PROFESSIONALISM / AFCA Case Study
THE PI VS ML CONUNDRUM
This determination involved an allegation that an insurance broker had breached its duty of care to the complainant by recommending an unsuitable professional indemnity (PI) policy that excluded noncompensatory fines. The complainant claimed the broker should have recommended a management liability (ML) policy that would have covered this loss.
Key lessons
In considering such complaints: • AFCA considers whether a broker recommended the most suitable policy based on the circumstance at the relevant time, and not with the benefit of hindsight; and • AFCA considers the various policy benefits and likely end result for the complainant. In this case, superior benefits identified in the PI policy and potential gaps in the ML policy for professional risks led AFCA to the view that the broker had made the right recommendation.
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Background facts
The complainant held a PI policy that had been arranged by the insurance broker. The complainant lodged a claim in relation to a breach of section 29(4)(b) of the Residential Tenancies Act (WA), and the complainant had pleaded guilty and been fined $18,000 and been ordered to pay $684.15 in costs. The insurer denied the claim on several grounds, which included that there was no ‘claim’ as defined in the policy, and the policy had an exclusion for noncompensatory fines or penalties. The complainant submitted that the broker had breached its duty of care and caused the complainant to suffer loss because the broker should have arranged a policy that would cover the type of incident above. The complainant identified an ML policy they say should have been brought to their attention, that would have covered the loss i.e., the broker should have presented all options.
The broker’s case
The broker submitted that it had not breached its duty of care to the complainant and was not liable for the complainant’s loss because:
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its conduct should not be reviewed with the benefit of hindsight, and it is the circumstances at the relevant time that should be considered. The relevant time would have been when the policy was due for renewal. This is because the relevant claim occurred whilst that policy was in force; the PI policy was appropriate for the complainant’s needs and superior to the management liability policy. This was because the PI policy: o was tailored for the real estate industry in which the complainant operated; o had an automatic reinstatement of the aggregate limit of liability if exhausted by claims, which could be relevant if the business had suffered significant losses; o provided seven years of run-off cover at no extra premium (which was useful because it would allow the business to continue being protected if, at any point, it decided to cease offering services), whereas the ML policy only provided one-two years at 100 percent or 150 percent of the premium; and o provided cyber/privacy claims costs and expenses; and the insurer had accepted a previous claim under the professional indemnity policy for almost the exact same circumstances.
The AFCA decision
AFCA held that: • the information provided was not enough to show that the ML policy was more suitable for the complainant as: o several sections of the ML policy contained exclusions for claims involving professional services creating potential gaps. AFCA concluded that any professional business would want
BY MARK RADFORD
Principal, Radford Lawyers
to ensure they were adequately covered for professional services risks; and o the fines were incurred as part of the complainant’s obligation to properly lodge bonds for their clients, and it was possible for the professional services exclusion to be applicable under the Statutory Liability cover, which was the only one that could potentially respond to the type of claim; • as the complainant had been indemnified previously for a claim made in almost the exact same circumstances, AFCA did not accept that a broker exercising reasonable care and skill should be expected to: o identify that this acceptance was made in error; and o recommend the complainant change his policy to the ML policy solely to account for the possibility of the same error not happening again. Especially as it was not clear that the ML policy would have covered this type of claim; • even if it was accepted that the broker should have presented all the options to the complainant, it would not have been reasonable to expect the broker’s services to end there and instead, a recommendation as to the most suitable policy should be made, as was done in this case; • on the available information, a broker exercising reasonable care and skill would not have recommended the ML policy instead of the PI policy, especially given the superior benefits noted above. Accordingly, AFCA held that the complainant had failed to show that the broker had breached its duty of care towards the complainant and was not liable to compensate the complainant for the losses incurred due to the rejected claim.
