Insurance Relationships Revisited

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Overview

In a recent decision of the NSW Court of Appeal (the Court) in Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368, a firm of insurance brokers (Horsell) was ordered to indemnify an insured (Divetwo) in circumstances where a policy of insurance placed by Horsell failed to respond to a public liability claim made against Divetwo.

The case highlights the risks for insurance brokers being held liable for a client's uninsured loss, and provides useful guidance in relation to the standard of care expected of insurance brokers. 

Conversely, the case shows the potential for policyholders, in certain circumstances, to claim against their brokers when they are left exposed to an uninsured loss.

The Facts

In 2006, a dive boat owned and operated by Divetwo (a commercial diving business) crashed into a fishing boat that was being operated by Mr Lane on the Myall River in NSW. Mr Lane suffered serious personal injuries as a result of the collision. 

Mr Lane sued Divetwo and a settlement for an undisclosed amount was agreed between them. There was no issue that the collision was caused by Divetwo's negligence. Unfortunately for Divetwo, its insurer, Liberty Mutual Insurance Co (Liberty) declined to provide indemnity to Divetwo in response to the claim. Liberty asserted that:

  • the accident occurred while Divetwo's employee, Mr Todd, was operating the boat for recreational purposes – being a matter outside the cover of the policy (the Policy) – which only provided indemnity in relation to claims arising out of Divetwo's business activities. The Policy was a combined 'General and Products and Professional Liability' policy – being a business policy prepared specifically for members of the Professional Association of Diving Instructors
  • alternatively, the claim fell within the Policy exclusion, which stated that conduct by the insured of a "fraudulent, dishonest, malicious, wilful or criminal" nature was excluded from cover. Liberty argued that, because Mr Todd had previously entered a plea of 'guilty' in the Local Court  to a charge of negligent navigation occasioning grievous bodily harm (section 52B(3)(b) of the Crimes Act 1900), that the exclusion clause was enlivened.

As a result of Liberty's denial of indemnity under the Policy, Divetwo commenced proceedings against Liberty, contending that that the Policy did respond to the claim. In the alternative, Divetwo also sued Horsell – on the basis that, if the Policy did not respond to the claim, then Horsell had breached its retainer and/or was negligent in obtaining inadequate insurance cover for Divetwo.

No Indemnity Under the Policy

The Court found that at the time of the accident the Divetwo boat was being used for a recreational purpose, ie Mr Todd was operating the boat with his wife and personal friends as part of a social outing – not as part of Divetwo's regular business activities. As a result of this factual finding, it followed that the Policy did not provide cover to Divetwo in relation to the claim.

The 'Criminal' Exclusion Clause

The Court also considered whether Mr Todd's plea of guilty to the criminal charge of "negligent navigation occasioning grievous bodily harm" enlivened the 'criminal' exclusion clause.

The Court found that the exclusion clause did not apply because: 

  • a proper reading of the exclusion clause, in the context of the anterior words "fraudulent, dishonest, malicious, wilful" required that 'criminal' conduct be constituted by some form of intentional or conscious wrongdoing on the part of the insured
  • there was no suggestion in the evidence that Mr Todd intended to cause the collision or to harm Mr Lane – rather the facts suggested that the collision was caused by Mr Todd not keeping a proper lookout and the windscreen of the boat not being kept clean.

The Court noted that, if the exclusion clause had been differently drafted then it could have been effective in excluding the claim. The finding of the Court on this issue, demonstrates the precision which is required in the wording of exclusion clauses to ensure they have maximum effectiveness in excluding claims.

Horsell was Negligent and Breached its Implied Retainer

The Court found that Horsell was both negligent and acted in breach of its implied retainer with Divetwo by failing to make it clear to Divetwo that coverage under the Policy did not extend to liability arising from the recreational use of the boat – as opposed to use of the boat as part of Divetwo's business.

In reaching this conclusion, the Court was influenced by statements made by Horsell to Divetwo in both a facsimile and also in marketing material sent to Divetwo prior to each year's policy renewal. Those statements created the impression that the Policy would provide cover in respect of all claims arising from the use of the boat and not just for claims arising during the course of Divetwo's business.

In finding Horsell liable, the Court provided the following useful guidance in relation to the nature and content of an insurance broker's retainer/duty of care to an insured:

  • a broker must ascertain the insured's needs and procure cover for the insured which adequately meets those needs
  • if a broker cannot obtain the required insurance, the broker must report to the insured on the unavailable aspects of cover and seek the insured's alternate instructions.
  • the policy obtained by the broker must not expose the insured to any unnecessary risks of legal disputes with the insurer
  • a broker must draw the insured's attention to any onerous or unusual terms and explain their nature and effect to the insured
  • the duties of a broker to the insured are of a continuing nature and subsist after the policy has been placed.

In the result, Horsell was held liable to indemnify Divetwo for the amount of the claim, together with Divetwo's legal costs.

Lessons for Insurance Brokers

The case serves as a reminder of the potential exposure of insurance brokers arising from an insurer declining indemnity under a policy of insurance placed by the insurance broker. It also demonstrates the degree of care which the law places on insurance brokers in procuring insurance which properly meets the needs of the insured.

Brokers need to have in place effective risk management systems to protect against the risk of such claims being made. Brokers must also pay close attention to their own errors and omissions insurance cover to ensure that they are fully indemnified when such claims do arise. 

Lessons for Policyholders

The case also demonstrates that, in certain circumstances, a policyholder may be able to avoid loss (when a policy does not provide cover) by recovery from the broker who placed the insurance. A policyholder should obtain specialist legal advice whenever insurance coverage issues arise.

Lessons for Both Brokers and Policyholders

To minimise the risk of insurance coverage disputes arising, policyholders and brokers should undertake a number of risk management steps, including:

  • ensuring that full instructions are provided to, and obtained by, the broker in relation to all of the policyholder's insurance requirements
  • ensuring that all relevant communications between the policyholder and broker occur in writing and that copies of the communications are kept for future reference
  • carefully considering the policyholder's and the broker's standard terms and conditions of appointment and objecting to clauses if necessary
  • carefully considering the terms of the policy to ensure that it provides the necessary protection and not just making assumptions about the scope of coverage.