Australia: Ask And Advise: Recent Decision Highlights Insurance Broker's Duty To Make Reasonable Enquiries

A recent decision of the Federal Court has clarified the scope of an insurance brokers' duty to make reasonable enquiries to ascertain the risks posed by their client's business operations, and to advise on the available options to address those risks.

In PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137, Anderson J found that the Instrat Insurance Brokers Pty Ltd (the Broker) acted negligently by failing to discern that PC Case Gear Pty Ltd (PCCG) had an exposure to a copyright infringement claim from the nature of its business, and by failing to raise that risk (and the options to address it) with PCCG.

The decision will have consequences for insurance brokers as the insurance market hardens. As narrow wordings and wider exclusions become more common place, this decision is a timely reminder for brokers of the importance of conducting interactive risk assessments to identify possible exposures, and providing tailored advice as to the cover available to address those risks.

The Facts

PCCG purchased licenses for Windows from a Microsoft sub-distributor, which offered cheaper prices on the condition that Windows would be installed on refurbished computers. PCCG installed Windows onto custom-made, new computers, among other business activities.

Between 2009 and 2016, PCCG retained the Broker to provide advice in relation to the risks that its business faced, and to recommend insurance policies which would indemnify the business against those specific risks. For that purpose, the Broker prepared annual insurance plans which identified:

• the Broker's key recommendations in relation to the cover that PCCG ought to consider obtaining. No specific recommendations were made with respect to the risk of copyright infringement claims. The Broker understood that exposure to be low, because PCCG predominantly resold hardware and software; and
• a broad range of classes of insurance in respect of which PCCG was uninsured, including infringement of copyright or patent. Those classes of insurance were not specific to the business of PCCG, including matters such as "Aviation Hull & Liability."

In January 2016, PCCG received a letter of demand from Microsoft alleging breach of copyright in relation to the Windows licenses. Microsoft's claim was settled for AUD250,000. While PCCG's management liability policy provided cover for defence costs, cover was unavailable in relation to the settlement sum by reason of the copyright infringement exclusion.

PCCG commenced proceedings against the Broker, alleging that it was negligent in failing to advise PCCG of the availability of cover for copyright infringement. The Broker denied liability, asserting that it did not breach its duties to PCCG and, alternatively, PCCG's loss was not caused by any breach of duty by the Broker, and was not otherwise reasonably foreseeable.

The Decision

Anderson J found that the Broker failed to make adequate enquiries to understand the nature of the risks to which PCCG's business was exposed. While some investigations were undertaken, the Broker did not ask sufficient questions,¹ and failed to appreciate that that PCCG's business involved the reselling of software that they installed on computers that were then sold to its customers.² Anderson J held that a reasonably competent broker in the position of the Broker would have identified that PCCG's business was exposed to a major risk for copyright infringement as they were purchasing Windows from third party resellers.³

Anderson J concluded that in order for Instrat to comply with its duties to PCCG it was required to expressly raise with PCCG that it faced a risk of copyright infringement, and to make PCCG aware that such cover was exempted under the insurance plan. In arriving at this finding, Anderson J:

• recognised that there is no absolute rule that requires an insurance broker to walk through a list of exemptions from cover with the insured: Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909; 124 FCR 1 per Mansfield J;
• held that whether the scope of an insurance brokers duty should extend to identifying particular exclusions should be informed by factors such as the nature of the client's activities, and the expertise and experience of the client. His Honour found that PCCG was not experienced in addressing the insurance requirements of the business and that is why it had engaged the Broker.⁵

The Broker's causation and contributory negligence defences were rejected by the Court. Anderson J found that cover for inadvertent copyright infringement was readily available on the market and that, on balance, PCCG would have obtained such cover if the Broker had raised that risk. There was insufficient evidence to support the Brokers submission that PCCG's own negligence caused or contributed to its loss; namely, that the impermissible use of the Windows licenses by PCCG was negligent.

Anderson J was satisfied that the settlement sum of AUD250,000 was reasonable. The Broker was ordered to pay PCCG AUD250,000 plus costs.

Analysis

For insurance brokers, this case highlights the importance of carefully examining the nature of their clients' businesses, to ensure the delivery of a fulsome risk assessment which identifies specific areas of exposure and makes recommendations as to the available cover to indemnify against those risks.

Insurance brokers should also exercise caution when drawing their clients' attention to exclusions (and conditions) to ensure that a prospective insured is on notice of any carve-outs, conditions or limits to cover. Advice should also be provided as to the extent to which that cover could be obtained elsewhere on the market.

Should you have any queries relating to the obligations of an insurance broker, or claims, please feel free to contact David Lee and Stephanie Weeks, who are based in our Sydney office. David and Stephanie each have significant experience defending broker professional indemnity scheme claims.

Footnotes

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.