Australia: Insurance brokers successfully defend $10 million negligence claim

No duty of care found to have been owed; causation of loss not established

After a chemical fire, a company and director found they held no insurance policy which would respond to their claim to recover outlays of over $10 million relating to the clean-up. They commenced proceedings against insurance brokers, alleging negligence in the handling of their insurance affairs. However, a Queensland Supreme Court ruling entered judgment for the brokers, holding that the plaintiffs were not owed any duty of care by those brokers and also that the plaintiffs had failed to prove that any breach of the tortious duty they had argued could have caused them loss.

Key Points

• While an insurance broker is obliged to take reasonable care in providing broking services to the entity with which it contracts, only in extraordinary circumstances would the broker have a duty of care to a related third party to investigate and provide advice on their insurance requirements.
• Liability insurance policies which provided indemnity for an insured's liability to pay compensation in respect of claims made against the insured could not respond to the remediation costs incurred by the insured in respect of their own property.

Background

The plaintiffs, a company and a director of a chemical manufacturing company Binary Industries Pty Ltd, owned land in Narangba, Queensland on which stood a chemical factory operated by Binary Industries Pty Ltd. On 25 August 2005, the factory and its contents were substantially destroyed by fire. Queensland Fire and Rescue Services attended to fight the fire, dousing the property with a large quantity of water which became contaminated with chemicals. The water overflowed the bunds and dams on the land and escaped to surrounding State-owned properties and a creek, severely contaminating them.

The Environmental Protection Agency prosecuted the plaintiffs as owners of the land, issuing a formal notice and obtaining Court orders under the Environmental Protection Act 1994 for the remediation of the contamination. Over the following years, the plaintiffs have paid well over $10 million in remediation costs.

After the fire, the plaintiffs' property insurers effectively paid the plaintiffs the full amount for which they were insured, $3 million. The same insurance company refused to pay on a liability policy in the name of Binary Industries Pty Ltd as insured under a clause which promised to indemnify the insured "against their liability to pay compensation for and/or arising out of injury or damage".

The plaintiffs sued the insurance brokers who had arranged liability insurance for Binary Industries to recover their legal costs of the EPA prosecution and the remediation costs the plaintiffs had paid. They alleged the brokers knew, or ought to have made sufficient enquiries to discover, that the plaintiffs owned the land and were exposed to the EPA prosecution and remediation costs, such that the brokers ought to have had them named as insureds or interested parties on Binary Industries' liability policy. The plaintiffs otherwise argued that the brokers should have obtained an Industrial Special Risks (ISR) policy for the plaintiffs which would have provided cover against disposal of debris and the costs of reinstatement of damaged property.

Concurrently, the plaintiffs sued the State of Queensland, alleging the Queensland Fire and Rescue Service had fought the fire negligently, in particular by application of an excess of water which had contaminated the land and had led to the remediation orders. The plaintiffs argued that the proper approach to the fire on this site was to simply let it burn itself out whilst being vigilant to extinguish any spread of the fire outside the site.

Case

The plaintiffs' Claim was heard by Justice Dalton in October and November 2013. Thynne & Macartney represented the insurance brokers, Marsh Pty Ltd and its authorised representative Otago Pty Ltd.

In advance of the hearing, by interlocutory application on behalf of the brokers by Thynne & Macartney, the Supreme Court had determined that the remediation and legal costs incurred by the plaintiffs for their own property were not capable of being indemnified under the liability policy or the ISR policy as they contended. Please click here to find a report on that application. The plaintiffs appealed that interlocutory decision to the Court of Appeal and were substantively unsuccessful, although the Court of Appeal declined to make any rulings or declarations in relation to the ISR and set aside those which had been made by the primary applications judge. Please click on the link to download a copy of the decision. Undeterred, the plaintiffs applied unsuccessfully to the High Court of Australia for leave to appeal the appeal decision.

Justice Dalton delivered her decision on 1 October 2014. Please click on the link to download a copy of the judgment.

The plaintiffs' claim in negligence failed at the first hurdle, with the judge finding the insurance brokers did not owe them a duty of care¹. The evidence before the Court was that the brokers had been engaged to obtain $10 million public liability insurance for the chemical manufacturing company operating on the Narangba site at a time when the company's usual insurance brokers had been unable to do so. Indeed, the company had been operating uninsured.

Given the difficult state of the market for such high risk activities as chemical manufacture, the insurance brokers looked to the London market, where primary cover of $2 million and excess cover of $8 million was found for the company, Binary Industries Pty Ltd. The brokers prepared a Services Agreement between Binary Industries and Marsh, whereby the broking services provided were stated to be services to Binary Industries. Although the Services Agreement was not signed on behalf of Binary Industries, after receiving it, the director of the company (subsequently a plaintiff to these proceedings) gave instructions to the brokers to effect cover, which was done.

There was thereafter only limited contact between the brokers and the insured, save for at renewal. The brokers' authorised representative tried to secure more business through this contact, proposing to source Directors and Officers Liability insurance for the company, but the director did not respond to requests for information to place such a policy. At the time of the chemical fire, the only policy placed by the brokers was the public liability policy in favour of Binary Industries. However, the plaintiffs had insurance cover (including property cover in respect of the site) as placed by their "usual" insurance brokers, and the defendant insurance brokers were aware that those usual brokers were attending to the plaintiffs' general insurance needs.

