Lawyers in Australia are puffing at the chest after a New South Wales Supreme Court case has highlighted their importance in choosing professional indemnity insurance cover.
Newcastle-based financial services firm Prosperity Advisers went into administration after it became involved in a battle with its former professional indemnity insurer over legal claims from unhappy investors.
The dispute with the company's former professional indemnity insurance provider relates to advice given to clients in 2004-05. Sfter following this advice, some investors lost money. Over 160 clients sued the company for negligently advising them to invest, which resulted in $17 million AUD (£11 million) in losses. The company referred the claims to its professional indemnity insurer.
What the company has labelled a "technicality" meant that the insurer would only cover part of the claims.
Prosperity’s insurer rejected the broker’s opinion that only one excess of $40,000 was payable on the entire case, and instead, required separate excesses to be paid for each individual claim.
Law firm Colin Biggers & Paisley says that the case demonstrates that organisations which rely entirely on a broker and do not seek separate legal advice on the suitability of their insurance policies are taking careless risks.
According to the law firm, the Court found that the insurance broker who provided incorrect advice had breached his duty of care.
Special counsel Kemsley Brennan, of Colin Biggers & Paisley, said assessing whether an insurance policy effectively meets the needs of a business requires a lawyer’s input.
"You cannot determine a business’s real exposures, if you’re not qualified to identify potential liabilities in employment and customer contracts. And you cannot advise on whether deductibles or limits are appropriate unless you have a strong understanding of insurance law principles,” said Brennan.
“The bottom line is that directors should always have a lawyer review the organisation’s insurance program and map it against the business’s needs. A good insurance lawyer will then identify coverage gaps and arm the organisation with the knowledge to ensure they ask the right questions of their broker, to get the insurance product that’s ultimately right for them.
“The right policy can mean the difference between business insolvency and success, so it’s important for organisations to get a lawyer involved at an early stage as a vital complement to their broker’s services,” he said.
The Court found that the broker had breached his duty of care to Prosperity.
Brennan said that ultimately however, Prosperity’s negligence claim did not succeed, as it could not identify an alternative insurance product available at the time that imposed a single excess.
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