decision of Kotku Bread Pty Ltd v Vero Insurance & Anor [2012] QSC 109, where an insurer directed that its "small business" be transacted on an online portal by one of its subsidiary companies. The applicant, who had previously been insured via the parent company, had disclosed its risk profile to its then insurer in a previous period of insurance.

When the insurer directed that small business transacted by it be directed to its subsidiary, the applicant was required to apply with that subsidiary as if it were "new business". Application for terms with the new subsidiary was transacted via an online quoting portal.

When completing the online application, the broker was asked about the proportion of the applicant's property containing expanded polystyrene (EPS). The broker answered "0-33%". It was subsequently found that the premises contained a much higher proportion of the material.

Insurer denies indemnity on basis of misrepresentation

The insured premises burned down and the insurer denied the claim. The applicant sued the insurer, its parent company and the broker.

Relying on the principle that an insurer may not be imputed with knowledge it holds somewhere unless such knowledge is reasonably in the mind of the officer responsible for contracting (see Macfie v State Government Insurance Office (Qld) (1985) 3 ANZ Ins Cas 60-606 at 78,688), the insurer denied indemnity and reduced its liability to nil under section 28(3) of the Insurance Contracts Act. This was on the grounds that the insured's answer was incorrect and constituted a misrepresentation.

The court found in favour of the insurer. The applicant's claim against the broker was brought in contract and in tort. The applicant was successful in receiving an award of $2,716,300, less $10,000 for the additional premium it would have paid to place alternative cover.

Disclosure of information that may affect an underwriting decision

The court held that the presence of EPS is well known within the insurance industry to be relevant when procuring cover for property insurance.

This means that when any application (including an online quoting system) is not clear regarding disclosure of information that may affect an underwriting decision and where a fact influencing the underwriting decision is evident, the broker must make all relevant enquiries regarding that fact and must subsequently disclose the fact to underwriters.

Informing an insured about its duty of disclosure under the Insurance Contracts Act does not relieve a broker of such duty.

Brokers must make enquiries, document responses and send them to the insurer

The writing is on the wall: some risks are not suited to online portal arrangements. In the event of any doubt, brokers should make enquiries with the insured and document these enquiries.

They should ensure that such correspondence is sent directly to the relevant insurer, even if it takes longer to do so, or a higher premium will subsequently be quoted, and especially where the insurer is offering a higher rate of commission for transacting business on its online portal.

Despite all the operational and transactional benefits of online transacting, it is imperative for brokers to revert to fundamental principles of utmost good faith and duty of disclosure when placing risk with insurers.

Marc Chiarella
Insurance and reinsurance
Colin Biggers & Paisley

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.

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