When things don’t go swimmingly: NSW Court of Appeal finds broker’s negligence did not cause policyholder’s loss
In the recent decision of Flanagan v Bernasconi  NSWCA 150, the New South Wales Court of Appeal dismissed an appeal brought by a policyholder in respect of a claim against her insurance broker alleging professional negligence. Although the broker had breached his duty of care, the Court of Appeal found that the policyholder’s claim ultimately failed on causation, because the policyholder had not established that cover would have been available for the underlying loss under an alternative policy.
The unanimous decision highlights the importance of carefully considering causation and loss evidence when assessing prospects and exposure for professional negligence claims. It also reinforces the position that the policyholder bears the onus in broker negligence claims of proving that cover would have been available for the underlying loss if the broker had not been negligent.
The policyholder and her former-husband were joint owners of a property that included a 5-lane swimming pool. Between 2003 and 2012, the residential property was covered by a homeowners policy issued by CGU. In March 2012, on the recommendation from her broker, the policyholder took out a homeowners insurance policy with Vero. The recommendation was made principally due to an increase in premium at renewal for the expiring policy.
Unbeknown to the policyholder at the time, the Vero policy included an exclusion for “Events involving swimming pools including…the pool lifting or any area around the pool lifting” (Pool Exclusion Clause).
In 2013, after noticing a large spike in her water bill, the policyholder arranged for the pool to be emptied to investigate a possible leak. The pool, however, remained empty without the leak being investigated or repaired. Following heavy rain in January and March, the pool lifted out of the ground causing extensive damage to the pool itself and to the surrounding structures. The policyholder made a claim on the Vero policy; however, it was declined on account of the Pool Exclusion Clause.
The policyholder then commenced proceedings against the insurance broker alleging negligence. During the hearing, the broker conceded that he breached his duty of care owed to the policyholder by failing to advise her of the relevant exclusions.
First instance decision
The primary judge dismissed the policyholder’s claim and found that, even if policyholder obtained an alternative policy that did not include the Pool Exclusion Clause (which was available in the market), the policyholder’s claim would not have been covered in any event because of the presence of clauses in any alternative policy that would have:
- excluded cover for “a defect in an item” (Defects Exclusion Clause); and
- required the policyholder to take reasonable precautions to prevent a claim (Reasonable Precautions Clause).
The primary judge held that both clauses would have operated to exclude cover for the policyholder’s loss had an alternative policy been obtained.
The policyholder appealed the primary judgment asserting that the primary judge erred in concluding that cover would not have been available under any alternative policy.
In dismissing the appeal,the Court found that the Defects Exclusion Clause would have applied on its terms in light of the expert evidence served on the cause of the loss.
The Court also held that the policyholder had failed to establish that she would have satisfied her obligations for the purpose of the Reasonable Precautions Clause. That was because she was on notice of the risk of the pool lifting and had various means available to address that risk that were not difficult, costly or beyond her means. In leaving the pool empty in those circumstances, the Court held that the policyholder acted with indifference to the risk and decided not to address it for her own financial reasons.
Importantly, the Court also noted that the policyholder bore the onus of establishing that, but for the broker’s breach of duty, she would have taken out a policy that would have covered her claim. As part of that onus, she was required to establish that the relevant exclusion clauses in any alternative policy did not apply. As she did not meet that onus in this case, her claim failed.
This case serves as a reminder that even where an insurance broker may face a risk of liability for breach of duty being established against him or her in a professional negligence claim, the policyholder still must prove that the breach of duty caused it loss. In many cases, that will require the policyholder to prove by evidence that some alternative form of cover would have been available, and would have been taken up, if the broker had not breached the relevant duty of care. That in turn requires close consideration of the terms of any alternative cover identified in the evidence to determine whether cover would have been available for the underlying loss, and if so, to what extent.