A recent decision of the NSW Supreme Court, Prosperity v Strathearn, found that an insured had a valid gripe against its broker about the extent of advice provided as to the potential application of multiple excesses under its PI policy.  However, Prosperity didn’t recover damages because it could not establish that it had lost a substantial chance to arrange alternative cover. 

The case highlights some lesser-known repercussions of the disastrous collapse of the Westpoint Group.  Some financial planners, such as Prosperity, recommended investing in Westpoint to hundreds of their small-time investor clients.  When the investors suffered losses in the collapse and brought claims against Prosperity, a lot of people got a nasty surprise by the insurance cover in place.  The devil was in the applicable $40,000 excess per claim and the operation of the aggregation clause. 

Prosperity was facing ruin if it had to pay $40,000 per claim (amounting to about $2.5million), so to avoid an even worse outcome, Prosperity settled with its PI insurer, QBE, and paid $800,000 to a combined settlement pool of $4.25 million.  This allowed investors to recover 35c in the dollar – better than nothing.  $800,000 was about 20 times more than Prosperity thought it would have to pay in such a scenario.  DLA Piper (as we are now known!) acted for QBE and administered the settlement pool on behalf of QBE and Prosperity, led by Kerry Hogan-Ross, Insurance Flashlight’s editor.

Once the dust had settled, Prosperity took on its broker, Strathearn, in the Supreme Court to recover the $800,000 (less the $40,000 single excess).  Prosperity established that the broker had indeed failed to adequately advise it about the likely application of the aggregation clause.  But despite that breach, Prosperity could not show that it would have been any better off if it had been advised of the way in which the policy would operate. Prosperity failed to establish to the satisfaction of the Court that there had existed a ‘substantial prospect’ of obtaining a policy that would have provided more cover. In short, there was no evidence that any PI product generally available at the time would have operated any differently.  Nor was the Court satisfied that a reasonable broker could have negotiated such broader cover for Prosperity. Accordingly, the Supreme Court did not award damages to Prosperity against Strathearn, notwithstanding the finding of negligence.

To read Carolyn Coventry’s detailed commentary on Prosperity Advisers Pty Ltd & Anor v Secure Enterprises Pty Ltd t/as Strathearn Insurance Brokers Pty Ltd [2011] NSWSC 35, click here.

This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.

Posted by Andrew Sharpe on Friday 16 Sep 2011

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