Brokers beware – a $2.7 million lesson in disclosure

The recent $2.7 million Supreme Court decision in Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor [2012] QSC 109 confirms that an insurance broker owes a duty of care to its client to not only take reasonable steps to inquire as to the property to be insured, but to not misrepresent the property to a third party.

On 19 August 2010, the plaintiff’s bakery was destroyed by fire. He claimed against his insurance policy with Vero, which had been arranged by insurance broker OIB. The plaintiff’s previous insurance was held with Suncorp-Metway Insurance (Suncorp), which had insured the plaintiff’s business for several years. Suncorp acquired Vero in 2007 and certain information held by Suncorp was ‘pre-populated’ into Vero’s computer system.

Vero asserted that the way in which OIB had completed the online insurance application form conveyed a misrepresentation under section 28 of the Insurance Contracts Act 1984 (Act) about the amount of expanded polystyrene (EPS) in the internal walls. Vero claimed that if it had known the true amount of EPS, it would not have insured the premises.

Vero alleged that its system asked a specific question about EPS, to which the OIB employee selected zero percent when the correct answer was more than 33 percent.

OIB argued that because Vero was a Suncorp subsidiary, it knew (or should have known) the true extent of EPS through Suncorp’s records. Alternatively, OIB submitted that if the true extent of EPS was not known to Vero, the scope of a broker’s duty did not oblige the broker to conduct investigations. At its highest, the scope of OIB’s duty was to advise the plaintiff that the extent of EPS was a fact that might affect Vero’s decision.

The court held that OIB had a duty to inform itself about the construction of the building. The answer of zero percent was a misrepresentation and it amounted to a breach of the plaintiff’s duty of disclosure.

Although OIB submitted that the information provided pertained to an existing client, Suncorp had no reason at the time of the automated transition of pre-populated data to Vero to believe this, because it was told it was a new business and neither Suncorp nor Vero could have been expected to find archived information in the ordinary course of business.

Vero was entitled pursuant to section 28(3) of the Act to reduce its liability to nil. The court affirmed that a broker is not under a general duty to ensure that its client is impervious to loss or risk of loss through the absence of insurance. However, OIB had a duty to inquire about matters in respect of which it had not made adequate inquiries in previous years.

Reminders to the plaintiff about its duty of disclosure under the Act, coupled with the plaintiff’s knowledge of the building’s internal construction, did not relieve OIB of the duty to advise the plaintiff of something that OIB knew but the plaintiff did not. OIB owed the plaintiff a duty to inquire about these things.

In giving the answer ‘zero percent’, OIB failed to discharge its contractual duties to the plaintiff and also breached its duty of care under general law, leading to judgment for the plaintiff for more than $2.7 million, plus interest.

If you have any queries or you would like to discuss any matter related to the duty of disclosure under the Insurance Contracts Act, please contact Quentin Owen or Lana Head. The authors thank Sofie Edwards for her research.