In the recent 2012 Supreme Court case of Kotku Bread Pty Ltd v Vero Insurance Limited and Anor, an insurance broker was ordered to pay their client of over $2,000,000 plus interest, after failing to secure adequate insurance. The broker was also liable to pay the legal costs of both the client and the insurance company.
The plaintiff in this case, Kotku, was a Bakery business and the client of the second defendant, OIB, an insurance broker. The broker had placed an insurance policy for Kotku with Suncorp. In 2007, Suncorp acquired Vero (the defendant insurance company) and required that Kotku’s insurance be transferred to a policy with Vero. The process for transferring the policy was by completing an online form, which the broker did on Kotku’s behalf in February 2010.
In August 2010, the premises of the bakery business were destroyed by fire and Kotku filed an insurance claim with Vero, who assessed the value of the damage to be in excess of $2,000,000. However the claim was denied by Vero, on the basis that the broker had misrepresented the volume of flammable material in the internal walls of the Bakery when making the application. The broker denied having filled out the online form in the manner alleged and Kotku brought an action in the Supreme Court against the insurance company for failing to pay the insurance claim. Kotku also claimed that if Vero was not liable, then the broker should be found liable for negligence and breach of contract.
Vero argued that the misrepresentation of the broker breached Kotku’s duty of disclosure under the Insurance Contracts Act. Further, they argued that had they been aware of the level of flammable material in the building, they would not have insured Kotku’s business. On this basis, Vero claimed that they were not required to indemnify Kotku under the insurance policy.
The court agreed and held that OIB had selected the incorrect answer to the question regarding flammable material and in doing so, had breached Kotku’s duty of disclosure to Vero. The court was also satisfied that had the broker correctly represented the amount of flammable material in the business, Vero would not have granted the insurance policy to Kotku. Accordingly it was held that Vero was entitled to reduce its liability under the policy to nil and Kotku was unsuccessful in its indemnity claim.
Following the unsuccessful claim against the insurer, it was then up to the court to determine whether Kotku could recover damages from the broker. OIB had initially argued that they were never asked the question regarding flammable material. However in finding that Vero was not liable, the court had already decided that OIB had caused Kotku to breach their duty of disclosure in regards to this question. The court then went one step further and stated that the importance of EPS (the flammable material in question) to the process of obtaining insurance at the time these events occurred, was a well known fact in the insurance broker industry.
The court consequently held that not only did OIB breach Kotku’s duty of disclosure to Vero with the online form, but also breached their contract and duty of care to Kotku by failing to make adequate investigations into the presence of EPS in Kotku’s business premises. Even in the face of evidence that suggested Kotku may have been aware of the significance of EPS in the insurance process, it was still held that OIB had an obligation “to inquire of its clients about the extent of EPS in the construction of the building”. Further, evidence was given by the broker that if Vero had declined to insure Kotku (as it would have done, had OIB correctly answered the online application), OIB could have obtained the same level of insurance for Kotku elsewhere.
The court therefore concluded that the broker failed to discharge its contractual duties to its client, as well as breaching the duty of care it owed under general law. As a direct result of these breaches, the insurer was able to reduce their liability to zero, resulting in a loss of more than $2,000,000 to Kotku. The broker was ordered to pay the insurance indemnity Kotku would have received from Vero, had the broker not acted negligently.
Aitken Whyte Lawyers
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