By Mark Darwin and Laurence Terret
A policyholder claim for negligence against its insurance broker has failed on the issue of causation even though it proved the broker had been negligent. The decision in Flanagan v Bernasconi is an important reminder that to succeed in actions for professional negligence, it is not sufficient to simply prove a breach of the broker’s duty. The policyholder must also prove that, had the broker fulfilled its duty, it would not have suffered the loss. Usually (as it was in this case) that means proving that an alternative policy was available and at a premium the policyholder would have been prepared to pay, that the terms of that alternative policy would have covered the claim and the amount that the policyholder would have received under the terms of the alternative policy.
The plaintiff owned a property which included a 25-metre swimming pool and surrounding pool enclosure. In 2013, the pool (which was empty) and enclosure were damaged when the pool lifted out of the ground during a heavy rain event. The damage was not covered by the plaintiff’s homeowners’ insurance policy with Vero, which contained a pool exclusion. The plaintiff issued proceedings against the defendant, her insurance broker, who had arranged the policy containing the pool exclusion.
The duty owed by insurance brokers to their clients was common ground between the parties and the judgment contains a useful summary of those duties, which were summarised in Horsell International. These duties include:
- to exercise all reasonable care and skill, both in advising the client and in obtaining appropriate insurance cover;
- if what is required cannot be obtained, to report in what respects the cover has failed and seek alternative instructions;
- to draw to the client’s attention any unusual or onerous terms and explain their nature and effect; and
- in the case of ambiguous instructions, to clarify the instructions and draw attention to the consequences of them. While the broker’s duty does not include expounding the law, it does extend to pointing out legal pitfalls.
On the facts of the case, it was common ground that the defendant did not advise the plaintiff of the existence and effect of the pool exclusion, or that other insurers had offered cover which did not contain the exclusion. After the defendant was cross-examined, the defence conceded that the duty owed to the plaintiff had been breached.
In an interesting aside, the defendant led affidavit evidence from other clients on his usual course of conduct in providing services, the admissibility of which was in issue on the basis that such evidence did not have “significant probative value”. The Court held that these affidavits established relevant similarities between the type of services the defendant provided to the plaintiff and how he went about providing them to other clients. Therefore, the evidence was admissible, having significant probative value given what was in issue, but given that the defendant conceded breach, this evidence was ultimately not determinative.
Notwithstanding the defendant accepted that it breached its duty, the plaintiff nevertheless failed on causation. In considering the question of causation, the Court applied the reasoning of the High Court that whether “one event caused or resulted from another is determined in legal proceedings by applying common sense criteria and not philosophical or scientific theories of causation”.
On the facts, the Court was satisfied that on the balance of probabilities, the plaintiff would have taken out insurance cover which did not contain the pool exclusion, likely a policy offered by CGU. So far so good for the plaintiff.
However, that was not the end of the causation question – she also had to establish that she would have actually been covered under the terms of the alternative policy such as that which CGU offered.
The defence argued that provisions in the alternative policy – specifically the “defects” and “reasonable precautions” provisions – would have meant that the claim would not have been covered under the alternative policy. In this regard, the defence put forward the opinion of an expert who considered that liability for such a claim would be declined. The Court rejected that evidence, holding that whether a policy provides cover in particular circumstances does not depend on expert evidence of what an insurer would have done, or the Court guessing or forming its own view about how the insurer would behave. Rather, it depends on the proper construction of the policy and its operation in those circumstances. Ultimately, based on the application of the facts to the construction of the alternative policy, the Court found that both the defects and reasonable precautions provisions would have defeated a hypothetical claim made under the alternative policy.
Even though the plaintiff failed on the causation hurdle, the Court nevertheless went on to consider whether the damages claimed could be established. The Court confirmed that the measure of damages is the difference between the position the plaintiff was actually in and the position that she would have been in the counterfactual that had the complained conduct not occurred The burden was on the plaintiff to prove the damage with as much precision as the subject matter reasonably permitted.
The Court found that, based on the reinstatement clause in the alternative policy, the entire cost of rebuilding would not have been covered, as the damage to the pool did not necessitate the demolition of the entire enclosure (notwithstanding this is what actually occurred). The Court also noted that the enclosure had not been built in accordance with building specifications and standards, so the costs required for compliance with those standards would not have been covered. The Court concluded that, “at most”, the terms of the policy meant that insurer would have paid only part of the cost of repairing the damaged pool and defective enclosure.
The Court also found that certain heads of damages were too remote, including the cost of removal of the debris left in the pool as a result of the plaintiff’s choice to demolish the enclosure, and the legal costs incurred in pursuing a challenge to the insurer’s refusal of the claim to the Financial Ombudsman Service. In the latter case, although that claim would not have been pursued had the plaintiff held the alternative policy, the pursuit of this challenge was not reasonably foreseeable, given the nature of the exclusion.
Claims against insurance brokers (or any professional for that matter) require all elements of the claim to be satisfied in order to succeed. It is not enough to just prove negligence – the plaintiff must prove the negligence caused loss by demonstrating how things would have been different if properly advised.
In respect of damages, the terms of the alternative policy should be considered carefully to ascertain as far as possible the quantum of a hypothetical successful claim, in terms of what would have been recoverable under the alternative policy. There is a distinction between losses suffered as a result of an incident and the losses that can be recovered from a negligent broker.
 Flanagan v Bernasconi  NSWSC 381
  NSWSC 381
  NSWCA 368; 18 ANZ Insurance Cases 61-991
 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603;  HCA 38
 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638;  HCA 20 at 643.