A good reminder about an insurance broker’s duty to ‘ask and advise’
On 19 February 2020, the Federal Court of Australia delivered its decision in PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq)  FCA 137, finding that an insurance broker breached its retainer and was negligent for failing to properly advise its client of its potential exposure to copyright infringement.
PC Case Gear (PCCG) conducted an online business selling and distributing computer hardware, accessories and software. CCG installed Microsoft’s Windows operating systems into its customers’ custom-made computers. It purchased Windows licenses from a third-party distributor.
Between 2009 and 2016, PCCG engaged Instrat Insurance Brokers (Instrat) as its insurance broker to prepare and provide annual insurance plans and procure for PCCG the cover described in those plans. During that period, PCCG held a combined professional indemnity and public liability policy procured through Instrat, which expressly excluded cover for copyright infringement.
In January 2016, Microsoft alleged a breach of copyright by PCCG in relation to the Windows licenses. The dispute between Microsoft and PCCG was settled for the sum of $250,000. Whilst PCCG’s insurer covered the cost of defending the claim under the relevant policy, it did not cover the settlement sum by virtue of the copyright infringement exclusion.
PCCG subsequently sued Instrat, alleging a failure by Instrat to advise PCCG of the availability of cover for copyright infringement. Instrat denied liability on the basis that it did not breach its duties and, in the alternative, that PCCG’s loss was not caused by its Instrat’s conduct, or was otherwise not reasonably foreseeable by the parties.
Drawing from a long list of well-established authorities, Justice Anderson found in relation to the scope of an insurance broker’s duty of care that:
- a broker must use reasonable skill and care to ascertain the client’s needs by instructions or otherwise. Unless the scope of the broker’s role is not otherwise confined, this requires the broker to become sufficiently familiar with the client’s business;
- the process of obtaining instructions will involve taking reasonable care to inform the client as to the availability of certain forms of insurance cover to ensure that the client considers these matters and then provides instructions as to the types and levels of cover that it wishes to secure;
- a broker is not required to explain in detail the effect of each term of an insurance contract. However, the broker should draw the client’s attention to any onerous or unusual terms, and should explain to the client the nature and effect of those terms; and
- the broker must provide the client with “advice and assistance to enable it to make an informed decision about its insurance requirements, and to instruct [the broker] about what insurance cover to procure on its behalf”.
Justice Anderson found that Instrate did not explain to PCCG either what copyright cover was, and its relevance to PCCG’s business, or that PCCG was uninsured for the risk of copyright infringement. The insurance plans did, however, list a range of classes of insurance for which PCCG was uninsured, which included an exclusion for copyright infringement.
His Honour held that Instrat breached its duties to PCGG by failing to:
- make adequate enquiries to understand the nature of the risks that PCCG’s business was exposed to;
- appreciate that PCCG’s business involved the reselling of software that PCCG installed on computers which were then on-sold to its customers;
- identify the major exposure of PCCG’s business to the risk of copyright infringement. This followed from, amongst other features of its business, PCCG installing Windows on computers that it subsequently sold online; and
- expressly raise with PCCG that it was not covered for the risk of copyright infringement, being a risk that was expressly excluded in the “Uninsured Exposures” section of each insurance plan.
Justice Anderson held that there is no absolute rule that an insurance broker must walk through a list of exemptions from cover with the insured: Elilade Pty Ltd v Nonpareil Pty Ltd  FCA 909; 124 FCR 1 per Mansfield J. The exact scope and nature of the duty is determined by the facts of each case, which in this case resulting in the finding that Instrat was in breach of its retainer and was negligent by failing to properly advise PCCG of its exposure to copyright infringement to enable PCCG to make an informed decision regarding that exposure.
There was no dispute that sufficient insurance cover for inadvertent breaches of copyright was readily available as the time of renewal. Justice Anderson found that, had that risk had been raised by Instrat, then, on the balance of probabilities, PCCG would have taken out relevant insurance cover.
Another issue was whether the settlement by PCCG of the Microsoft claim was reasonable in the circumstances. Justice Anderson found that it was, as it was clear from the evidence that PCCG had infringed Microsoft’s copyright, that Microsoft was initially seeking damages of over $700,000 and the statutory defence in s 115(3) of the Copyright Act was inherently uncertain.
PCCG was accordingly entitled to damages of $250,000 from Instrat.
This case serves as a reminder to insurance brokers that their duty to exercise reasonable care and skill includes a duty to be properly informed about the nature of their clients’ businesses in order to advise their clients about the types and levels of cover available. Detailed enquiry as to the client’s processes and a full understanding of how the business provides its goods or services is the only sure way to ensure that the broker understands the client’s risk profile from an insurance perspective.
Additionally, the case reiterates that, whilst there is no absolute rule that an insurance broker must walk through a list of exemptions from cover with the insured, it is dangerous not to do so, and they should bring to their client’s attention any onerous or unusual terms and should explain to their client the nature and effect of those terms.