Prosperity Advisers Pty Ltd & Anor v Secure Enterprises Pty Ltd t/as Strathearn Insurance Brokers Pty Ltd

Background 1The first plaintiff, Prosperity, carries on the business of providing accounting and financial planning services to clients. In mid January 2005, Mr Tony Wagstaff, Prosperity's financial controller, contacted the defendant, Strathearn, an insurance broker based in Western Australia, to see whether it could arrange professional indemnity insurance on Prosperity's behalf. It appears that Strathearn had been recommended to Prosperity by someone at Asgard (the financial services arm of St George Bank) as a broker with particular expertise in relation to the financial planning industry. Previously, Prosperity had used a broker based in Newcastle, Markey Insurance Brokers, to arrange its professional indemnity insurance on its behalf and Markey, in turn, placed Prosperity's cover through Willis. At the time Prosperity approached Strathearn, it had cover with Allianz. The Allianz policy was due to expire on 11 February 2005, although it was extended until 25 February 2005. 2At about the same time that Prosperity approached Strathearn, it also asked Markey whether it could arrange professional indemnity insurance to take effect on expiry of the Allianz policy. On 16 February 2005, Willis sent a fax to Markey (which Markey passed on to Prosperity) setting out the results of the enquiries it had made on Markey's behalf. The fax said in part: To ensure that we obtained the most competitive terms from the insurance market, we requested the following underwriters to quote on the insured's business Underwriters Response Dexta Corporation Unable to assist due to the high percentage of investment advice. Liberty International Underwriters Awaiting their response. Assetinsure Unable to assist due to the high percentage of investment advice. CGU Insurance Unable to assist due to the fee size of the entity. Resource Underwriting Unable to assist due to the fee size of the entity. QBE Insurance Before they can consider providing terms, QBE required a financial planners addendum to be completed. Macquarie Underwriting Awaiting their response. ACE Insurance Unable to assist due to financial planning activities. Vero Insurance Unable to assist due to the insured's occupation and operating environment. AIG Insurance Verbally approached - Initial terms too high. This years [sic] renewal terms from Allianz has seen the premium increase of 10%. Please note that fee income increased by 32%. The minimum excess for this risk due to the fees will now be $50,000 each and very [sic] claim except for those activities were [sic] an excess of $80,000 applies. The fax went on to explain that a deductible of $80,000 would apply to each and every claim in the case of various activities including financial planning activities and that the premium including stamp duty and GST would be $152,460 for a limit of indemnity of $5 million any one claim and $15 million in the aggregate but $10 million in the aggregate in respect of investment advice and financial planning activities. 3On 23 February 2005, Mr Stephen Hughes, a senior accounts executive with Strathearn, wrote to Mr Michael Hughes, who was the director of financial services at Prosperity and was the person to whom Mr Wagstaff reported, outlining five options that Strathearn had identified. Three of those options were with QBE and two were with a combination of ACE (in respect of accounting services) and AIG (in respect of financial planning services). The three options offered by QBE differed in the limit of indemnity, the excess and the premium. Option 1 (with a total cost of $130,356.05) offered a limit of indemnity of $5 million any one claim and $15 million in the aggregate and an excess of $40,000 each and every claim. Option 2 (with a total cost of $113,501.03) was similar to Option 1, but the limit of indemnity was reduced for claims arising out of the provision of financial planning services to $2 million any one claim and $6 million in the aggregate. Option 3 (with a total cost of $103.991.58) offered the same limit of indemnity as Option 1, but an excess of $200,000 each and every claim. Strathearn recommended Option 2. 4The QBE quote was given on the basis of its standard Civil Liability Wording with a number of amendments. Prosperity had not seen a copy of QBE's standard terms and did not do so until well after the policy was taken out. However, Strathearn provided it with a copy of a quote dated 18 February 2005 which QBE had provided to Strathearn and which had formed the basis of Strathearn's letter dated 23 February 2005. That quote proposed that the standard form insuring clause be deleted and be replaced by the following: QBE agrees to indemnify the Insured against civil liability for compensation arising from any Claim first made against the Insured during the Period of Cover and notified to QBE during the Period of Cover as a result of breach of professional duty: i. in the conduct of the Insured's profession; ... The Insured's profession was described in the quote as "Accountants, Financial Planners". "Claim" was defined in cl 7.3 of the standard terms to mean: (a) The receipt by the Insured of any written notice of demand for compensation made by a third party against the Insured. (b) Any writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counterclaim or third or similar party notice served upon the Insured which contains a demand for compensation made by a third party against the Insured. 