Summaries of Claims against Insurance Brokers

The following case study summaries are actual Professional Indemnity (PI) claims against Insurance Brokers.

What the summaries provide is an insight as to the type of problems that can occur and why it is important to be diligent with your insurance programme.

In some instances, the broker has been found against for Professional negligence and in some cases the broker only had a certain degree of responsibility and wasn’t entirely at fault.

We often receive responses from business owners saying that if the Insurance Broker were responsible for the rejection of their claim, they will sue the broker.

The following are such events, however what most people fail to consider when making such statements is that they first need to go through the initial  fight with the insurance company to arrive at the final rejection of their claim, and then separately go through a second legal fight with another insurance company who is holding the Insurance Broker’s Professional Indemnity cover.

Real cost of claiming against a broker’s PI cover.

How long would you guess at this whole process taking, 2 years to 5 years, or more?

How many thousands in legal expenses will you need to fund until such time as your win (assuming you do win) provides any funds?

What about the original insurance loss and the impact on your business.  If a severe impact then can your business survive the total time taken to collect damages, for example two to five years?

Whilst we cannot publicly disclose the source and names of those involved in the following summary case studies for privacy reasons, they did occur and if validating the source is imperative to you, then please contact us and we will work towards providing the validity requested.

Property Insurance – Construction of Building and Exclusions

A client insured his property through a trusted broker for many years and both the client and the broker believed that the property did not contain asbestos. On renewal, the broker changed insurers from one that did not have an asbestos exclusion to one that did, without highlighting the exclusion to the client.

The property was destroyed by fire and is was found that there was asbestos in the roof, therefore the insurer declined the claim, due to the asbestos exclusion.

The client maintained, although they were of the mistaken belief that the property did not contain asbestos the broker had not warned them of the risks of changing the cover to an insurer with an asbestos exclusion.

The client’s lawyer argued that an asbestos exclusion is a significant enough exclusion to introduce into a property cover and the broker should have been aware of the implications and therefore should have highlighted its existence to the insured.

Construction Liability – Exclusions and Sub Limits

The clients Public Liability policy included a “Construction Exclusion” for any liability for personal injury arising out of the “Insured erecting, demolishing, altering or adding to a building or structure, if the value of the erection, demolition, alteration or addition when finished will be more than $1 million”.

The broker did not bring the exclusion to the attention of the insured nor bring to the underwriter’s attention that the client was involved in a $2 million renovation project.

A third party contractor was injured during the course of the renovation project and a claim lodged against the client. The client’s insurer denied Liability on the basis that the value of works exceeded the $1 million limit.

Liability – Sub Contractors

The broker placed the Public Liability insurance for a client with an insurer. The insurer’s underwriting risk appetite changed over time and 2 renewals prior to the claim, introduced an exclusion to the policy wording that excluded “bodily injury to hired labour and/or sub-contractors”.

The broker had not advised the client of the existence of the exclusion nor that cover was readily availability. The broker had also not picked up on the fact that it was clear from the client’s annual declaration that they were making substantial payments to sub-contractors.

A claim for significant bodily injury was denied as the injured party was a sub-contractor.

Public Liability – Business Description and Exclusions

The insured operated a restaurant and the broker placed a Public Liability policy using the information provided by the client. The policy also contained a “Nightclub Exclusion”. The insured also operated as a Nightclub when the restaurant was closed and provided entertainment after hours.

When a claim was lodged against the insured for an injury which occurred whilst the insured was operating as a Nightclub, the insurer declined the claim. The insured maintained that the broker failed to make reasonable enquiries of his business and failed to warn them of the risk of being uninsured for this activity.

The broker was unable to produce evidence of making enquiries of the insured’s business to establish that it was operating only as a restaurant and did not bring the Nightclub Exclusion to the insured’s attention. The broker had a duty to the insured to make such enquiries and not just rely on answers from the business owner, who was not aware of implications of operating a Nightclub and the risk of this activity being uninsured.

