Instrat's breaches
111 In my opinion, Instrat breached its duties in contract and tort to exercise reasonable skill and care in three key respects.
112 First, Mr Prior, on behalf of Instrat, failed to make adequate enquiries to understand the nature of the risks to which PCCG's business was exposed. He failed to do so upon commencement of the insurance retainer in 2009, and did not rectify that understanding in subsequent years. Although Mr Prior conducted some investigation into the nature of PCCG's business, including by touring the business' premises and surveying PCCG's website, it ultimately appears that he did not ask sufficient questions of Mr Cameron to obtain a thorough understanding of the nature of the business.
113 In this regard, the evidence establishes that Mr Prior was unaware of various aspects of PCCG's business. For instance, he did not know the type of advice that was being provided by PCCG at its helpdesk. Nor did Mr Prior appreciate that PCCG was also providing IT&T consulting and IT network support. However, critically for current purposes, Mr Prior failed to appreciate that PCCG's business involved the reselling of software that PCCG installed on computers that were then sold to its customers.
114 Second, Instrat failed to sufficiently identify and characterise the exposure of PCCG's business to the risk of copyright infringement. Consistent with Mr Parnell's expert evidence, and contrary to that of Mr Ellison, I accept that an insurance broker in the position of Instrat, exercising reasonable care and diligence, would have identified the major exposure of PCCG's business to the risk of copyright infringement. This followed from, amongst other features of its business, PCCG installing Windows on computers that it subsequently sold online.
115 The risk of copyright infringement was increased by PCCG purchasing Windows from third party resellers and not directly from Microsoft. I accordingly accept Mr Parnell's expert evidence that the purchase of software from third parties heightens the risk of potential exposure to a claim for copyright infringement. This is because PCCG does not control, or have awareness of, all of the steps between the initial sale by Microsoft to the third party reseller and the on-sale of that software to PCCG. This risk may be further aggravated where the third party reseller is based overseas (such as the supplier of the unauthorised licences in the present case).
116 With this knowledge, an insurance broker in the position of Mr Prior, exercising reasonable skill and care, would have made further enquiries of the nature of PCCG's business. Had Mr Prior sufficiently investigated the nature of PCCG's business, and asked the questions that a reasonably competent broker in his position would have done, my view is that he would have identified that PCCG's business was one that was exposed to a major risk of a claim for copyright infringement.
117 Third, Instrat failed to raise with PCCG the fact that PCCG was not covered for the risk of copyright infringement, being a risk that was expressly excluded in the "Uninsured Exposers" section of each insurance plan. It is useful to explain this failure by reference to previous case law.
118 McNealy v The Pennine Insurance Co Ltd [1978] 2 Lloyd's Rep 18 (McNealy), a decision of the Court of Appeal of England and Wales, involved a plaintiff, Mr McNealy, who was a property repairer and a part-time musician. Mr McNealy sued, relevantly, two insurance brokers for damages after his comprehensive insurance policy did not cover him in relation to injuries that he and a passenger suffered in a car accident. He had instructed the brokers to effect a comprehensive insurance policy on his car. The insurer's underwriting instructions, of which the brokers were aware, set out a list of risks which were not acceptable, including that of whole or part-time musicians. Mr McNealy, in reply to a question from one of the brokers as to his occupation, said that he was a property repairer. After Mr McNealy was involved in the car accident, the insurance company - The Pennine Insurance Co Ltd - denied liability on the basis that the plaintiff was a part-time musician, which had not been disclosed to the insurer.
119 The Court of Appeal held that the insurance brokers were liable to indemnify the plaintiff in circumstances where the brokers knew that cover for a part-time musician was excluded, and this was a material fact that ought to have been disclosed to the insurer. Lord Denning MR, writing the lead judgment, expressed his conclusion (at 20) as follows:
It was clearly the duty of the broker to use all reasonable care to see that the assured, Mr. McNealy was properly covered. An obvious step in the course of doing his duty would have been to say to Mr. McNealy: The Pennine will not cover you if you are a full or part-time musician, a bookmaker, a jockey, or anything to do with racing. He ought to have gone through the whole list with Mr. McNealy and said: You are not going to be accepted if you are one of these categories because, if you are, the insurance company can get out of it. I am afraid the broker did not do his duty. He did not go through that list with Mr. McNealy at all. He simply asked him what was his occupation, and Mr. McNealy said "property repairer". The broker ought to have gone on and asked: "Have you ever been or are you a full or part-time musician?", and the answer would certainly have been "Yes". On the answer being "Yes", the broker should have said: It is no good trying to insure with the Pennine. You had better go to one of the companies who are ready to insure full or part-time musicians, but that will no doubt be at a higher premium. The broker did not do that at all. In other words, he did not do all that was reasonable to see that Mr. McNealy was properly covered.
