Insurance brokers – Duty to Enquire

Posted on October 19th, 2015

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by Tony Cavanagh

Tony Cavanagh is a Director at Mullane & Lindsay in Newcastle and specialises in commercial dispute resolution & litigation, and employment law.

In Swansson v Harrison [2014] VSC 118, a terminally ill plaintiff sued his broker for a negligent failure to advise at the time the relevant (life) policy was applied for. In short, S had an existing life policy but its premium increased significantly, so he sought advice from his regular broker about alternatives. The broker recommended another policy. An application for it was made and accepted; and the old policy was then cancelled. Soon afterwards the plaintiff was diagnosed with a terminal illness. The old policy was no longer available and the new insurer declined to pay on the basis that there had been a non disclosure of a medical condition.

Relevantly, shortly prior to meeting the broker, S had an appointment with his GP about stomach pain. That was disclosed in the application form. However between making the application, and the insurer accepting it and issuing the new policy, the plaintiff was referred for further medical investigation. Those investigations ultimately led to the diagnosis.

At trial, all parties accepted that the insurer was entitled not to pay under the policy. The real issue was whether the broker should have given different or other advice – with the result that S would have kept his old policy which, it was agreed, would have resulted in a significant cash payment to him.

The broker successfully defended allegations of failing to advise S that he had an ongoing duty of disclosure; or that the new policy could be avoided within the first 3 years (under a specific provision of the Insurance Contracts Act 1984); or of ‘trivialising’ S’s recent medical consultation with the GP, when assisting to complete the application form for the new policy.

However S succeeded on an allegation that the broker failed to make further enquiry about S’s (medical) condition, prior to cancelling the old policy. The Court concluded that because a skilled broker would have been aware of the risk that the new insurer could avoid the policy within the first 3 years (but the old insurer could not); because the broker knew the client had seen a doctor only 2 days prior to completing the application form and of the possibility that the condition was unresolved; and because making a further enquiry would have been a simple and inexpensive step to take; a failure to do so was a breach of the broker’s duty to his client. The Court also held Mr S partly responsible, for failing to positively update the broker of the changed medical advice prior to cancellation of the old policy; and this reduced damages. However the broker was ultimately held liable for damages of just less than $750,000.00, plus interest.

The case demonstrates the breadth of the duty owed by a professional advisor, such as a broker, to his or her clients. The duty does not necessarily end when the immediate task at hand is finalised. A failure to discharge that duty can expose the advisor to quite significant claims for damages.

Tony Cavanagh is a Director at Mullane & Lindsay, and practises extensively in Commercial and other Litigation and Employment Law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle office.

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