5Under the heading "Application of the Deductible" the quote proposed that cl 6.7(b) of the standard terms be deleted and replaced with the following: Where a single act, error or omission gives rise to more than one Claim, all such Claim(s) shall jointly constitute one Claim under the Policy. A separate Deductible will apply in respect of each and every party to such Claim(s) that makes a demand to the Insured for compensation. The aggregate deductible for any single act, error or omission shall not exceed $120,000. Clause 6.7(b) of the standard terms (the clause to be replaced) provided: Where a single act, error or omission gives rise to more than one Claim, all such Claim(s) shall jointly constitute one Claim under the Policy, and only one Deductible shall be applicable in respect of such Claim. Furthermore, if there is an Aggregate Limit of Indemnity, only one Limit of Indemnity will be applicable in respect of such Claim. 6Clause 6.7(a) of the standard terms (although Prosperity did not know it at the time) provided: All causally connected or interrelated acts, errors or omissions shall jointly constitute a single act, error or omission under this Policy. 7Two points are to be noted about these provisions. First, the effect of cl 6.7 of the standard terms was to aggregate claims made against the insured so that multiple claims arising from causally connected or interrelated acts, errors or omissions were to be treated as one claim for the purpose of applying the deductible and the limit of indemnity. Whether acts, errors or omissions are causally connected or interrelated is a question of fact the answer to which depends on the particular circumstances of the case: see, eg, Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] UKHL 48; [2003] 4 All ER 43. Clauses such as cl 6.7 are often referred to as "aggregation clauses". Second, the effect of the amendment to cl 6.7(b) was to impose a separate deductible in respect of each claim by a different person or entity up to a maximum of three. Clearly, by doing so, the revised cl 6.7(b) narrowed the circumstances in which claims would be aggregated for the purposes of the deductible. 8When Mr Michael Hughes received Strathearn's letter of 23 February 2005 he became concerned about how the deductible applied in respect of multiple claims arising from a single failed investment recommended by Prosperity and, in particular, whether under the terms of the QBE policy those claims would be aggregated and treated as one claim for the purposes of the deductible. Mr Hughes discussed his concerns with Mr Allan McKeown, the Chief Executive Officer of Prosperity, at a meeting they had on 24 February 2005. At Mr McKeown's suggestion, Mr Hughes raised that concern with Mr Stephen Hughes of Strathearn shortly after the meeting. There is a dispute about precisely what was said when the issue was raised with Mr Stephen Hughes. I will return to that dispute shortly. It is sufficient for the moment to say that Prosperity was satisfied with the response it received in relation to that issue, that it accepted Strathearn's advice and, on the afternoon of 24 February 2005, instructed Strathearn to accept Option 2 offered by QBE - which is what Strathearn did. The policy took effect at 4.00 pm the following day. 9Like many financial planners, Prosperity only recommended to its clients investments that were on an approved list. Indeed, under an endorsement to the QBE policy, Prosperity was not covered in relation to claims arising from investments not on its approved list. Prosperity had an investment committee that reviewed investments for inclusion on that list. Three of the investments included on the list were in funds established by subsidiaries of the Westpoint Group known as Mount Street Mezzanine Pty Limited, Bayshore Mezzanine Pty Limited and York Street Mezzanine Pty Limited. Each investment took the form of unsecured promissory notes issued in respect of specific real estate developments undertaken by the Westpoint Group. Investments of that type are often described as 'mezzanine finance investments'. In all, approximately 155 to 165 clients (the precise number depends on how particular clients are grouped) invested in one or more of the three Westpoint products recommended by Prosperity. Those investors suffered large losses when the Westpoint Group collapsed in a blaze of publicity and regulatory investigations in the second half of 2005. 10On 10 January 2006, Prosperity gave notice of potential claims against it arising from the Westpoint collapse. In June 2006, two clients commenced proceedings against Prosperity and subsequently Slater & Gordon wrote to Prosperity's clients inviting them to join in a class action against it. Many of Prosperity's clients made complaints or indicated that they intended to pursue claims against Prosperity arising out of the losses they suffered on their Westpoint investments. Not surprisingly, the claims or threatened claims were put in various ways. Some investors complained that Prosperity failed to research adequately the Westpoint investments. Many complained that Prosperity was negligent in recommending the investments having regard to the investors' particular needs. For example, the applicants in the Federal Court proceedings alleged that they were close to retirement, that they needed to invest to provide for their retirement and that the inherently risky nature of the Westpoint investments made those investments unsuitable for their needs. 