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Determination
Case number | 1007605 |
Financial firm | Steadfast IRS Pty Limited |
Case number: 1007605 6 June 2024
The complainant is a business and is represented by its director. Any reference to the complainant will include the business and the director.
The complainant appointed the financial firm as its broker (broker) in August 2018. The broker arranged management liability insurance for the business through two insurers, DL and later AG.
The complainant lodged a claim with AG for indemnity after receiving a notice of litigation from Mr C, a former shareholder, and employee of the complainant. AG denied indemnity on the basis that the matter was previously known to the complainant and was not disclosed to AG.
The complainant says the broker should have notified the insurers of the potential to claim as the complainant had made disclosures to the broker.
Yes. The broker has breached its duty to the complainant.
Did the broker’s breach cause the complainant’s loss?
No. The information exchanged does not establish the broker’s breach of its duty of care, caused the complainant’s loss.
No. The broker is not required to pay non-financial loss compensation in the circumstances of this complaint.
The outcome is fair because it is consistent with the information exchanged and the rights and obligations of the parties.
This determination is in favour of the broker.
The broker is not required to take any further action regarding this complaint.
There has been a full exchange of all material information relied on for the purposes of this determination and each party has had the opportunity to address any issues raised by the other.
This complaint has been determined based on what is fair in all the circumstances, having regard to the relevant law, good industry practice, codes of practice and previous decisions where applicable.
A panel has determined this complaint. The panel consists of the panel chair ombudsman, a representative with extensive experience in the insurance and broking industry and a representative with extensive experience in consumer claims.
While the parties have raised numerous issues in their submissions, for the purposes of this determination commentary has been restricted to those issues considered directly relevant to the outcome only.
The complainant engaged the broker in August 2018, to obtain management liability insurance for the complainant. The broker obtained a policy through DL for the period 31 August 2018 to 31 August 2019. The broker then arranged a policy through AG for 2019 to 2021.
Mr C and Mrs C were shareholders of the complainant.
Mr C Mrs C ceased to be registered shareholders pursuant to a 2016 share sale agreement, Mr C then became an employee of the business. The complainant terminated Mr C’s employment on 8 August 2018. It notified the broker at the time (SC) of potential legal action by Mr C, in relation to his termination, which SC conveyed to D.
On 29 May 2019, the complainant received requests for information from Mrs C’s legal representatives regarding the transfer of shares via another shareholder under the 2016 share sale agreement.
On 23 July 2019, the complainant met with SC and says it informed SC of potential legal action against it, by Mr C. The complainant also says it advised SC of the potential legal action by Mrs C.
On 31 August 2019, the insurer on risk changed from DL to AG, for the policy period 31 August 2019 to 31 August 2020.
By email and letter dated 17 August 2020, representatives of Mr C, advised representatives of the complainant of a proposed statement of claim for recovery of damage due to issues with the 2016 share sale agreement.
On 19 August 2020, the complainant notified the broker (SG) of ‘circumstances that may give rise to a claim’ after receiving these legal notices from Mr C’s legal representatives.
On 21 August 2020, SG notified AG (as the insurer on risk at the time) of the matter.
It will become apparent from what follows, within this determination, that the panel is of the view that there were two quite separate potential actions against the complainant;
There is also a third potential action against the complainant, being that detailed within the abovementioned draft statement of claim from Mr C’s lawyers. That potential claim, while not naming Mrs C as a party, indirectly disclosed the circumstances giving rise to the risk of potential legal action by Mrs C regarding the share transfer.
There is no information exchanged to confirm that the potential legal action by Mr C, in relation to either his termination as an employee, or as envisaged in the draft statement of claim, ever eventuated.
The exchanged information confirms that the potential legal action by Mrs C, did eventuate.
Insurance brokers have a duty to exercise reasonable care and skill in the performance of their duties. The relevant standard is that expected of a competent and experienced professional insurance broker.
In addition, brokers provide services to their clients under an Australian Financial Services Licence (AFSL). This means they are required to do all things necessary to ensure those services are provided efficiently, honestly and fairly. It also requires the broker to act in the best interests of their clients.
In considering whether a broker has acted reasonably, AFCA considers the requirements set out in the Insurance Brokers Code of Practice (Code), as well as good industry practice.
In pursuing a claim for compensation against a broker, a complainant must generally establish the following:
the broker breached a duty owed; and
the loss claimed was caused by that breach of duty.
