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Engaging an insurance broker helps remove the complexity and complications associated with taking out insurance.
However, in the case of broker error, the consequences for the client are often financially catastrophic.
What is the insurance brokers job?
Insurance is notoriously complicated and wide-ranging. Most people usually require a range of policies, whether it be home and contents or other property coverage, business interruption coverage, workers compensation coverage, professional indemnity coverage, income protection coverage, or contract works (construction) coverage, to name a few.
Insurance brokers act as the intermediary between the insurer and the person requiring coverage (the Insured). However, the broker's duty of care is to the Insured, not the insurer. Brokers are expected to exercise care, skill and diligence. This means assessing their client's risks and needs, identifying any gaps in their coverage, sourcing appropriate policies, and giving advice on appropriate protection. Once a policy is in place, the broker's job is not simply to renew each year by the press of a button. The broker must continue exercising their judgment on whether the policy meets the Insured's needs and advise accordingly.
We have seen plenty of unfortunate instances where certain brokers have been too lax in their practices, or left it to untrained staff to do most of the work, which has led to disaster for their client, the Insured, when something goes wrong. Sometimes, it can be a small error in a moment of time that has major implications for the Insured in the years ahead.
More often than not, these types of problems are discovered well down the track, after a claim has to be made under the policy and the insurer refuses to pay. By then it's too late to fix...
Examples of errors by brokers
The types of errors we have seen by certain brokers, that have led to major disputes, include:
- failing to renew an insurance policy
- taking out a policy that wasn't appropriate to the client's needs
- taking out a policy with an inadequate coverage amount (and not warning of potential underinsurance problems)
- failing to update or amend a policy when asked, eg. to increase insured amount
- failing to advise the client of potential risks and policy limitations
- failing to make proper enquiries about the client's needs (eg. buildings that are to be covered, their replacement costs, construction material, ownership, etc)
- failing to advise what is excluded under a policy
Real life cases
Here are some actual examples of disputes that have arisen to the error of an insurance broker. In each instance, the Insured was entitled to recover their loss not from the insurer but from the broker.
A company ran a factory producing commercial bakery goods. The factory coolrooms were made of 'expanded polystyrene' (EPS) panels, which were not uncommon but were highly flammable. The company took out insurance for the factory, with the help of its insurance broker.
The factory burnt down. The company claimed under its insurance but the insurer refused to pay. The insurer realised that when the policy was taken out, the broker had said there was zero percent EPS in the building when in fact the insurer discovered the factory was over 33% EPS. The insurer said it wouldn't have offered the insurance had it known the true amount of EPA within the factory. The company pursued the insurer and the broker in court. The court held the broker had a duty to make inquiries about the factory relevant to the policy and failed to do so. The broker was found negligent for misrepresenting the level of EPS in the factory and was ordered to pay $2.7million to the company.1
The Insured ran an online business selling computers pre-installed with Microsoft Windows operating systems. The Insured's broker obtained coverage for the Insured's business. Later, Microsoft pursued the Insured for breach of copyright, which the Insured later settled by paying $250,000. The Insured was unable to claim that loss under its insurance because the policy didn't include copyright infringement coverage.
The Insured commenced proceedings against the broker for failing to advise the Insured about copyright coverage. The Court found the broker negligent as it should have made inquiries of the Insured's business, realised copyright infringement was a relevant risk and given advice about it being excluded from the policy. The broker was ordered to pay $250,000 to the Insured.2
The Insured operated a hotel located near the sea in England. At the Insured's request, the broker took out coverage against storm and flood damage. A major storm occurred and rising sea waters flooded the hotel causing extensive damage. The Insured made a claim under its policy. The insurer refused to pay because the policy excluded damage caused directly or indirectly by the sea.
The Insured pursued the broker. The Court held the broker failed to obtain the coverage sought by the Insured and failed to provide the Insured with appropriate advice regarding the policy's exclusion. The broker was held liable for the Insured's loss.3
The Insured ran a retail and wholesale fruit and veg business. Its broker arranged insurance over the business premises as well as plant, equipment, stock and contents. A fire occurred resulting in losses of over $1.7 million. The insurer refused to pay because, when the policy was taken out, the Insured's rather long history of making insurance claims (amongst other things) had not been disclosed by the broker to the Insurer.
The Insured and its insurer settled that dispute with the insurer paying $900,000. The Insured then pursed its insurance broker for the rest of its losses. The Court held the broker liable and ordered it to pay the Insured.4
Where brokers did wrong but escaped scot-free
Not every situation where the broker is at fault will result in the Insured recovering against the broker. The following are examples where the insurance broker breached their duty but was not ordered to pay anything:
An insurance broker took out homeowners' insurance for a couple's property, which included a large inground fibreglass pool. The premiums jumped up and, on the broker's recommendation, the Insured changed insurers. (The new policy contained a pool exclusion' clause...) At a time when the pool was empty, there was a heavy rain event, and the empty pool lifted out of the ground causing damage to it and surrounds and caused a building wall to collapse. The insurer refused to pay due to the pool exclusion clause.
The Insured pursued the broker. Although the broker admitted that he failed to inform the Insured of the pool exclusion clause under the new policy, the Court was not satisfied the Insured would have been indemnified under the previous or another policy because of the existence of a defect in a pool valve and the Insured's failure to take reasonable precautions. The Court found in favour of the broker - the Insured's claim failed.5
Financial advisors took out professional indemnity coverage with the help of a broker. The broker gave advice to the financial advisors (the Insured) along the lines that, if a number of the financial advisors' clients pursued them (for instance, in relation to a bad investment in a product), the insurer would only treat it as one claim under the policy... The financial advisors' unfortunate clients later claimed to suffer losses of $17million following the advisors' investment advice.
The financial advisors in turn made a claim under their insurance but, in contrast to what the broker had advised, the insurer treated them as separate claims, meaning a lot more deductibles would need to be paid by the Insured. The insurer agreed to make a payment but the financial advisors paid deductibles of $800,000.
The financial planners sued the broker saying that, had the broker not given negligent advice, they would only have needed to pay deductibles upwards of $120,000. The court did not agree. While the court agreed the broker gave negligent advice, the court was not satisfied that the financial advisors would have obtained a policy that would have meant only one deductible. The financial advisors' claim against the broker failed.6
Conclusion
It is said that insurance policies existed as far back as ancient times. Although there has been no discovery of an ancient scroll prepared by a scrupulous insurance broker (as far as the writer is aware), in today's world insurance brokers are in abundance and play an important role.
Using an insurance broker enables you to obtain specialised insurance advice from a registered professional. It also takes a lot of the pain and inconvenience out of obtaining and managing insurance policies. However, sometimes human error can never be avoided so it is vital to ensure that accurate information and clear instructions are provided to the broker (in writing) at all times and that all policy-related documents are checked thoroughly.
If you find yourself in a dispute with an insurance broker, or an insurer, please contact Charlie Young of Bennett & Philp Lawyers for advice.
Footnotes:
1 Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor [2012] QSC 109 95
2 PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) (2020) 379 ALR 732
3 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corp Ltd [1984] WAR 365
4 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603
5 Flanagan v Bernasconi [2023] NSWCA 150
6 Prosperity Advisers Pty Ltd (Prosperity) v Secure Enterprises Pty Ltd (trading as Strathearn Insurance Brokers (Strathearn) [2012] NSWCA 192
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.
