Cross claim against Aon
65 The gist of the cross-claim is that Aon breached its retainer as broker in not taking all reasonable steps to procure cover for Tasman Investment against liabilities incurred as a financial planner and investment adviser. The claim covers the liability to Tosich and to other investors, namely John and Denise Roach and Archana Kotwal. The first issue for determination, in view of my previous findings, is whether Aon was in breach of duty to Tasman Investments in connection with the failure to procure Professional Indemnity (PI) insurance for it to take effect after 31 March 2002 when the cover by Macquarie Underwriting expired.
66 The issue relates to the nature of PI insurance. That form of insurance is generally (as here) offered on a "claims made" basis, ie for claims made upon the insured in the current period of insurance. Such insurance is usually offered on an annual basis. A claims made policy may or may not respond to claims arising out of circumstances occurring before the year of claim. Furthermore, if circumstances that may give rise to a claim are known to the insured prior to the relevant period, they must be disclosed to the insurer. This may cause the insurer to decline to review cover, or to exclude the risk that is disclosed. The Australian Law Reform Commission discussed some of the ramifications of this structure in Report No 20 on Insurance Contracts, eg para 47 and para 265. Section 40 and s 58 of the Insurance Contracts Act 1984 (Cth) are a partial response. (See, generally, Derrington D, Ashton RS, The Law of Liability Insurance, 2nd ed, LexisNexis, Australia, 2005.)
67 Aon was an insurance broker with a substantial business. It had dealt with the Warne companies since early 2000. Mr Schuyler Elia was the employee who usually dealt with the Warne companies.
68 The claim in this case was made on behalf of Tosich on or about 10 December 2002. Leaving aside the AIG policy, the only PI policy in force in relation to the Warne companies in December 2002 was the policy with Dexta Corporation entered into in April 2002 through Aon. That policy did not cover Tasman Investment at all. By then Tasman Investment was not engaged in financial planning and advisory services. It had been covered by a PI policy with Macquarie Underwriting, taken out effective from 30 June 2000 to 31 March 2001, and renewed for another year, expiring on 31 March 2002. As that was a claims made policy, it did not respond to the claims made after the expiry of the policy. Thus, Tasman Underwriting had no "run off" or retrospective insurance in relation to the financial planning and advisory business it had carried on. That is the cause of the complaint. It is contended by the defendants that Aon should not have caused or permitted that to occur.
69 On 5 March 2002 Tasman Capital Limited sent to Aon (per Mr Schuyler Elia) completed proposal forms for PI insurance for it and its subsidiaries with Macquarie Underwriting. This amounted in substance to a proposal to renew. Tasman Investment was named as an insured. Although financial planning was stated as an activity of the group, the details described Tasman Investment Management Ltd only as the responsible entity of Wollongong Prime Project Trust. A financial planner's addendum was forwarded on 13 March 2002 on behalf of Tasman Capital Ltd and its subsidiaries. Tasman Financial Planning Pty Ltd was identified as the company through which insurance agent agreements are held.
70 Aon, by Elena Kazakova, described as an account broker and one of a service team consisting of herself, Schuyler Elia and Nerida Wallace, sought clarification of some issues arising out of the proposal for renewal. One question was:
"Tasman Investment Management Limited ('Warne') can still be named as an Insured under any new policy, however, they will not be covered for conducting a managed Property Trust. Please advise what you require."
The answer, provided by Mr Brian Johnson, was
"Suggest you talk to Schyuler about whether or not we need this. If there is no extra cost I suggest we include them."
There is no evidence as to whether this request was followed up.
71 In the meantime, Aon, by Elena Kazakova, obtained a quote for PI insurance from AIG. The "non-binding indication" covered breaches as a licensed security dealer only. The principal terms of what were described as option one were:
· a limit of $2 million on any one claim and in the aggregate;
· a retention (excess) of $50,000 inclusive of costs for each and every claim;
· a premium of $25,000 plus GST and stamp duty.
The proposed retroactive date was "Policy Inception". No option two was included.
