Federal Court finds insurance brokers liable for failing to offer clients the right additional insurances.
On 19 February 2020 the Federal Court of Australia handed down its decision in PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq) [2020] FCA 137. The judge found that the defendant insurance broker (Broker) was negligent in not advising the plaintiff, a computer retailing client of the Broker (PCCG), as to obtaining an extension to its insurance for copyright infringement. As a consequence, the court ordered the Broker pay PCCG damages of $250,000, together with interest and court costs.
The background
PCCG operated an online business selling and distributing computer hardware, accessories and software. As part of its offerings, it packaged gaming computers using a Microsoft Windows licensed operating system.
From 2009 to 2016, PCCG engaged the Broker to act as its insurance broker, and one person at the Broker particularly had the carriage of PCCG’s work. Importantly, this person was engaged because he was an experienced insurance broker with knowledge of the IT industry.
The Broker arranged insurance typical for that type of business, within the individual broker’s understanding of PCCG’s business. Although the individual broker was aware of risk generally in the IT industry for copyright infringement, he did not understand PCCG’s business (as a retailer) to be as exposed as, say, a software engineer.
As is typical, once a suitable insurance policy was put in place, then it was renewed annually without much substantial change. While the same representative of PCCG and the individual broker met annually to discuss the policy, PCCG did not engage in the minutiae of the policies, and the discussions were mainly high level. The Broker advised PCCG on what it saw as the most significant and likely risks.
At points, PCCG raised significant topical risks that it perceived and instructed the Broker to obtain additional extensions of insurance for certain of those risks.
Notably, PCCG did not instruct the Broker specifically to obtain insurance for copyright infringement.
What went wrong?
It turned out that PCCG had been using a cheaper version of a software licence intended for use for refurbished computers and only available to Microsoft approved re-furbishers. The commercial rationale appears to be that as refurbished machines were sold at a lower price point, Microsoft made its discounted software more accessible for those re-furbishers.
PCCG however was not an approved re-furbisher, and only sold new machines, and had unintentionally but inappropriately used some 4,000 of these cheaper licences. Microsoft claimed against PCCG. Despite initially believing that insurance was available to meet the Microsoft claim, in fact only PCCG’s legal costs in the defence of the matter (ultimately settled) were covered. The quantum of the settlement amount was not.
PCCG settled Microsoft’s claim for $250,000.
PCCG engaged a new insurance broker, who made a new series of recommendations for insurance, including (albeit, with the benefit of hindsight!) professional indemnity coverage with extensions for unintentional breach of copyright. Importantly, these policies were commonly available during the relevant times.
Federal Court findings
The court found the Broker had failed to exercise its duty to PCCG with reasonable care and skill, and consequently had breached its insurance retainer and duty of care.
The court further found:
- PCCG’s loss was foreseeable;
- PCCG’s actions in settling the claim by Microsoft were reasonable and PCCG had sensibly mitigated its loss; and
- PCCG was not contributorily negligent by not being more active in identifying the relevant risk to the Broker.
Practical lessons learned
It is difficult not to feel some empathy for the Broker. However, it is important to note that an insurance broker’s role is inextricably linked to probability and risk, including risk that is not immediately perceptible, but which is a tail risk in a statistical sense.
The main takeaway points are that:
- the individual insurance broker charged with PCCG’s work did not have a full understanding of PCCG’s business, and had not understood PCCG had a higher risk profile than typical for a retailer. Reading the summation of the evidence, it is an important reminder for all professionals who provide advice that:
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- you must understand your client’s business to be truly effective;
- familiarity can be a double-edged sword. After six or seven years of meeting and renewing the same policy with some occasional extensions to meet occasional, topical concerns of the representative of PCCG, the individual broker probably stopped asking the right questions and looking at the matter afresh at each renewal. No professional advisor with an established relationship with a client likes to waste that client’s time, or to offend that client by appearing ignorant of the client’s affairs, so it is natural behaviour for the advisor over time to minimise those probing, back to basics questions and to make assumptions. The reality is though, to be truly competent, professional advisors must always ask those repetitive, probing questions to obtain a true understanding of the client’s position; and
- it is the duty of the advisor to make itself fully informed;
- checklists or forms designed to be used with a new client are useful way to ensure a robust process – they can prompt the sort of deep probing which is essential;
- risk is always out there, so mechanisms are needed to counteract that risk as best possible. For example, with the case discussed above, a regular, internal audit by another senior broker of PCCG’s file would be a good policy; and
- every professional advisor, including insurance brokers, needs to maintain professional negligence insurance. It is likely the Broker was itself insured, and the matter was litigated with reference to its own insurer!
Our anecdotal experience
In the last year we have acted for a client in a very similar circumstance to PCCG in the case discussed above, with the exception that our client specifically instructed its broker to obtain insurance for a certain risk. In that matter the broker failed to insure the risk, the risk arose, our client had to pay a third party hundreds of thousands of dollars in damages, and ultimately our client claimed against its insurance broker, who sensibly settled the claim with reference to our client’s damages.
If you require any assistance in regard to an insurance claim, your coverage under a policy or general liability, please contact the Clifford Gouldson Litigation + Dispute Resolution team.
An afterthought
For insurance professionals, we highly recommend you take the time to read the case which is available here.
The case is (in our respectful opinion) a very clear and exceptionally well written judgement that is accessible to a layperson. The case provides an excellent insight to the standard of care owed to clients by insurance professionals, and the approach and considerations of the courts, and could stimulate a productive review of current policies and procedures.
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