Broker breaches: don’t forget causation!

By Gemma Dehn and Matthew Rofe

The Sydney and Newcastle Hall & Wilcox team – comprising Matt Curll, Albert Ponte and Jennifer Andrews – were pleased to successfully defend its insurance broker client in the recent Court of Appeal case – Flanagan v Bernasconi.^[1]

The case concerned a claim against a broker for alleged breach of duty and associated loss. The decision is a good reminder that even if a broker has arguably breached their duty, this does not necessarily mean they are responsible for the claimed loss. The claimant must also clearly establish that the breach caused the loss. We frequently see claims against a broker where a breach may have occurred but in fact the claim fails on causation.

The case also provides some useful commentary (in relation to a policy of insurance) on:

1. the operation of a defects exclusion clause; and
2. the practical operation of a ‘reasonable precautions’ clause.

Facts

The appellant, Dr Flanagan, owned a property which boasted a 5-lane, 25 metre pool. The First Respondent, Robert Bernasconi (Broker) was Dr Flanagan’s insurance broker.

From 2003 to 2012, Dr Flanagan’s property was insured with CGU, which included cover for accidental damage to the pool.

At the end of the 2012 policy period, the CGU policy premiums nearly doubled. The Broker subsequently went to market and recommended Dr Flanagan obtain an alternative policy with Vero. However, it was alleged the Broker failed to notice or draw Dr Flanagan’s attention to an exclusion clause in the policy for events involving swimming pools, which did not exist in the CGU policy she had held for the nine years prior.

In late 2012, Dr Flanagan emptied the pool, suspecting a leak. While the pool was empty, Dr Flanagan was advised – by email by her estranged husband – of the risk that damage may occur to the pool if she left it empty, without attending to the cause of the leak. Despite this, Dr Flanagan failed to take further action and in March 2013, while the pool was empty, it partially lifted out of the ground, causing one of the walls of the pool to collapse (Loss).

It later transpired that the cause of the leak was a malfunctioning hydrostatic valve (Valve). The Loss occurred because the pool was left empty with the malfunctioning Valve for well over six months without any attempt to address the cause of the leak.

Dr Flanagan made a claim with Vero for the Loss. The claim was declined as the policy excluded cover for loss or damage caused by the pool (or any area around the pool) lifting (pool exclusion).

Dr Flanagan then pursued a claim against the Broker for her Loss.

Findings

The Broker accepted, and it was not in dispute, that by failing to notice or advise Dr Flanagan on the pool exclusion in the Vero policy, he had breached his duty of care. However, the Broker disputed that his actions had caused Dr Flanagan’s loss. He argued that the Loss would not have been covered by an alternative policy (even without a pool exclusion) because, either:

1. the failure of the Valve was caused by a defect and as such the Loss would have been excluded by the standard defects exclusion; or
2. the standard ‘reasonable precautions’ exclusion would have been triggered, because when Dr Flanagan first became aware of the pool leak, she was warned of the risk of leaving the pool empty but did not take steps to prevent the risk of the pool lifting.

In assessing causation, the court examined whether the Loss would have been covered if she had continued cover with either CGU or another hypothetical insurer.

The court concluded that the claim would have been excluded by reason of either:

1. a ‘defects’ exclusion. While Dr Flanagan argued that the Valve was not defective because it had previously operated for some time (suggesting the Valve failure was due to wear and tear), the Court disagreed. It found that there was no requirement for a defect to be immediately present in an item and in any event, there was no evidence to suggest the defect was not initially present; and
2. a ‘reasonable precautions’ exclusion. The Court said that this was because Dr Flanagan failed to take any steps to investigate the cause of the leak and left the pool empty for several months in circumstances where she knew of the risk of not doing so, because her estranged husband had warned her by email.

Takeaways

1. One of an insurance broker’s key duties is to arrange insurance that is appropriate for their individual client’s needs. To do this, a broker should make sure they fully understand their client’s insurance needs and arrange appropriate insurance to reflect those needs.
2. Sometimes broking errors occur and claims are made, but this does not always mean that the error has caused the loss claimed. If a claim arises, it is important to carefully analyse whether the breach of duty has actually caused the uninsured or alleged loss. If it hasn’t, then the broker may not be responsible for the uninsured loss (despite their breach).
3. It is worth adding there was a suggestion that the broker had offered to walk Dr Flanagan through the policy documents and point out the relevant exclusions, but Dr Flanagan declined the advice. The broker did not retain any file notes and was not accepted on this point. This is a salient risk-management lesson for a broker.
4. While reasonable precautions exclusions are difficult to engage, they can be relied on where conduct is sufficiently unreasonable.
5. A defect does not necessarily need to be immediately present to be categorised as a defect.

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[1] [2023] NSWCA 150.