72 On 27 March 2002 Dexta Corporation Ltd responded to Schuyler Elia with a non-binding indication. The insured were Tasman Capital Ltd and Tasman Financial Planning Pty Ltd and the business was described as "Financial Planner". As clarified later, the basis was for a limit of $1 million and $3 million aggregate and an excess of $20,000, a premium of $23,800 plus GST and stamp duty was quoted, alternatively, for a limit of $2 million and $6 million aggregate and an excess of $20,000, a premium of $30,950 plus GST and stamp duty was quoted. The terms included:
"2) Financial Relationship Endorsement
There is no indemnity under this Policy for any Claim made against You:
(a) by any person advised or induced by You or Your employees to invest or lend money to You or any firm or corporation operated or controlled by You or by any of Your employees nominees or trustees and in which You or any member of Your family has a direct or indirect financial interest;
(b) arising out of the provision by You of any advice, inducement, recommendation, endorsement or opinion regarding the investment of interest, capital or personal endeavour in an investment facility or service in which You or any member of Your family has a direct or indirect control or financial interest.
For the purpose of this exclusion only:
Financial Interest shall not exclude any Nominal Financial Interest in a corporation listed on a stock exchange being a member of the associated Australian stock exchanges.
Nominal Financial Interest shall mean less than 10% of the issued capital in a public company.
3) Conflict of Interest Endorsement
There is no indemnity for any Claim made against You or any claim by You for indemnity under this Policy directly or indirectly arising from an actual or alleged conflict of interest.
However this exclusion shall not apply where:
(a) prior to providing professional services, You have obtained from a party relying on Your professional services a signed and dated document wherein the party acknowledges that You are also involved with another party whose interests may differ to those of the party relying on Your professional services, or
(b) after investigation, Dexta Corporation Ltd is satisfied that a conflict of interest does not exist.
4) Managed Investment Schemes
There is no indemnity for any Claim made against You or any claim by You for indemnity under this Policy directly or indirectly arising from investments in managed investment schemes other than schemes which invest in equities, property, fixed interest or cash.
…
9) Amended continuity clause
Clause 1.8 of this policy is deleted in full and replaced by the following:
1.8 Continuous cover
Notwithstanding exclusion 3.7 (prior Claims or circumstances), and in the absence of fraudulent non-disclosure by You, We agree to extend indemnity under insuring clauses 1.1 and 1.2 to any Claim arising from or attributable to or in consequence of any fact or circumstance which could have been, but which was not, notified under a previous professional indemnity insurance policy ('Previous Policy') PROVIDED THAT:
(a) if the fact or circumstance had been notified under the Previous Policy, You would have been entitled to indemnity under the Previous Policy;
(b) apart from Our right to refuse indemnity due to:
(i) Your failure to disclose the fact or circumstance to Us before this Policy was entered into; or
(ii) the application of exclusion 3.7 (prior Claims or circumstances);
You are entitled to indemnity under this Policy; and
(c) You have continued without interruption to be insured under a professional indemnity insurance policy with Us from the time when the fact or circumstance could have been notified under the Previous Policy until the time when the Claim, fact or circumstance is notified to Us.
Our liability for the Claim shall not exceed the amount of indemnity which would have been available under the Previous Policy if the fact or circumstance had been notified under the Previous Policy or the available Limit of Liability under this Policy, whichever is the lesser."
(Original emphasis.)
73 On 3 April 2002 Schuyler Elia of Aon reported to Johnson advising that Macquarie had requested further information and that he had asked for an indicative quotation based on the information on file. The report included:
"I must apologise for the inconvenience this has caused with Elena not aware of your other insurance in place with AIG …"
The report summarised the key elements of the AIG and Dexta quotes. AIG was recommended. Neither the analysis nor the recommendation discusses the question of "run off" cover for the financial planning activities of Tasman Investment, although reference was made to "additional reinstatement of the sum insured".
74 Johnson favoured the second Dexta alternative, but elected to wait for a response from Macquarie. After several prompts from Johnson to Aon with no response, on 17 April 2002 Johnson instructed Elia to proceed with Dexta Option 2, confirmed by email on 18 April 2002 at 9.31 am. At 12.29 pm on that day, Elia sent an email to Johnson reporting that Macquarie had quoted $2 million on one claim with $6 million aggregate, with a deductible of $20,000 each and every claim with a premium of $65,000 before charges. He recommended Dexta. The reasons did not include any reference to the position of Tasman Investment.
75 Dexta required further information. Johnson forwarded that information, signed by Warne. It included the material earlier provided for the Macquarie renewal. The insured were identified as Tasman Capital Ltd and Tasman Financial Planning Pty Ltd. The policy issued in due course.