11QBE retained Phillips Fox to act on its behalf in relation to Prosperity's claim for indemnity. Phillips Fox indicated to Gilbert + Tobin, who acted for Prosperity, that QBE's view was that cl 6.7 of the policy did not apply to aggregate the claims that were made or threatened in the particular circumstances of the case and that consequently an excess applied in respect of many, if not all, the individual claims that were threatened or which had been brought against Prosperity. That was because many of the claims were based on an allegation that Prosperity was negligent in recommending the investments to individual clients having regard to their particular needs and it could not be said that negligent advice tailored to a particular client's needs was causally connected or interrelated to negligent advice given to another client on the basis of that client's needs. It followed according to QBE that cl 6.7(a) did not aggregate the different acts, errors and omissions into one and that consequently the claims arose out of different acts, errors or omissions and so were not aggregated under cl 6.7(b). Phillips Fox did, however, acknowledge that the issue could not finally be resolved until the claims succeeded and their true basis was determined. Gilbert + Tobin denied that a separate deductible applied to each claim brought by a client in respect of a particular investment and there was considerable correspondence between the two firms in relation to the issue. The total amount claimed against Prosperity was approximately $17 million and according to Phillips Fox, at least, the total of the deductibles to be borne or to be paid by Prosperity was in the order of $2.5 million. 12Ultimately, Prosperity reached a settlement with QBE. Under the terms of that settlement, QBE contributed $4.25 million and Prosperity contributed $800,000 (including an amount of approximately $35,000 which it paid directly in legal and administrative costs) to a pool to be used to pay legal costs and to be divided among clients in settlement of their claims. The settlement between QBE and Prosperity was conditional on Prosperity reaching an agreement with at least 80 per cent of its clients to settle their claims. In the end, all or almost all clients agreed to settle on the basis that they would receive a payment which, together with any amounts they received from the liquidators of the relevant companies, would amount to a return on their investment of 35 cents in the dollar, and Prosperity's liability in respect of those settlements was met out of the pool. 13In these proceedings, Prosperity sues Strathearn for its contribution to the settlement pool less $40,000 or $120,000. That claim is put in various ways, but essentially Prosperity says that the advice given by Mr Stephen Hughes to Mr Michael Hughes during the telephone conversation on 24 February in relation to the aggregation of claims for the purposes of the deductible was negligent or misleading or deceptive in breach of s 52 of the Trade Practices Act 1974 or was in breach of a contractual obligation not to provide advice that was incorrect, misleading or irrelevant. Prosperity says that, if it had received accurate advice in relation to the operation of the aggregation clause, it would have obtained different policy wording with the result that the claims it faced would have been aggregated for the purposes of the excess clause; and that consequently, apart from a single deductible or a single deductible in respect of each of the three investments, it would not have had to contribute to the settlement pool. Alternatively, it says that it lost the opportunity to obtain different policy wording and that it should be compensated for that lost opportunity. 14On 3 December 2010, Prosperity, which was in administration at the time, purported to assign "all its rights, obligations and interests" to all causes of action asserted by Prosperity in these proceedings to Prosperity Advisers (Newcastle) Pty Ltd. That assignment was made in connection with the sale of Prosperity's business to Prosperity Newcastle. Following execution of the assignment, Prosperity sought to join Prosperity Newcastle as a plaintiff in these proceedings. On the first day of the hearing I made orders by consent by which Prosperity Newcastle was joined as a plaintiff. The question remains whether the assignment was effective. 15Prosperity's claim, then, raises three broad issues: (a)Was the advice given by Mr Michael Hughes on 24 February 2005 given in breach of contract or negligent or did it amount to misleading or deceptive conduct? (b)If the answer to any part of (a) is yes, did Prosperity suffer loss as a consequence of the breach of duty or by reason of the breach? This issue itself raises two questions. One is whether Prosperity could have obtained a policy which aggregated the Westpoint claims or whether it lost the opportunity to do so. The other is whether it was liable to make payments in respect of the deductibles that it did. (c)Was Prosperity entitled to assign its claim to Prosperity Newcastle?

