A win for the broker: no damages despite negligent advice

The New South Wales Court of Appeal has upheld a decision dismissing a client’s claim for damages arising out of the negligent advice of an insurance broker, in Prosperity Advisers Pty Ltd (Prosperity) v Secure Enterprises Pty Ltd (trading as Strathearn Insurance Brokers (Strathearn) [2012] NSWCA 192.

The facts

Prosperity carried on business providing accounting and financial planning services. It engaged Strathearn to arrange professional indemnity insurance on its behalf. Strathearn recommended a particular policy that would provide cover of up to $6 million. Prosperity sought advice from Strathearn in relation to an aggregation clause in the policy. The question asked was:

If, say 100 clients had an investment in a particular product at say $40,000, and it went bad and we were found to be negligent in our advice, would this be seen to be one claim or 100 claims?

The broker responded that in such a scenario the insurer would treat it as one claim and not separate claims. Prosperity then instructed the broker to arrange the recommended policy.

On Prosperity’s recommendation, a number of its clients invested in funds and subsequently suffered substantial losses when the parent company of these funds, Westpoint, collapsed.

Many of the investors commenced proceedings against Prosperity, arguing it was negligent in recommending the investments. The amounts claimed totalled approximately $17 million. Prosperity made a claim for this amount on its professional indemnity insurance.

The insurer alleged that Prosperity owed $2.5 million in deductibles on the basis that each action by a client of Prosperity was a separate claim. However, a settlement was reached under which the insurer agreed to contribute $4.25 million if Prosperity paid $800,000 in deductibles.

Prosperity then sued Strathearn, seeking damages and arguing that the broker provided negligent advice regarding the calculation of deductibles. Had the broker not given negligent advice, Prosperity argued that it would only have been liable for a maximum of $120,000 in deductibles.

The decision of the trial judge

Justice Ball of the Supreme Court was satisfied that the advice given by the broker was negligent, misleading or deceptive, or constituted a breach of contract. Therefore, the primary issue for determination was whether or not Prosperity could recover damages from Strathearn. This required consideration of whether or not Prosperity suffered any harm as a result of the broker’s negligent advice.

Prosperity alleged that the harm it suffered was in the form of the loss of a chance to obtain or negotiate an alternative insurance policy on terms that would have minimised its liability in the circumstances. The trial judge accepted that Prosperity had lost an opportunity to procure insurance on more favourable terms, but emphasised the need for Prosperity to prove that such loss was of some value.

Justice Ball concluded that ‘the possibility that Prosperity could have and would have obtained cover that meant that only one deductible would have been applied to the Westpoint claims was at best speculative and (did) not satisfy the threshold needed to assess Prosperity’s damages as loss of a chance’. The Supreme Court therefore dismissed Prosperity’s action.

On appeal

Prosperity appealed the decision. However, the New South Wales Court of Appeal unanimously found that Prosperity failed to establish that its loss of opportunity constituted a loss capable of being valued.

According to the Court there was insufficient evidence as to what Prosperity would have done had it known that its policy did not offer cover on the terms it wanted. For example, the evidence showed that Prosperity was ‘at least as concerned about the premium cost (as) the quality of cover’. Also, there was insufficient evidence that Prosperity would have been able to negotiate the terms of the aggregation clause it sought with any of the various insurers suggested by Prosperity at trial.

Significance

The message from this decision is that damages do not necessarily flow from every negligent act or omission of an insurance broker. It is for the client to prove that the negligent advice has caused loss or damage. The client must be able to prove that, properly advised, it would have chosen a different policy, if necessary, was prepared to pay a higher premium, and an alternative policy was available.

If you would like further information on any of these issues, please contact Gillian Bristow on 07 3231 2444.