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20 June 2013
The award last week of more than $2.7 million in damages against a Brisbane brokerage has again highlighted the need for brokers to take extreme care when assessing and reporting risk factors for an insurance proposal.
Queensland Supreme Court Justice Peter Applegarth made it clear that brokers, rather than their clients, have a duty to be aware of the sort of risks that may affect underwriters’ decisions.
Much of the case the parties presented in the court revolved around a question automatically generated by an IT platform. The broker denied completing the online form inaccurately, while the insurer said the broker had not disclosed information about a significant risk.
Kotku Bread Pty Ltd sued Vero Insurance and Brisbane brokerage 786 International Pty Ltd, trading as Osman Insurance Brokers.
The company operated from a building in the Brisbane suburb of Capalaba. Its broker, Osman, arranged insurance from Vero in February 2010, using the insurer’s Enterprise IT platform.
Kotku had been insured with Suncorp for several years before the 2010 decision by Suncorp to move all commercial lines business to Vero.
In August that year fire destroyed the bakery – a loss assessed by Vero at $2,716,300.
But Vero declined the claim, saying the way in which an Osman employee had completed the online form misrepresented the amount of highly flammable expanded polystyrene sandwich (EPS) panelling in the bakery’s walls.
One question in the form asked the amount of EPS in the building, with a dropdown box offering three options: zero, 1-33%, or over 33%. The Osman employee disputed Vero’s allegation that she selected “zero”.
There was no dispute at trial that the bakery contained up to 67% EPS. Vero maintained that had the broker’s employee selected “over 33%”, the system would have declined the cover.
The broker contended that if Vero had declined the cover because of the amount of EPS present, alternative cover was available through other insurers. It therefore had no reason to misrepresent the presence of EPS.
Justice Applegarth said in his judgement that if the IT system asked the question, the brokerage was obliged to find the answer.
Osman’s counsel raised another issue that could have affected the case, but the judge discounted it. Comsure, a rival broker, tried to win the Kotku business in 2006 and went so far as to obtain quotes from Suncorp Insurance. Its proposal to Suncorp noted the presence of “internal insulated panelling” at the bakery.
Osman argued that this information would have been known to Vero, because shortly before accepting the cover Vero told Kotku and Osman it would rely on information given to Suncorp when Kotku first took out insurance with it, “as well as any other information provided to Suncorp”.
Justice Applegarth found the information about the presence of EPS supplied by Comsure in 2006 went no further than the company’s broker referral section, and there was no awareness that Kotku was already a Suncorp client.
He said Osman principal Mahmood Osman dealt with Kotku’s directors, “but did little, if anything, to ascertain the internal construction” of the bakery while it was being built in 2006, or after.
Nor was the presence of EPS ever noted on the Suncorp policies as they were renewed each year between 2006 and 2010.
A director of the bakery testified that he did not know what EPS was or its relevance to the insurer, and relied on the broker’s expertise.
The judge said: “The evidence does not persuade me to conclude that [Kotku’s directors] knew in 2006 that the insulated panelling was known as EPS; and that EPS was a matter of significance to insurers in assessing risk and in deciding whether to insure the building and its contents.”
He was critical of Mr Osman’s failure to inspect the interior of the premises “for reasons best known to him and never adequately explained in his evidence”.
“Kotku was entitled to rely upon Osman Insurance Brokers, in discharging its professional duty, to inform itself about both the external and internal construction of the building and other matters of relevance to current or potential insurers,” he said.
As for the broker who submitted the online proposal to Vero, “she had no reason to give an answer that she knew to be false”.
Justice Applegarth found it “not improbable” that the broker treated the proposal as a renewal rather than as a new document for a new insurer. She knew little about the uses of EPS, and gave evidence that she did not expect it would be used in a bakery, saying at one point: “If it was a butchery I’d probably look into it.”
She had never been to the bakery, and the judge said “it would be understandable for her to assume that if Kotku’s premises contained EPS, then this information would have been obtained by Mr Osman at some stage in the previous four years”.
Finding in favour of Vero as the first defendant, Justice Applegarth said Osman Insurance Brokers did not conduct its own enquiries about the presence of EPS panelling in the building.
He found the “nil” answer on the Vero proposal was a misrepresentation, saying this meant Osman Insurance Brokers failed to discharge its duty to Kotku.
“In the circumstances of this case, Osman Insurance Brokers was not simply under a duty to warn or advise its client that EPS was a matter of interest to insurers,” he said. “In carrying out its retainer… [the brokerage] had a duty to enquire about a matter in respect of which it had not made adequate enquiry in previous years.”
He said there was no need for Kotku to call expert evidence about what a reasonably careful broker should have done. “The failure of Osman Insurance Brokers to make proper enquiries with a view to ascertaining the internal construction of the bakery is so rudimentary that expert evidence of broker practice was not necessary.”
Damages of $2,706,300 were awarded against Osman Insurance Brokers. This was $10,000 less than the figure claimed, with Justice Applegarth explaining this was a conservative estimate of how much a premium containing fire risk would have cost if the underwriter had known about the EPS panelling.
The judge also awarded 10% interest from the time the claim might have been expected to be paid. He said his “provisional view” is that Osman Insurance Brokers should pay Kotku’s and Vero’s costs.
Editor’s note: The insurance brokerage mentioned in this article has no relationship to a Sydney brokerage of the same name.
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