Australia: Brokers' duty to advise on sub-limits in insurance policies

Insurance Update (Australia)
Last Updated: 23 January 2013
Article by Andrew Sharpe

Strategic Property Holdings No.3 Pty Ltd v Austbrokers RWA Pty Ltd [2012] NSWSC 1570

Strategic Property Holdings (Strategic) owned significant property assets, including a property in the ACT which was leased to the Commonwealth and used by the Australian Defence Academy (the ADA Property). The Broker was retained by Strategic and its property and investment manager (Eclipse) to arrange insurance for Strategic's property assets, including the ADA Property.

In 2005, the Broker arranged an Industrial Special Risk (ISR) policy with Suncorp. The ISR policy:

  • Was a 'master policy' covering all properties owned by Strategic, each of which were specifically declared in a Schedule of Assets. The declared value of all property insured was $128.8 million
  • Listed the ADA Property in the Schedule of Assets with a declared value of $22 million
  • Had a limit of indemnity for material loss or damage of $30 million
  • Featured a sub-limit for 'accidental damage' of $200,000
  • Defined 'accidental damage' as accidental loss, destruction or damage but not including loss, destruction or damage caused by perils specifically insured (which were each listed in the policy) or any peril excluded by the policy
  • Excluded damage caused by faulty materials or faulty workmanship but not 'subsequent loss, destruction or damage to the Property Insured occasioned'.

During the policy period the roof of the ADA property collapsed due to inadequacies in the design and construction of the roof trusses.

Suncorp admitted liability to pay under the ISR policy but applied the accidental damage sub-limit of $200,000. Strategic and Eclipse unsuccessfully challenged Suncorp's decision to apply the sub-limit in separate proceedings. That left an uninsured loss in the order of $1.9 million. Strategic and Eclipse then sued the Broker to recover its uninsured loss.

The Broker was held to have breached its duty of care and found liable to Strategic. That conclusion followed from the following important findings:

  • It was an implied term of the Broker's retainer that the Broker would give advice to its client in relation to the availability of different types of cover, the nature of any exclusions and limitations on the cover, and the material risks associated with the level of cover proposed by the Broker having regard to the declared value of the properties insured. That implied term arose as a usual incidence of the broker-client relationship.
  • Specifically, the Broker had a duty to advise Strategic of the presence and effect of the accidental damage sub-limit, including explaining the type of damage to which the sub-limit might apply as defined in the Policy. The Broker did not provide any advice in relation to the effect of the sub-limit and, in fact, had a fundamentally flawed understanding of the concept of 'accidental damage' and, therefore, the extent of the risk faced by Strategic.
  • Had the Broker provided adequate advice as to the accidental damage sub-limit, including the fact that a higher sub-limit could have been negotiated for additional premium, Strategic would have instructed the Broker to obtain an accidental damage sub-limit of $2 million. That cover would have been available at an additional premium of $21,375, which Strategic would have paid.

Brokers need to understand the operation of sub-limits included in policies of insurance arranged by them and to consider the appropriateness of those sub-limits to their client's needs. Where the sub-limits have the potential to expose their clients to material uninsured losses, Brokers should explain that potential exposure to the client so that the client has the opportunity to instruct the broker to negotiate a higher sub-limit (where available). In this case, the large disparity between the value of the ADA Property and the accident sub-limit required specific advice to be given to the client.

Click here to read the judgment.

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