Did Prosperity suffer any loss as a consequence of Strathearn's conduct? 27Although Prosperity's primary position was that it could have obtained insurance for the same premium that imposed only one deductible of $40,000 in respect of losses (whether related or not) from the failure of one product, Prosperity could not identify any policy that had those characteristics. In reality, its claim was that it lost the opportunity to obtain a policy of that type and that it was entitled to recover damages to compensate it for that lost opportunity in accordance with the principles set out in cases such as Malec v JC Hutton Pty Ltd [1990] HCA 201; (1990) 169 CLR 638; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 and Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332. 28There was no dispute between the parties concerning those principles so far as they are relevant to this case. Essentially, it was for Prosperity to establish that there was "a substantial prospect of acquiring" a policy of the requisite type: Sellars v Adelaide Petroleum NL (1994) 179 CLR at 368 per Brennan J. If it can do that, then the court will assess the chance of it doing so and award damages to reflect the loss of that chance - even if the chance is less that 50 per cent and even if the task is difficult and some guess work is involved: La Trobe Capital & Mortgage Corporation Limited v Hay Property Consultants Pty Ltd [2011] FCAFC 4 at [90] per Finkelstein J; Malec v JC Hutton Pty Ltd (1990) 169 CLR at 643 per Deane, Gaudron and McHugh JJ. 29Mr Beech-Jones characterised Prosperity's lost chance in two ways. First, he says that, if Mr Stephen Hughes had given a correct answer to Mr Michael Hughes' hypothetical, Prosperity would have instructed Strathearn to obtain a policy that only imposed one deductible in relation to all claims arising from a particular failed investment and that there was a substantial prospect (or better) of Prosperity obtaining such a policy from at least Dexta, Dual or Lloyd's. Alternatively, Mr Beech-Jones says that, even if I do not accept that submission, there was a substantial prospect (or better) that Prosperity would have obtained insurance from Dexta on its standard terms and Dexta would not have or would not have been entitled to take the same position as QBE in relation to the application of the deductible having regard to those standard terms. 30I do not accept either of these submissions. In my opinion, the possibility that Prosperity could have and would have obtained cover that meant that only one or three deductibles would have been applied to the Westpoint claims was at best speculative and does not satisfy the threshold needed to assess Prosperity's damages as a loss of a chance. 31Before dealing with the ways in which Prosperity puts its case, two points should be made about what Prosperity does not say. 32First, Prosperity does not assert that there was any policy available in 2005 that had the effect sought by it. It says as part of its alternative case that, from a practical point of view, the Dexta policy came close. I will return to that policy below. However, its primary case is that Strathearn would have been able to negotiate an amendment or endorsement to the standard terms of an insurer's existing policy to incorporate an aggregation clause of the type that it sought - that is, of a type that meant that the answer to Mr Michael Hughes' hypothetical question would invariably be that only one deductible applied. 33Second, Prosperity does not assert that it would have been able to negotiate an amendment with QBE - the insurer that did provide it with professional indemnity cover in 2005 - or Allianz - the insurer that had provided Prosperity with professional indemnity insurance in the past and that offered renewal terms for 2005. That is hardly surprising. QBE clearly thought that the aggregation clause was an important term of the policy and had provided a quote on the basis that its standard form aggregation clause would be amended in a way which was less favourable to the insured so far as the application of the deductible was concerned. It seems unlikely in those circumstances that it would have been prepared to agree to an amendment to that clause which was more favourable to the insured, let alone for no additional premium and without any change to the amount of the deductible or the sum insured. There is no evidence of the terms on which Allianz provided cover in 2004, although there is no suggestion that it offered an aggregation clause that would achieve the results sought by Prosperity and there is no evidence that it was prepared to negotiate the terms of its aggregation clause. Moreover, the cover it offered was substantially more expensive than the cover offered by QBE. Understandably, price was an important factor to Prosperity. In addition, the deductible in respect of financial planning services was twice that offered by QBE. There is no reason in those circumstances to suppose that Prosperity would have accepted a policy proposed by Allianz even assuming that it could have negotiated an amendment to the aggregation clause. 