This passage was quoted by Ipp JA, with Mason P and Hodgson JA agreeing, in Caldwell at [104].
120 Shaw LJ expressed (at 21) similar reasons to Lord Denning:
… it was within the knowledge of the broker that there were numerous categories and classes of persons who were not acceptable to the intended insurers. One of them was part-time musicians. It seems to me that this was so special a category that specific questions should have been put to the proposer to see whether he fell within that or any other unacceptable category. There would have been no great difficulty or trouble in doing this because the broker need only have read the list of unacceptable activities to the proposed assured, and by this simple means he could have safeguarded the interests of the proposer whose agent he was.
121 Waller LJ likewise held the following (at 21):
It was clearly [the broker's] duty, in my view, to make as certain as he reasonably could that the plaintiff, Mr. McNealy, came within the categories acceptable to the Pennine Insurance Co., and the only way in which he could properly do that, in my opinion, was to show him the list and probably go through it with him to make sure that the plaintiff understood that he had to be outside those particular risks, because they are headed "Risks not acceptable", and there is a reminder to brokers that anybody falling "within any of the undernoted categories . . . is not acceptable". If he had done that, it is in my view unlikely that Mr. McNealy would not have said: "I do play the guitar part-time", and the whole of the facts would have come out.
122 The approach in McNealy has been applied by Australian courts. In Provincial Insurance, Kirby P, in the course of summarising the duties of an insurance broker, stated the following (at 556):
5. It is especially important that an insurance broker should go through with the insured the list of exceptions in the policy secured. This should be done in order to afford the insured, who may fall within an exception, the opportunity to request deletion of the exception upon payment of a higher premium or cover with another insurer: McNealy v Pennine Insurance Co Ltd [1978] 2 Lloyd's Rep 18 at 20 …
123 This passage of Kirby P was subsequently applied in Elilade in a decision by Mansfield J in this Court. The applicant insured in Elilade - Elilade Pty Ltd - claimed that its insurance broker and agent - Nonpareil Pty Ltd - negligently failed to advise it about procuring flood insurance after severe rainstorms in Katherine in the Northern Territory had caused damage to stock, plant and premises of the applicant's business. The broker had not expressly raised with the insured that the proposed insurance cover did not have flood insurance.
124 The broker in Elilade accepted that it owed the insured a duty in contract and tort to take reasonable care in the performance of its function. However, the broker relevantly argued that, in the circumstances of that case, it was not required to positively advise the insured to procure flood cover and, further, that its duty of care did not require it to inform the insured that the insurance cover it had under the policy excluded cover for damage caused by flood. Mansfield J disagreed.
125 Mansfield J held that the broker had breached its duty to the insured to provide advice and assistance to enable the insured to make an informed decision about its insurance requirements. His Honour's conclusion on this point was as follows:
[100] … I did not perceive Mr Cielens [i.e. an insurance broker at Nonpareil] to have asserted that Nonpareil had no advisory responsibility in respect of Elilade. In my view, given my findings as to the relationship between Elilade and Nonpareil, Nonpareil in contract and in tort was obliged to take reasonable care to inform Elilade as to the availability of certain types of insurance cover, so as to ensure that Elilade considered and then gave considered instructions to Nonpareil about what types and levels of insurance cover it wished to secure.