Directors & Officers – Offerings Exclusion

The client’s annual revenue had grown to over $200 million and the broker was advised by the insurer that the Management Liability cover had to be moved to a stand-alone D & O (Directors & Officers), EPL (Employment Practices Liability), Crime & Statutory Liability insurance policies. The broker and the insurer were also aware the client intended to list on the ASX in the near future.

The insurer issued D & O terms that contained several exclusions by endorsement including an “Offerings Exclusion” which the broker did not understand and had not seen before. The broker believed this was a standard exclusion and bound cover on that basis. An offerings exclusion excludes claims in relation to “any public offerings and capital raisings”.

During the policy period the client issued a prospectus document as part of their listing, raising substantial funds from public investors.

A short time later the business had a substantial loss and issued a dire profit warning through the ASX. The Directors received several claims from shareholders alleging misrepresentations within the prospectus document and breach of disclosure conditions.

The insurer declined indemnity due to the Offerings Exclusion. The broker was unaware the exclusion could be removed or amended following negotiation with the underwriter or a separate prospectus liability policy arranged.

ISR – Disclosure and Construction

An ISR (Industrial Special Risks) renewal was completed online by a junior broker using information contained on record in the client’s file. The broker had not visited the premises and was not aware from the information contained in the file, that the building contained EPS (Expanded Polystyrene).

The online system defaulted to nil however requires the broker to provide a range of percentages in relation to EPS contained in the building (eg up to 10%, 30%, 50%).

The client’s property subsequently suffered extensive fire damage and the claim was denied by the Insurer due to non-disclosure of over 50% EPS in the building. Had the insurer been aware of the EPS they would have declined the risk.

The broker failed to make adequate enquiries of the client’s business and matters that were relevant to the Insurer’s decision whether to insure the risk. In this case the insurer would have declined the risk and the client would have placed cover with an alternative insurer willing to underwriter risks containing EPS.

ISR and Sub-Limits

A large industrial property was insured by an ISR (Industrial Special Risks) for a $50million limit any one loss and an Accidental Damage (AD) sub-limit of $300,000.  The broker did not explain the limitations of the policy in relation to the AD sub-limit or that a higher sub-limit up to $2million was available for additional premium.

When the property suffered extensive damage due to an unexplained roof collapse the insurer determined the policy could only make a payment under the AD sub-limit, restricting the claim payout to the AD sub-limit $300,000.

Policy Wordings Amendments – Instructions to the Insurer

A broker identified, during the renewal process, that the insurers public liability policy has a standard E & O (Errors & Omissions) endorsement containing an absolute design exclusion.

An endorsement was negotiated with the insurer by the broker to include cover for the client’s design exposure “whilst pursuant to the supply of the Insured’s products or services” irrespective of whether a fee was being charged or not.

A claim involving a design error was made on the policy and the insurer declined the claim highlighting the absolute design exclusion and denied that an agreement had been reached to amend the standard E & O endorsement.

The broker could not produce sufficient written evidence to the contrary and the insurer maintained they had not received clear instructions from the broker in relation to the alleged amended endorsement, therefore the standard endorsement was applied to the claim.

Policy Wordings – Instructions from the client

The broker negotiated 2 options for the client’s commercial and industrial properties for which the client praised the broker. Option A offered a broader cover than Option B but was more expensive and the client acknowledged that both options offered broader cover than the cover arranged by their previous broker. Option B was accepted and cover bound.

When a claim for fire damage to a building was denied due to an exclusion contained in Option B, that did not appear in Option A, the client denied that they had instructed the broker to place cover on the basis of Option B. The broker was unable to produce any written instructions or file notes to substantiate the instructions from the client.

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If you require any assistance with reviewing your business cover then we provide a

1. Free Small Business Review (no requirement to purchase any insurance coverage).
2. For larger organisations we offer a review of existing coverage and policy pricing as verification to management or board, that coverage is as expected and premium pricing is within an acceptable market competitive range.