34Prosperity relies heavily on expert evidence given by Mr Gottlieb, who is a broker with Mega Capital Pty Ltd, Prosperity's current broker. The effect of Mr Gottlieb's evidence was that the insurance market for financial planners softened in 2004 and 2005, that insurance companies were willing to negotiate the terms of their policies and that he personally had successfully negotiated improvements in the terms and conditions of professional indemnity insurance for clients who provided financial planning services during the period 2005 to 2007, particularly with Dexta, Dual and Lloyd's and that, in fact, he had successfully negotiated an amendment to Dexta's standard form aggregation clause for Prosperity so that in 2007-08 it was in a form that was sought by Prosperity in 2005. 35In my opinion, little weight can be put on Mr Gottlieb's evidence. Dexta was one of the insurers approached by Willis on behalf of Markey to provide cover to Prosperity in the 2005-06 year. The evidence is that Dexta declined to provide cover "due to the high percentage of investment advice". Mr Beech-Jones says that I should discount that evidence because there was no evidence concerning the basis on which Willis approached Dexta or the relationship between Willis and Dexta. He says that instead I should place weight on the fact that in the following year Dexta did provide cover to Prosperity and did so again in the 2007-08 year on terms that involved an amendment to Dexta's standard form aggregation clause. I do not accept that submission. Willis is a well known insurance broker. There is no reason to suppose that Dexta declined to provide cover because of the way the risk was presented or because it was presented by Willis. In my opinion, the best evidence of what Dexta's attitude would have been if it had been approached by Strathearn shortly after 24 February 2005 is the attitude it conveyed to Willis when it was approached by it a short time earlier. It is true that Dexta was prepared to provide cover to Prosperity the following year. However, it is noteworthy that that cover was offered on the basis of the following exclusion: We shall not be liable to provide indemnity in respect of any Claim against the Insured directly or indirectly arising from any mezzanine finance investments and/or any advice regarding investments related to Westpoint Corporation Pty Ltd ABN 80 009 395 751 or any group, subsidiary or related company of Westpoint Corporation Pty Ltd. A similar endorsement was included in the 2007-08 policy provided by Dexta, although the exclusion was expressed to be in respect of "promissory note investments" rather than "mezzanine finance investments". If an exclusion in respect of mezzanine finance investments or promissory note investments had been accepted by Prosperity in 2005, it would have had no cover in respect of the Westpoint claims irrespective of the terms of aggregation clause. There is nothing to suggest that it could have obtained cover from Dexta on any other terms at that time. The evidence in relation to the approach by Willis is to the contrary. 36The position in relation to Dual and Lloyd's is no different. There is no evidence of whether Dual or one or more Lloyd's syndicates would have offered Prosperity cover in 2005 and there is no evidence of what premium they might have charged, what deductible they might have imposed or the limits of cover they might have been prepared to offer. The evidence of the difficulties Willis had of obtaining cover from other insurers suggests that it would not have been easy for Prosperity to obtain cover from Dual or Lloyd's on any terms. Nor is there any evidence that justifies Mr Gottlieb's view that it would have been possible to negotiate the terms of the aggregation clause. The fact that he was able to do so with Dexta two years later in the circumstances where the policy contained an exclusion in respect of promissory note investments says nothing about what may have been possible with other insurers at a different time absent such an exclusion. That is particularly so having regard to the time available. On Prosperity's case, once it was informed of the position under the QBE policy on 24 February 2005, it would have asked Strathearn to locate alternative insurers. Assuming that could have been done, it would then have been necessary to try to negotiate the terms of their aggregation clause. In the meantime, Allianz's policy was due to expire on 25 February 2005. I accept Mr Beech-Jones's submission that it was likely to have been possible to negotiate a further short extension to that policy. However, no evidence was presented from which I would be prepared to infer that Allianz would have been prepared to grant a sufficiently long extension on terms acceptable to Prosperity to permit that to happen, assuming it could happen. In my opinion, any possibility of Prosperity getting the cover that it wanted was merely speculative. 37The same is true of Mr Beech-Jones's alternative case. That case depends on Dexta agreeing shortly after 24 February 2005 to insure Prosperity on its standard terms. For the reasons I have given, I do not accept that there was a substantial prospect of that happening. 38It follows from what I have said that the plaintiffs' case must fail and consequently it is not necessary for me to consider the other two issues raised by it. However, since those issues were argued before me, I think that I should say something about them.

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