The complainant says the broker breached its duty of care by:
failing to keep records of discussions it had with them,
Mr C and Mrs C purchased shares in the business as trustees for their family trust. The reference to one of these ex-shareholders should include both as they were trustees acting on behalf of the trust under which the shares were purchased,
neglecting to inform the insurers of potential claims when the complainant provided this information to them,
the broker failed to correct the answers in the renewal proposal forms for AG despite being aware of potential matters which could give rise to a claim,
they are not experts in insurance matters and relied on the broker to guide them if an error was made, and
while SC notified DL about the potential legal action, the broker failed to notify AG of the same when the insurer changed in 2019.
The broker does not agree with the complainant’s allegations. It says:
the complainant only notified SC and SG of potential legal action by Mr C, not Mrs C
the brokers notified the complainant about the need to disclose any known matters which may give rise to a claim, which the complainant failed to do
given the 29 May 2019 letter from Mrs C’s lawyers, the complainant would have been aware:
> Mrs C had instructed lawyers,
> the lawyers were investigating the contract for the sale of shares; and
> there was a clear risk a claim might result from those investigations.
given the above, the complainant should have notified the broker of the potential claim
the claim giving rise to the loss was brought by legal action from Mrs C, not Mr C, of which they had no prior knowledge about, and therefore could not inform the insurers.
The complainant bears the onus to disclose all known matters to the broker who acts as its agent. The broker is then required to relay the necessary information to the insurers.
The exchanged material confirms that the complainant was provided multiple renewal emails by the broker which highlighted the importance of disclosing matters that may give rise to a claim, as the policies were on a ‘claims made’ basis.
The panel accepts that the broker was made aware in August 2018, of the potential legal action by Mr C, in relation to his termination.
The panel also accepts that the broker (SC) notified DL of the potential claim, based on which DL agreed to accept the complainant’s risk commencing 31 August 2019.
The panel accepts the broker was provided further details of the potential legal action by Mr C in relation to his termination, when the complainant met with SC on 23 July 2019. The complainant maintains that the broker was also advised at this meeting of the potential legal action involving Mrs C, in relation to the 2016 share sale agreement. The broker denies this.
However, there is no contemporaneous information to show what discussions the complainant had with SC in their face to face meeting on 23 July 2019. The complainant says SC took comprehensive notes throughout the meeting. An email from SC to the complainant dated 29 July 2019, supports a meeting took place, however, the email does not convey what the nature of the discussions were in the meeting.
The broker says SC no longer works for the brokerage and it was unable to locate any notes relating to this discussion. It also says the broker does not keep file notes of communication with its clients.
The panel is satisfied that the broker’s failure to keep notes of its discussions with the complainant is a breach of its duty as it does not meet the standards required of a professional in these circumstances.
The broker’s obligation is not simply to provide advice regarding the best insurance for the complainant. The broker’s obligation extends well beyond the correct insurance policy and includes appropriate advice regarding disclosure obligations concerning potential claims.
It may be that the advice provided by the broker regarding insurance policies and/or advice concerning disclosure of potential claims was correct, but we cannot know as there is no contemporaneous record of the discussions.
Further, having reviewed all exchanged information, despite the lack of contemporaneous confirmation (notes from the broker), the panel is prepared to accept that at the 23 July 2019 meeting, the complainant also disclosed to the broker the potential legal action by Mrs C.
The panel notes that the complainant had previously made fairly prompt disclosure of known issues. In those circumstances, it seems implausible to the panel that the complainant would not have disclosed the 29 May 2019 letters from Mrs C’s legal representatives, to SC, less than two months after receiving them and at a meeting to discuss ‘Management Liability’.
In the absence of any information to refute this disclosure, the panel accepts that, on the balance of probabilities, the complainants did disclose the matter regarding Mrs C, to SC.
The panel is also of the view that having received notice of the legal letters concerning Mrs C, the broker’s failure to advise the complainant it needed to disclose the letters to both DL and AG, supports a finding that the broker breached its duty to the complainant.
The panel is not satisfied that the complainant having ticked ‘no’ in response to the question about knowledge of circumstances giving rise to a claim, relieves the broker of its obligations.
The panel accepts that it is an established aspect of the broker’s duty, when told of circumstances that might give rise to a claim, to be fully on top of the proposed notification and make sure that the right information is relayed to the right place in the right form.
The panel is satisfied that the broker breached its obligations to the complainant.
2.2 Did the broker’s breach cause the complainant’s loss?
The complainant has the onus of establishing that the broker’s breach caused it to suffer a loss.
The complainant maintains all known matters were disclosed to the broker SC and then SG when it became aware of them. The complainant says the broker should have notified the insurers on risk regardless of whether the disclosure questions were correctly answered.
The complainant also argues it was not made aware of the exclusions applicable to its circumstances.
