Brokers’ PI: a salient reminder of insurance brokers’ duties
The recent Australian appeal case of Horsell International Pty Ltd v Divetwo Pty Ltd serves as a useful reminder of the scope of coverage of a liability policy, the effect of a criminality exclusion and the duties of insurance brokers. The Australian law on these matters is substantively the same as the English law position and a number of English judgments were cited.
A boat owned by the insured, a scuba diving business, collided with a fishing boat, injuring Mr Lane who was using the fishing boat. At the time of the collision, the dive boat was being used for recreational, as opposed to dive, use. Mr Lane commenced proceedings against the dive company and its sole director (who was navigating the dive vessel). The dive company’s liability insurers, Liberty Mutual, and brokers, Horsell, were joined to the proceedings. The director pleaded guilty to criminal charges relating to his navigation of the dive boat.
Mr Lane’s claim was settled by consent judgment against the dive company and its director leaving over whether there was coverage under the liability policy and, if not, whether the broker was liable.
The trial judge held that the policy did not cover the accident because the dive boat was not being used “in connection with the Insured’s business”. However, the first instance judge found that the broker was liable for failing to advise of deficiencies in cover.
The broker appealed, contending that the claim was covered under the policy and, alternatively, even if the claim was not covered, the lack of cover was not due to the broker’s negligence.
The dive company had taken out and renewed on successive occasions an insurance policy, known as the PADI Asia Pacific Watertight Liability Insurance Programme, developed by Horsell to cover “liability of water craft up to 12 metres in length”. The insuring clause provided:
“all sums which the Insured shall become legally liable to pay by way of compensation as a result of a Claim(s) both first made against the Insured and notified to [Liberty] during the Period of Insurance for Injury and/or Damage in connection with the Insured’s Business”.
The “Insured’s Business” was described as “Scuba Diving”, which was itself defined.
The policy excluded “any alleged or actual fraudulent, dishonest, malicious, wilful or criminal act or omission of the Insured...”.
The dive company was told by the broker that the policy provided adequate public liability insurance and that no other boat insurance was needed.
There were 2 main issues before the Appeal Court in relation to the cover:
- Whether the director’s criminal conviction invoked the exclusion clause for criminal acts.
- Whether the loss was “in connection with the Insured’s Business”.
In respect of the first issue, the Appeal Court found that the exclusion clause did not apply because the words "fraudulent, dishonest, malicious, wilful" required that 'criminal' conduct be intentional or a conscious wrongdoing on the part of the Insured, following a previous decision of the NSW Court of Appeal (Australian Aviation underwriting Pty Ltd v Henry (1988)).
The Appeal Court had little difficulty in upholding that an insurer is not required to cover a deliberate loss but that it was required to cover a negligent loss unless covered by a clearly identified exclusion.
However, in respect of the second issue, the Appeal Court found that, at the time of the accident, the boat was being used for recreational purposes and therefore did not fall within the ambit of the professional liability policy. The insured sought to contend that the purpose of the trip was to thank his guests for promoting his business and business referrals but the court viewed this as “concocted”.
Accordingly, the Appeal Court held that there was no cover and turned to the fallback claim against the broker. The judge recognised that a broker is under a positive duty to ensure that the policy is suitable for the insured’s needs. Here, there was a representation by the broker that the vessel was covered if it was up to 12m in length and the insured was not advised that the policy only covered business liabilities.
Therefore, the broker was found to be both negligent and in breach of contract for its failure to explain properly the limited nature of the insurance cover it arranged. Had the dive company received advice to that effect, it would have taken out additional insurance to cover recreational activities. Furthermore, it was the broker’s obligation to ensure that the insured understood that the policy only covered it for matters covered by, or reasonably incidental to, the insuring clause.
Although an Australian judgment, this case should serve as a salient reminder to all brokers that they are under a positive duty to ensure that the insured understands the insurance cover and that the cover is suitable for the insured’s needs. In doing the latter, the broker should ensure that they inquire as to why the policy is needed and should not make assumptions about the scope of the coverage required; comprehensive instructions from the insured and a written record of the insured’s instructions are the key to avoiding a future dispute on the matter. Here, the broker should have ensured that the insured was aware that the cover was for business purposes only.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.