If your insurance does not cover you for a loss you or your business has suffered and/or your insurer has declined you cover under your insurance policy, it may be due to negligence of your insurance broker. Insurance brokers owe you as the policy holder a duty of care to properly ‘ask and advise’ to ensure that you have an adequate level of insurance cover that is suitable to the nature of your personal circumstances or business.

In the Federal Court of Australia case of PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137, an insurance broker was found to have breached the terms of their retainer and  be negligent for failing to inter alia make adequate enquiries to understand the nature of the risks of their client’s business and failing to advise their client that the subject professional indemnity insurance taken out would not cover it for copyright infringement.  In this case, the policy holder/client PC Case Gear [PCCG], was a computer hardware and software supply company, who was in January 2016, sued for breach of copyright by Microsoft in relation to its Windows licenses.

PCCG subsequently sued its insurance broker for failing to advise them that cover under the relevant professional indemnity policy was not available for copyright infringement.

Breach by Insurance Broker

In PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137, it was found that the insurance broker breached its duty of care to the client (PCCG) by failing to:

• make adequate enquiries to understand the nature of the risks that PCCG was exposed as the broker did not ask the client sufficient questions to obtain a thorough understanding of the nature of the PCCG business;
• sufficiently identify and characterise the exposure of PCCG’s business to the risk of copyright infringement; and
• raise with PCCG the fact that the subject insurance policy would not cover them against copyright infringement.

Put another way, the broker’s failure to advise PCCG of the risk of gap in cover for copyright infringement meant that PCCG was unable to make an informed decision as to whether to take out insurance to protect itself against that risk. As such, the insurance broker was found negligent.

Causation Issues

The Federal Court in the case of PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137 concluded that there was a causal link between the breaches of duty of care by the insurance broker and the losses suffered by the policy holder/client, PCCG. The Court found that if the insurance broker had brought the risk of a gap in cover for potential copyright infringement to PCCG’s attention then the significance of the exposure would have been apparent, and PCCG would have purchased insurance that would have indemnified it against copyright infringement subject to the terms of the policy.

Have you as the policy holder caused your loss?

Your conduct as a policy holder may be relevant in determining if your insurance broker has caused you or your business loss. Even if an insurance broker has breached its duty of care, the Court will examine if you have suffered any loss and if so what the true causes of your loss are. Careful consideration needs to be given to causation issues and evidence assessing what alternative insurance cover would have been available if appropriate advice was given to you.  You as the policy holder bear the onus in a negligence case to prove that alternative cover would have been available to you for the loss you have suffered if the broker has not been negligent.

On 4 July 2023, the New South Wales Court of Appeal in Flanagan v Bernasconi [2023] NSWCA 150 [71] dismissed an appeal by appellant, Dr Sue Flanagan, and ruled that even though the insurance broker breached his duty of care, it was the policy holder’s own conduct that resulted in her loss and her claim failed on causation because she was unable to establish that alternative insurance cover would have been available had the broker not been negligent.

This case was a negligence claim made by Dr Flanagan against her insurance broker for failing to advise her of an exclusion clause in her homeowners insurance policy which denied cover for damage to her pool as a result of a defect in a hydraulic valve which caused her pool to lift out of the ground following heavy rain after it had been left empty.

At first instance, the primary Judge found that Dr Flanagan did not prove that her loss was caused by the insurance broker’s breach because even if she had taken out alternative insurance cover on proper advice from her broker, the alternative cover would still not have covered her loss because such cover would have still contained a defects exclusion clause and requirement for her to take ‘reasonable precautions’ to prevent the damage.

On appeal, the Court also found that the defects exclusion would have applied, and that Dr Flanaghan would not have satisfied her obligations to take reasonable precautions because she was on notice of the risk of the pool lifting and could have taken steps to prevent that from happening.

Key Takeaway

It is important for careful consideration to be given to the true and underlying causes of loss in a negligence case against an insurance broker including what alternative cover would have been available but for the alleged negligence by the broker. This should also involve assessment of what you as the policy holder have done and if you have contributed in any way to your loss.

At Elit Lawyers, we believe that policy holders should be treated fairly, and we fight to ensure that policy holders recover what they deserve.

Our insurance law team, led by Robert McGirr and Danielle Snell, understand the full spectrum of issues faced by policy holders and know how to enforce your rights to achieve maximum recovery in insurance related matters.

Should you have any concerns about advice you have received from your insurance broker, do not hesitate to contact us personally on 03 9098 8646.

Article co-authored by Isabella Best, Paralegal at Elit Lawyers.