Kotku Bread Pty Ltd v Vero Insurance Ltd and Anor  QSC 109
Risk Management is defined where any organization has an obligation to identify and assess foreseeable hazards, and take steps to eliminate or control the risk. It is the process of identifying the risk, assessing the risk then elimination or controlling the risk. The employer or organization is responsible to provide a safe working environment and take reasonable care to identify hazards to both people and the business, and introduce effective measures to mitigate or control the risk. To ensure protection, you have various duties both before you enter into a new insurance contract as well as at renewal or whenever your risk changes. Failure to observe these duties could lead to the rejection or diminution of an otherwise proper claim. The broker provides an integral service to ensure a smooth and successful outcome is achieved following an insured loss.
Throughout the claims process, your broker can handle everything for you. The broker is a trusted advisor ready to communicate with the client. When something goes wrong, the broker is the client’s point of contact. Having a personal relationship with clients means that you can feel comfortable calling your broker and knowing they’ll fix your problem. Buying your insurance online or from a large, unknown entity means you don’t have that reliable point of contact. With a broker, you always know who to call, and it’s easy to speak to your broker to explain what caused the loss. The broker is an experienced professional who understands the ins and outs of the claims process.
Earlier this year a Brisbane-based insurance broker found itself on the receiving end of a $2.7m settlement after Kotku Bread Pty Ltd sued Vero Insurance and Brisbane brokerage 786 International Pty Ltd, trading as Osman Insurance Brokers. So, what can the broker community learn from this?
In 2010 the premises of the Kotku bakery were destroyed by a fire and it was revealed that the premises had been constructed using a large quantity of highly flammable ‘Expanded Polystyrene’ (EPS). During the underwriting process, the broker had used Suncorp/Vero’s online system to assess the risk and determine whether to issue a new policy to Kotku. The online form included a question relevant to the use of EPS in the internal construction of Kotku’s business premises.
The broker selected ‘zero per cent’ as the answer which indicated that the premises had no EPS component. In fact, more than two-thirds of Kotku’s premises comprised EPS. Vero denied the claim on the grounds of a relevant non-disclosure and/or misrepresentation. Kotku commenced proceedings against Vero seeking indemnity under the policy, and against the broker for negligence and breach of contract.
In court, Justice Applegarth found that Kotku’s answer to the EPS question amounted to a relevant non-disclosure and misrepresentation with the effect that Vero was entitled to reduce its liability under the policy to nil. Justice Applegarth also found that the broker had breached its duty of care to, and contractual retainer with, Kotku.
On the question of whether the broker breached its duty of care and contractual retainer, Justice Applegarth said that on the facts of this case, the broker’s failure to make enquiries about the presence of EPS, or to inspect Kotku’s premises, constituted a breach of the broker’s duty. The court held that, even if the EPS question had not been asked as part of the underwriting process, the broker still would have breached its duty of care and contractual obligations to Kotku because the importance of EPS risks was so well-known in the insurance industry.
Damages of $2,706,300 were awarded against Osman Insurance Brokers with Justice Applegarth explaining this was a conservative estimate of how much a premium containing fire risk would have cost if the underwriter had known about the EPS panelling.
Brokers are more than just conduits between an insurer and the insured – they have positive obligations to their client to ensure that relevant risks that they know of are accounted for, and to ask appropriate questions of an insured so that adequate information is provided to the insurer in proposal forms. Brokers must remember that there is potential for them to be ‘on the hook’ of liability if things go wrong in the event of a contentious claim. In this case the failure to ask simple questions of an insured in relation to a known risk meant that the broker failed to properly fulfil their duty, with serious consequences.
Brokers are a relatively easy target for joinder to proceedings by an insured who is denied cover, even if only as a secondary target to an insurer.
It is very important that brokers keep adequate records of all stages in the process of obtaining a policy. In the absence of documents to support their position, brokers can be left in a “he said/she said” position where a claim is made or threatened by an insured. Contemporaneous documentary evidence is usually the best way to refute a claim or threatened claim by an insured. Brokers should also remain up to date with risks in the areas that they place cover, particularly as the Kotku Bread decision highlights that a broker has a responsibility to bring those risks to the insured’s attention. Brokers should also remind their clients in each transaction of their disclosure obligations and be careful not to make assumptions about an insured’s business or premises.