Gallagher has won a dispute over the size of a settlement owed to a small business after it made no reference to a policy limit of $50,000 for legal defence cover, breaching its duty as an insurance broker.

The small business was sued for the conduct of a former employee which was said to be fraudulent. After just six months, it was advised by insurer-appointed lawyers that its legal fee cover was almost exhausted.

Gallagher offered a $4500 settlement but the business owner went to the Australian Financial Complaints Authority (AFCA) seeking $41,000 to pursue legal action with different lawyers.

AFCA ruled that while Gallagher had breached its duty by failing to inform the business of the legal fee policy limit, the client did not suffer a loss because of that breach.

There was “insufficient basis to conclude the complainant’s financial position would have been improved if it was informed of the policy limit,” AFCA said. “The broker’s offer to pay $4500 in settlement is fair … given the complainant was unduly stressed and inconvenienced by this experience but has not established a financial loss from the broker’s conduct.”

The small business lodged a claim when a business partner pursued it for the fraud losses. The insurer engaged a large law firm to defend, which AFCA said charged fees “likely to be on the higher scale”.

After around six months, the insurer’s lawyers had spent $43,000 of the $50,000 policy limit and warned they would no longer be able to act once the limit was reached. The legal case had not been resolved, and the partner was withholding commissions to compensate for the alleged fraud.

Gallagher breached its duty, the small business said, by failing to update it on the progress of its legal fees and not disclosing invoices or information about the legal rate. If it was aware of these legal fees, it would have utilised the legal limit allowance more effectively, it said.

The small business said Gallagher’s actions caused it to suffer financial loss and had it been aware of the cap, it would have used different lawyers.

AFCA was “not persuaded by this”.

“The complainant now says it would have used different lawyers,” AFCA said. “This is likely being said with the benefit of hindsight”.

Gallagher explained it was not privy to legal cost accruals as the insurer appointed the lawyers, and it was not receiving billing or costs information and therefore could not update on the legal fees.

AFCA said this argument held up.

“The lawyers were chosen and engaged by the insurer, not the broker,” AFCA said. “The bills were being sent to the insurer and paid by it. The insurer would have been aware of the accrual of the fees and their approach to the limit, not the broker. There is no evidence to show the insurer was informing the broker of these fees. Therefore, I am not satisfied the broker owed a duty to the complainant to update it on its legal fees,” AFCA said.

AFCA did accept Gallagher breached its duty by not notifying the business of the limit during correspondence, which it said a “broker acting with reasonable care and skill would have”.

After the legal action began, the business emailed Gallagher saying it wanted to “clarify the lawyer’s fees will be taken care of by insurance company as they appointed them”. Gallagher advised that the insurer had confirmed legal costs will be covered. Its response included an excerpt of an email received from the insurer which said "I confirm that as things currently stand, (lawyer’s) fees will be covered under the Legal Expenses extension".

Gallagher should have notified the small business of the policy limit, AFCA said.

“There is no reference that the complainant was ever informed of the $50,000 limit in this correspondence or at any stage,” AFCA said.

“The small business asked Gallagher a specific question about the legal fees extension to which it responded by saying the legal costs were covered.

“No reference was made to the policy limit. In these circumstances I accept a broker, acting with reasonable care and skill, should have also notified the complainant of the limit,” the ombudsman said. “I do not accept that because the policy was given, that it should be taken the complainant understood the coverage and did not need to be informed.”

“This limit was plainly relevant to these circumstances.”

AFCA said there was no sign the small business owner had “turned his mind to this limit” and this was unsurprising given his attention was “dominated” by defending the actions of its larger business partner and this was “seriously impacting the complainant’s business”.

Gallagher had argued that given discussions at the time of renewal, the business should have been aware of the cap.

The insurer, which was not named in the ruling, apologised for not being explicit about the indemnity and agreed to pay out the remaining sum insured of $9000.

See the full ruling here.