76 In my opinion, Aon was clearly in breach of its duty to the defendants to exercise due care and skill in arranging insurance cover in not drawing to the attention of Johnson the need for cover for the previous financial planning and advisory activities by Tasman Investment, including the officers of Tasman Investment, having in mind the rearrangement of corporate responsibilities within the group. Aon, by Elia, had been closely involved in the details of professional indemnity cover for the group since May 2000, and was well aware of the details of the corporate rearrangement of responsibilities. Aon was involved in effecting PI insurance for all entities in the group, including directors' and officers' cover. It had effected the cover with AIG. The lack of "run off" cover for the prior financial planning and advisory services of the group was a critical feature of the insurance rearrangements and very material to decision making as to that cover. However, there is no evidence of the issue having been raised by anybody on behalf of Aon at any time. Neither Warne nor Johnson was cross-examined to suggest that they had been given any advice by Aon concerning the run off of liabilities of Tasman Investment or, indeed, that there was any discussion by anyone on behalf of Aon about that factor to be taken into account when making a decision about PI insurance. There was no cross-examination of Johnson to suggest that the query concerning Tasman Investment being a party, the subject of the correspondence, was discussed by any officer of Aon with him. What is more, no explanation for the omission has been given by those involved. Indeed, those involved for Aon, particularly Elia and Kazakova, were not called to give evidence.
77 Counsel for AON cross-examined Warne and Johnson to suggest that a conscious choice was made to exclude Tasman Investments from PI insurance. He submitted that Aon's role was limited to executing specific instructions. He also pointed to the absence of evidence from Blackett, who had a role in relation to effecting insurance. There were unsatisfactory features of the evidence of Warne and Johnson, principally because of their attempts to bolster the case against AIG on the Investment Managers Policy. However, the decision making by Warne and Johnson took place without any attention paid to the "run off" of the group's financial planning and advisory services preceding the change of role of Tasman Investment within the group. Blackett's absence is of no significance. Aon has not led any evidence of any relevant communication with Blackett. There is no suggestion that Blackett was aware of the "run off" problem. He was not a decision maker. Johnson gave evidence that, had he been aware at the time of renewing PI insurance after 31 March 2002 that Tasman Investment would be exposed for its past financial planning activities and investment advice, he would have addressed with Aon what needed to be done to protect Tasman Investment against that risk. I accept that evidence. Commercial reality compels the conclusion that, if Warne and Johnson had been made aware of the problem, they would have paid attention to the solution of it. Warne, in particular, had potential personal liability and a considerable stake in the fortunes of the companies. I do not accept that a conscious choice was made to exclude cover for the run off of financial planning liability or that Aon's role, as broker, was restricted to merely executing instructions.
78 The unexplained omission by Aon to draw the attention of the client to such an important consequence of the overall insurance arrangements that were in contemplation was a breach of the duty of Aon to exercise care and skill in carrying out its role as broker (Caldwell v JA Neilson Investments Pty Ltd (2007) 14 ANZ Ins Cas 61-724;[2007] NSWCA 3; per Ipp JA at [103]-[104]). No expert evidence is necessary to come to that conclusion (cf Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012 per Kirby P at 76768).
79 The next question is what loss flowed from the breach. The role of damages in a case such as the present is to place the wronged party in the position it would have been in if there had been no breach of duty, ie if correct and timely advice had been given. The defendants lost the benefit of that advice. They were never in the position of having the advantage of it. That much is clear. That amounts to a loss caused by the breach sufficient to complete the cause of action (if it is viewed as tort) (Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 per Mason CJ, Dawson, Toohey and Gaudron JJ at 355 and Brennan J at 362 and 368).
80 Quantification of damages is a different matter. It has been said that the defendants have to establish that, absent the breach of duty, relevant cover would have been obtained, eg Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd (1997) 9 ANZ Ins Cas 61-339 per Cole JA at 76732. That is so if full indemnity is to be awarded, cf Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 per Mason, Wilson and Dawson JJ at 13. The position is different if less than full indemnity is considered. Reconstruction of what would have occurred if the correct advice had been given involves a hypothetical set of past circumstances. As explained in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638, particularly per Brennan and Dawson JJ at 639-640 and Deane, Gaudron, McHugh JJ at 642-643, this is not decided as if it were an assessment on the balance of probabilities as to whether an event did or did not happen. Furthermore, in considering this case, it is to be borne in mind that Aon prevented the posited situation occurring and that it, not the defendants, was the expert in the field. See, generally, Cee Bee Marine Ltd v Lombard Insurance Co Ltd [1990] 2 NZLR 1 at 5-6. The reconstruction of events in this case does not depend upon what the defendants would have done in a particular situation in the sense discussed by Buchanan JA in Crown Insurance Services Pty Ltd v National Mutual Life Association of Australasia Ltd (2005) 13 ANZ Ins Cas 61-659 at [9]-[14]. It principally (but not entirely) depends upon the assessment as to what others would have done. It is to be noted that the discussion of this question by Ashley J in TBI Pty Ltd v Aon Financial Planning Ltd (2004) 13 ANZ Ins Cas 61-601 at [213]-[218] was tentative obiter dicta.