The complainant says it has suffered a loss of $416,194, which is made up of a $200,000 settlement to Mrs C and $166,194 in legal costs. It maintains the actions of the broker led to the loss due to the broker’s failure to disclose matters to the insurer.
The panel notes that this loss said to be suffered by the complainant, concerns payments made in respect of the legal action initiated by Mrs C. The loss claimed by the complainant does not relate to any claim or potential claim by Mr C.
The exchanged material confirms that on 21 August 2020, AG was notified of circumstances that may give rise to a future claim under the policy. Those circumstances were detailed in a letter (dated 17 August 2020) from the complainant’s legal representatives, that attached a letter from Mr C’s representatives and draft Statement of Claim that detailed a potential claim by Mr C, against the complainant and others.
The claim made therein relates, amongst other things, to share transfers.
On 5 November 2020, AG notified the complainant in writing, that it denied the claim on the basis the complainant did not disclose a matter which may give rise to a claim at prior renewals or upon becoming aware after the renewal.
There is no evidence that Mr C ever commenced legal proceedings or that the complainant suffered any loss as a result of Mr C’s potential legal proceedings.
Mrs C commenced legal action against the complainant, Mr C and others, on 18 November 2020.
It is understood that the resolution of Mrs C’s legal action included payment by the complainant of $416,194 (referred to above).
There is no evidence of a claim being made by the complainant against either insurer for loss arising from the legal action of Mrs C.
The result is that the complainant has not demonstrated a loss which arose from the brokers breach of its duty.
The panel notes the broker’s submission that the complainant has not requested AG to review the denial and there are no other decisions made by AG. So, the panel can only consider the reasons for the denial as provided to date.
Further, the broker argues, even if the complainant had notified the broker (as the panel accepted it did) and the broker then notified DL in 2019, of the circumstances giving rise to Mrs C’s claim, DL would not have provided insurance cover for the claim by Mrs C, because of the following exclusion:
4.10 Major Shareholder
Any claim brought by or on behalf of a shareholder:
irrespective of the time of the wrongful act, employment practice breach or other conduct.
It is unnecessary to reach a conclusion on this issue as the complainant has not made a claim against DL.
Further, the panel is satisfied that it would be difficult to determine whether DL would have accepted the claim as this has not been determined through DL’s processes. There is insufficient information regarding this issue to reach an accurate conclusion as to what decision DL would have made.
Finally, the panel is satisfied that if AG had been told of the facts and circumstances of a potential (as it was then) claim by Mrs C, prior to inception of the policy, it would not have agreed to provide cover for the complainant, regarding Mrs C’s potential claim.
The panel accepts the broker’s assertion that as at 2018, no insurer incepting a new ‘claims made and notified’ type policy, including of the type relevant here, would have provided cover for circumstances that were known to the complainant prior to the date of the insurer coming on risk.
The exchanged material does not contain any information to challenge this.
There is no evidence that the complainant has suffered a loss of opportunity to obtain insurance elsewhere, because there is no evidence that any insurer would have offered cover in the circumstances known prior to inception.
Therefore, the panel does not accept the complainant has established the broker’s breach has caused it to suffer a loss.
No. While AFCA does have the capacity to award non- financial loss compensation, the panel is not satisfied that it should be awarded in this complaint.
Under the AFCA Rules, we may award compensation (capped at $5,400) for non-financial loss where a complainant has suffered an unusual degree or extent of physical inconvenience, time taken to resolve the situation or interference with their expectation of enjoyment or peace of mind.
AFCA’s approach to non-financial loss compensation is that it will normally only be awarded to individuals (‘natural persons’).
Importantly, in this complaint, the complainant is a company with shareholders and directors.
The panel is satisfied that the circumstances of this complaint do not require the broker to pay non-financial loss compensation.
The outcome is fair because it is consistent with the information exchanged and the rights and obligations of the parties.
AFCA has determined this complaint based on what is fair in all the circumstances, having regard to:
the legal principles
applicable industry codes or guidance
good industry practice
previous decisions of AFCA or its predecessor schemes (which are not binding).
The respective parties have completed a full exchange of the relevant information, and each party has had the opportunity to address any issues raised. We have reviewed and considered all the information the parties have provided.
While the parties have raised several issues in their submissions, we have restricted this determination to the issues that are relevant to the outcome.
AFCA is not a court of law. We do not have the power to take or test evidence on oath, or to require third parties to give evidence.
When we assess complaints, we consider:
available documents
the recollections of the parties
all relevant circumstances.
We give more weight to documents created at the time the events occurred. If there are no relevant documents, we will decide what most likely occurred based on the available information.
If there are conflicting recollections and these are evenly weighted, we may find that a claim cannot be established.