…
[103] In my view, Nonpareil in the proper performance of its duty to Elilade was required to raise expressly with Elilade whether it required flood insurance, and to make it aware that flood was exempted from the defined events under the policy. Elilade was undertaking a new business enterprise. Nonpareil, through its previous dealings with [certain directors of Elilade], was aware that they were not well-experienced in addressing the insurance requirements of the business. It knew that there was a not insignificant risk of flooding in Katherine. Indeed, it sought to inform its clients of that risk by displaying in its office the brochure "Flooding in Katherine"' referred to above …
[104] Without giving any oral notification to Elilade of the risk of flooding in Katherine, or raising at the meeting on 10 July 1996 that the insurance cover proposed to be obtained exempted flood from the risks covered, Mr Cielens as I have found proceeded to secure insurance including the flood exemption. He did not point out the exemption. In Provincial Insurance, Kirby P (with whom Mahoney and Priestley JJA agreed) said at 556:
"It is especially important that an insurance broker should go through with the insured the list of exceptions in the policy secured. This should be done in order to afford the insured, who may fall within an exception, the opportunity to request deletion of the exception upon payment of a higher premium or cover with another insurer . . .'"
Kirby P's comments must be seen in the context of the facts of that case, rather than as laying down an absolute rule to apply whatever the circumstances. His Honour did not purport to do so. Nevertheless, those remarks do confirm the desirability of an insurance broker upon whom an insured is relying to make a decision as to appropriate insurance cover to properly inform the insured of relevant exceptions in the policy.
(Emphasis added.)
126 As Mansfield J warned in [104], there is no absolute rule that an insurance broker must, in every circumstance, walk through a list of exemptions from cover with the insured. The exact scope and nature of the duty is determined by the facts of each case. This will be informed by, amongst other relevant considerations, the expertise and experience of the broker, the history of the relationship between the broker and client, the communications between the broker and client from time to time, the nature of the client's activities and the expertise and experience of the client. Having regard to these considerations, my view is that the analysis in Elilade is analogous to the present case.
127 Although PCCG in 2009, unlike the applicant in Elilade, was not undertaking a "new business enterprise", PCCG was not experienced in addressing the insurance requirements of the business. That is why PCCG engaged Instrat. To adopt the wording of Mansfield J at [100] of Elilade, Instrat was engaged to inform PCCG as to the availability of certain types of insurance cover, so as to ensure that PCCG considered and then gave considered instructions to Instrat about what types and levels of insurance cover it wished to secure. The circumstances were such that it was reasonable for Mr Cameron to rely upon the advice given by Mr Prior: see Mutual Life & Citizens' Assurance Co Ltd v Evatt [1968] HCA 74; 122 CLR 556 at 571 per Barwick CJ, quoted in Tepko Pty Ltd v Water Board [2001] HCA 19; 206 CLR 1 at [47] per Gleeson CJ, Gummow and Hayne JJ and [76] per Gaudron J.
128 For current purposes, the key aspects of the insurance plans prepared and settled by Instrat were the "Major Recommendations" and "Uninsured Exposures" sections. As found above, Mr Prior would highlight and discuss with Mr Cameron the contents of the former section, but there was no discussion of the exemptions listed in the latter section. For the purpose of identifying a breach of Instrat's duties to PCCG, it is unnecessary to conclude that Mr Prior should have taken Mr Cameron through all of the list of exemptions in the "Uninsured Exposures" section, although I observe that the discussion in McNealy (as cited with approval by Kirby P in Provincial Insurance and the New South Wales Court of Appeal in Caldwell) appears to favour that approach. In the circumstances of the present case, it is sufficient to conclude that Instrat, in order to comply with its duties to PCCG, was required to expressly raise with PCCG that it faced a risk of copyright infringement, and to make PCCG aware that such cover was exempted under the insurance plan.
129 The risk of copyright infringement should have been brought to the attention of Mr Cameron. Mr Prior should have provided advice as to the insurance policies that would provide PCCG with the insurance cover to meet that risk. It may have been a stand-alone policy to indemnify for copyright infringement or a policy developed for the IT industry which combined product liability, professional indemnity and insurance against the risk of a claim for copyright infringement. Such policies were available on the market, as discussed further below. The failure of Mr Prior to advise of the risk of copyright infringement resulted in PCCG not being in a position to make an informed decision as to whether to take out insurance to protect itself against that risk. This amounted to a breach of the insurance retainer and of the duty of care owed by Instrat to PCCG.