81 The defendants relied upon the evidence concerning Macquarie Underwriting to support the availability of appropriate insurance. That company had been the underwriter for the financial planning and investment advice activities of the group for 2000-2001 and 2001-2002 years. The renewal for 2001-2002 on 3 August 2001 was on the basis that the policy was unlimited as to retroactive date of the circumstances giving rise to the claim without any express exclusion of known claims and/or circumstances. The policy when first issued had an unlimited retroactive date. The communication from Stuart Coleman of Macquarie Underwriting to Elena Kazakova of Aon on 15 March 2002 indicated that Tasman Investment could be named as an insured, however, it would not be covered for conducting a managed property trust. It will be recalled that Johnson's response was to suggest Elena Kazakova talk to Schuyler Elia about whether it was necessary. There is no indication that the policy would not be framed as to the retroactive date in accordance with the then current policy. The only material given by Aon to Johnson at that time made no reference to retroactive cover.
82 An unidentified handwritten note on a Macquarie Underwriting communication with the initials SE (no doubt Schuyler Elia) and dated 18 April 2002 says:
"MACQ - S.C. → $62,000 - (new bus premium) - retro inception"
That note requires explanation. The absence of evidence from either Elia or Kazakova from Aon is significant on this aspect, particularly as there is no evidence from Macquarie that proves or explains a change in its attitude to retroactive cover.
83 It was submitted for Aon that Johnson had rejected Macquarie's quote out of hand because of cost and it might therefore be put to one side. I do not agree. There was no explanation of the Macquarie quote by Aon in the context of the "run off" problem and it was never considered by Johnson or Warne in that context. I am satisfied that disclosure of that factor would have compelled close consideration of the Macquarie quote.
84 Aon called evidence from two underwriters as to PI insurance, principally in relation to non-disclosure, but some of that evidence was relevant to the instant issue. One common factor was the impact of the collapse of HIH and its withdrawal from the PI insurance market for financial planners by March 2001. Up until then, it had been the dominant local underwriter in the field. It had a large market share and offered low premium rates. It is interesting in this connection to note that Macquarie Underwriting's original quote in 2000 for the Warne companies was less in premium and deductible than HIH. The principal competition was from two agents for Lloyd's syndicates, one of which was Markel Australia and the other Resource Underwriting. By March 2001 Resource Underwriting was reducing its exposure to the Australian market. As a result, it was said that a sellers market developed in PI insurance, including that for financial planners. Markel Australia declined many financial planning PI proposals in 2001 and 2002. Markel Australia was not approached by Aon in respect of Tasman Investment or the Warne group in March/April 2002.
85 Ian Williams, an underwriter from QBE, was called by Aon to give evidence of guidelines prepared by QBE in 2001-2002 concerning PI cover for financial planners. It is not clear when they actually came into force. Those guidelines are silent as to both renewals and run off cover. QBE had formerly provided professional indemnity cover to the Warne group that was cancelled in July 2000 after the Macquarie Underwriting quote had been accepted. The nature of that cover was not explored. There is no evidence that Aon approached QBE for PI cover in 2002. It can be deduced from the cross-examination of the witness upon particular files that QBE provided cover retroactive to the inception of business to a former client of HIH that had made known claims upon HIH. In another case, Aon had submitted a proposal for renewal to QBE on the basis that it was to be a run off policy. Williams confirmed that QBE would normally afford run off or retroactive cover provided it was already the insurer.
86 That is consistent with the experience with Macquarie Underwriting to which reference has been made. It is also consistent with the experience upon renewal of the Investment Managers Policy with AIG in October 2001. Although it did not cover Tasman Investment for its financial planning activities, it was a PI policy. General Condition 5 was as follows:
"Continuity
Cover is provided under Insuring Clauses A and B of this policy for any Claim, fact, matter or circumstance which could or should have been notified under any earlier policy. Provided always that: