The recent Supreme Court decision in Strategic Property Holdings No. 3 Pty Ltd v Austbrokers RWA Pty Ltd, found an insurance broker liable for more than $2,000,000 in damages, in a professional negligence/breach of contract claim brought by a client after the broker failed to obtain adequate insurance for its client. The broker was liable not only for the costs associated with the gap in the insurance, but also for the costs of rectifying the damage to the clients’ property as well as legal fees associated with bringing the action.
The plaintiff in the case, Strategic Property Holdings (‘Strategic’), owned an industrial building worth approximately $22,000,000. The defendant, Austbrokers RWA Pty Ltd, acted as their insurance broker. The Broker was an authorised representative of Austbrokers Sydney which, under the Corporations Act, was liable for the conduct of the broker.
In 2005, the Broker recommended to Strategic that they obtain an Industrial Special Risks insurance policy from Suncorp Metway. Based on this recommendation, Strategic agreed and the Broker procured the policy accordingly. The policy listed the value of the building at $22,000,000. However, it contained a sub-limit of liability clause which essentially limited the amount recoverable for accidental damage to only $200,000.
During the course of this insurance policy, the roof of the building collapsed, causing significant damage to the property. This event was classified as accidental damage. Consequently, when Strategic made an insurance claim on Suncorp under the policy obtained by the Broker, Suncorp admitted their liability to indemnify Strategic for the damage, but invoked the sub-limit clause and therefore only paid $200,000. The cost of repairing the damage to the building was significantly greater than $200,000.
Following this, Strategic took the matter to the Supreme Court and sought to challenge the payout figure. It was found that as Suncorp had correctly fulfilled their obligations under the insurance policy, Strategic was unsuccessful in recovering further funds from them.
Following their unsuccessful action against Suncorp, Strategic then sought action in the Supreme Court against the insurance broker on the grounds that they had arranged a policy with a sub-limit which was inadequate given the value of the building, failed to advise Strategic of these limitations so that they could obtain further coverage and failed to follow instructions to obtain the broadest coverage possible. Further, Strategic also claimed that the Broker had engaged in misleading or deceptive conduct, contrary to the Corporations Act, by representing that the coverage under that policy was on the best terms available at the time.
The court held that it was an implied term of the retainer between the broker and Strategic that the broker would “exercise all reasonable skill, care and diligence in and about the provision of insurance broking services” and that ultimately, the broker had breached that duty. It was also held that the broker owed the client a duty to give advice in relation to the availability of different types of cover, the nature of limitations on that cover, as well as the risks of the proposed cover, having regard to the value of the building being insured.
As well as the breach of duty outlined above, it was also held that the broker failed in any way to explain the sub-limit to the client.
The court reached the conclusion that at the very least, the broker had a duty to read the policy, examine what it said about sub-limits and to advise that the effect of the sub-limit would be that if accidental damage occurred, then despite the listed value of the building, only $200,000 could be recovered. Further, it was held that the broker could and should have obtained cover with a much higher sub-limit and that had Strategic been aware of this, they would have paid higher premiums for more adequate cover.
The broker attempted to rely on a defence under the Civil Liability Act, pleading that it was a professional acting in a manner that was widely accepted by peers in the profession as competent professional practice. However no evidence was given to support this and in fact expert evidence contradicted this claim.
Therefore, the broker was found to be in breach of his duty to Strategic through his failure to obtain adequate insurance or to at least inform the client of the effect of the sub-limit clause.