The plaintiffs, by their cross-examination, sought to assert that had the brokers made general rather than focussed inquires about the insurance cover required, they would have discovered that the plaintiffs had no liability insurance cover for the site. The authorised representative's evidence was that no such inquiries were made because it was given a specific task, that is, to obtain a particular type of insurance for a particular entity, which it did. It was on this basis that the trial judge had "no doubt" that the insurance brokers owed a duty of care to Binary Industries and that they had fulfilled the terms of their retainer².

The plaintiffs claimed, however, that the communications that the brokers had with the director of Binary Industries gave rise to a duty to investigate the relationship between the company and the plaintiffs, by which they would have realised that the insurance as placed by their usual insurance brokers was inadequate to cover the situation where the plaintiffs became subject to remediate the site. The judge rejected this contention and found that no such duty was owed³. Her Honour found that the defendant brokers had no reason to think that the cover as placed by the plaintiffs' usual brokers was not adequate.

Further, the judge found that it could not be said the plaintiffs had any reliance on the defendant brokers to place insurance on the behalf other than to obtain the liability policy for Binary Industries. Indeed, the evidence clearly was that the plaintiffs had rejected the defendant brokers' attempts to assume a wider role. Although the plaintiffs' representatives referred the judge to cases where a duty was owed by a broker to a company with which it had no contract⁴, Her Honour distinguished those cases on the basis of their "extraordinary" circumstances, and found that there was no case where a third party in an analogous position to the plaintiffs had been found to be owed a duty of care by brokers who were acting pursuant to a contract with someone else.

The trial judge further found that the plaintiffs had failed to prove that any breach of the tortious duty they had argued could have caused them loss. Her Honour did so on several separate bases, including the following⁵:

• The trial judge was not convinced, given the history of dilatory responses to requests for information from the defendant brokers, that had the authorised representative made the "focussed enquiries" about the adequacy of their insurance cover as alleged, the plaintiffs would have co-operated at all;
• The trial judge was unable to conclude that had the defendant brokers made recommendations to the plaintiffs about their insurance cover needs, the plaintiffs would have followed that advice, preferring their "usual" insurance brokers' advice on such matters and otherwise being prepared to take "risks" such as allowing the chemical manufacturing company to operate uninsured for almost twelve months before the defendant brokers placed the liability policy it;
• The trial judge relied on expert evidence led on behalf of the defendant brokers to find that no insurer would have provided ISR cover of the type the plaintiffs contended for while their existing property cover for the site remained in place, such existing cover already providing for removal of debris and extra costs of reinstatement.

Notwithstanding these findings which defeated the plaintiffs' claim, the trial judge considered in further detail the potential application of the ISR policy to the facts of the case, and in particular a "construction problem" presented by the ISR policy terms, being whether chemical residue in the concrete, soil and ground-water of the plaintiffs' land could be "debris", which could then be "removed", within the meaning of the policy. This was in response to the plaintiffs' contention that provisions under the ISR policy would have responded to at least partly indemnify them in respect of the costs spent remediating the land. Expert evidence at trial was to the effect that the removal of debris was something different from the bio-remediation or decontamination of the plaintiffs' land or ground-water. The trial judge stated that this evidence tended to confirm her view that the ordinary English usage of the term is that chemicals soaking into the soil and ground-water does not render it "debris" or that those chemicals somehow can be considered "debris" separate from the soil and ground-water into which it has soaked.

In any case, the trial judge accepted the arguments put on behalf of the defendant brokers that the ISR policy the plaintiffs contended ought to have been obtained on their behalf would only have covered the chemical "stock" which had escaped by reason of the fire and the fire-fighting tactics of the Queensland Fire and Rescue Service as debris which could then be "removed" if the plaintiffs had insured such stock. Again, the trial judge could not find on the evidence before her that the plaintiffs would have insured that stock, even if they had bought an ISR policy.

In relation to the concurrent Fire Case brought by the plaintiffs, the trial judge found that the Service had a duty of care to the plaintiffs to take reasonable care not to damage their property when acting to combat a fire and hazardous materials emergency on the plaintiffs' land. Her Honour found that the Service had a reasonable fire-fighting strategy available to it, being to let the fire burn itself out while applying water to areas which could have exploded and caused serious damage and harm to persons and property, but that the Service had deviated from that strategy in a manner that was unreasonable, by applying excess water to other areas over an extended period of time.

Notwithstanding this finding, however, Justice Dalton found that the Service was immune from suit under the Fire and Rescue Service Act (Qld) 1990 which provides protection for acts done in response to a fire or hazardous materials emergency of the sort the fire officers confronted at the site.

Implications

The judgment is positive for the insurance industry as it reinforces that the obligations of an insurance broker are limited to providing broking services to its clients and not to third parties that might have a connection to those clients, except in the most extraordinary of circumstances. It also provides an Australian context for the management of pollution and contamination risks presented by hazardous industries.

Footnotes

¹The findings in respect of the Insurance Case can be found at paragraphs 274 and following of the judgment.

²Hamcor Pty Ltd & Anor v State of Qld & Ors [2014] QSC 224 at 294 and 295

³Ibid at 295

⁴For example, Punjab National Bank v de Boinville [1992] 3 All ER 104; BP plc v AON Ltd [2006] 1 All ER (Comm) 789

⁵Hamcor Pty Ltd & Anor v State of Qld & Ors Op.Cit at paragraphs 318 and following

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