A recent NSW Supreme Court case has highlighted that directors should not rely solely on the advice of insurance brokers when choosing appropriate insurance cover for their organisations.
The Court found that an insurance broker who provided incorrect advice to the director of a firm of financial planners, on the legal effect of a policy’s excess (or deductible) provisions in the course of arranging professional indemnity cover for the firm, had breached his duty of care.
The firm, Prosperity, was subsequently sued by over 160 clients for negligently advising them to invest in certain financial products resulting in $17 million in losses. Prosperity’s insurer rejected the broker’s view that only one deductible of $40,000 was payable on the entire matter, and instead, required separate deductibles to be paid for each investor’s claim.
Kemsley Brennan, special counsel at Colin Biggers & Paisley lawyers (CBP) says the case demonstrates that organisations that rely solely on a broker and do not seek legal advice on the adequacy of their insurance policies are taking careless risks.
“Assessing whether an insurance policy effectively meets the needs of a business requires a lawyer’s input. You cannot determine a business’s real exposures, if you’re not qualified to identify potential liabilities in employment and customer contracts. And you cannot advise on whether deductibles or limits are appropriate unless you have a strong understanding of insurance law principles,” Brennan said.
“The bottom line is that directors should always have a lawyer review the organisation’s insurance program and map it against the business’s needs. A good insurance lawyer will then identify coverage gaps and arm the organisation with the knowledge to ensure they ask the right questions of their broker, to get the insurance product that’s ultimately right for them.
“The right policy can mean the difference between business insolvency and success, so it’s important for organisations to get a lawyer involved at an early stage as a vital complement to their broker’s services,” added Brennan.
In the case of Prosperity Advisers Ltd v Secure Enterprises Pty Ltd  NSWSC 541, the policy, which the broker arranged, provided multiple claims would be treated as one claim requiring payment of one deductible of $40,000 if arising out of a single error; however, a separate deductible would apply for each party to the claim, subject to a cap of $120,000. A director of Prosperity contacted the broker to ascertain whether multiple claims stemming from a single failed investment that Prosperity recommended would be treated as one claim under this provision. This was confirmed by the broker.
When 160 clients subsequently sued Prosperity for negligently advising them to invest in certain complex products, the insurer advised the claims could not be aggregated because they arose out of tailored advice given to each client and consequently, a $40,000 deductible would apply to each investor’s claim.
The Court found the broker had breached his duty of care to Prosperity. Ultimately however, Prosperity’s negligence claim did not succeed, as it could not identify an alternative insurance product available at the time that imposed a single deductible.