Lessons for insurance brokers: how a small sub-limit can turn into a big claim

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

Lessons

1. Insurance brokers may find themselves being sued for loss suffered by an insured if there is a failure to properly consider and advise an insured on sub-limits of policies.
2. Following last year’s much discussed Queensland Supreme Court decision of Kotku Bread v Vero Insurance, a recent decision of the Supreme Court of New South Wales has again highlighted the vulnerability of brokers to claims for professional negligence.
3. The case demonstrates that the courts will impose a high standard of care on insurance brokers and that brokers cannot simply renew policies and send out policy wordings without any explanations. Rather, a broker must ‘explain the areas of exposure and uninsurable exposure, discuss major exclusions and cover restrictions and explain sub-limits’. It is not enough for a broker taking over an account to accept the sub-limits contained in a policy they inherited. Rather a prudent broker should personally consider any sub-limits.

Facts

1. Strategic Property Holdings No. 3 Pty Ltd (Strategic) was the owner of a portfolio of properties, including a property leased to the Australian Defence Academy (ADA site). Eclipse Property Group Limited (Eclipse) was the property and investment manager for Strategic. Austbrokers RWA Pty Limited (Broker) was the insurance broker for Strategic and Eclipse.
2. In 2005, the Broker recommended that Strategic and Eclipse renew a single master Industrial Special Risks policy of insurance (Policy) issued by Suncorp Metway Insurance. The Policy had the following features:(a) The declared value of all property insured was $128.8 million with the declared value of the ADA site being $22 million.(b) The limit of liability for material loss or damage was $30 million with a sub-limit of liability for ‘accidental damage’ of $200,000 (Sub-Limit).

   (c) The ‘accidental damage’ definition in the policy excluded certain losses, including loss arising from fire, smoke, storm, tempest and theft.

3. The Broker did not explain the effect of the Sub-Limit or the definition of ‘accidental damage’ to Strategic.
4. During the policy period, the roof of a building at the ADA site collapsed causing significant damage. Strategic made a claim on Suncorp under the Policy. Suncorp agreed to indemnify Strategic, but invoked the Sub-Limit and only paid $200,000 in respect of the damage caused by the roof collapse. This left an uninsured loss in the order of $1.9 million.
5. Strategic unsuccessfully instituted proceedings to recover the full value of its losses from Suncorp under the Policy.
6. After the proceedings against Suncorp were dismissed, Strategic sued the Broker claiming that it had breached its retainer and duty of care by:(a) arranging the Policy with an accidental damage sub-limit that was inadequate, having regard to the value of the ADA site;(b) failing to advise Strategic and Eclipse as to coverage limitations; and

   (c) failing to follow instructions to obtain the broadest possible coverage.

Decision

The Court made the following findings:

1. It was an implied term of the retainer that the Broker would give advice to Strategic 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.
2. While the Broker’s duty did not extend to ‘expounding the law to the insured’, the Broker had a duty to advise Strategic that the effect of the Sub-Limit was that if ‘accidental damage’ of the kind defined in the Policy occurred, then, despite the fact that the ‘declared value’ of the ADA Site was $22 million, Suncorp’s liability under the Policy would be only $200,000.
3. The Broker ’did not in fact give the concept of sub-limits any real consideration at all’ and that ‘the only steps the Broker undertook on renewal of a policy, relating to sub-limits, was to consider if the sub-limit in the incoming policy was similar to that of the existing policy’.
4. Higher sub-limits for accidental damage were available and if proper advice had been provided Strategic would have sought and been prepared to pay for an accidental damage sub-limit of $2 million.

The Court found the Broker liable in damages but made no ruling on quantum, leaving it to the parties to attempt to agree on damages. The claim made by Strategic and Eclipse was approximately $2.7 million and included finance costs and the costs of the unsuccessful court proceedings.

If you would like more information on these issues, please contact Gillian Bristow or Lynne Friis on +61 7 3231 2444.