Financial advice firm loses $800k due to PI insurance mishap

by |

A wealth management firm that had to pay $800k to its insurer following the negligence of its insurance broker won't receive a cent in compensation, says the NSW Court of Appeal. Here's why...

The Court upheld a decision dismissing wealth management services and chartered accounting firm Prosperity Advisers’s claim for damages arising out of the negligent advice of an insurance broker, according to a report by Grace Cooper Ward Lawyers.

The case Prosperity Advisers Pty Ltd (Prosperity) v Secure Enterprises Pty Ltd (trading as Strathearn Insurance Brokers (Strathearn), stated that Prosperity had engaged Strathearn to arrange professional indemnity insurance on its behalf.

Strathearn Insurance Brokers n recommended a particular policy that would provide cover of up to $6m. Prosperity sought advice from Strathearn in relation to an aggregation clause in the policy. The question asked was:

  • If, say 100 clients had an investment in a particular product at say $40,000, and it went bad and we were found to be negligent in our advice, would this be seen to be one claim or 100 claims?

The broker responded that in such a scenario the insurer would treat it as one claim and not separate claims. Prosperity then instructed the broker to arrange the recommended policy.

On Prosperity’s recommendation, a number of its clients invested in funds and subsequently suffered substantial losses when the parent company of these funds, Westpoint, collapsed.

Many of the investors commenced proceedings against Prosperity, arguing it was negligent in recommending the investments. The amounts claimed totalled approximately $17m. Prosperity made a claim for this amount on its professional indemnity insurance.

The insurer alleged that Prosperity owed $2.5m in deductibles on the basis that each action by a client of Prosperity was a separate claim. However, a settlement was reached under which the insurer agreed to contribute $4.25m if Prosperity paid $800,000 in deductibles.

Prosperity then sued Strathearn, seeking damages and arguing that the broker provided negligent advice regarding the calculation of deductibles.

Negligent, misleading or deceptive

Justice Ball of the Supreme Court was satisfied that the advice given by the broker was negligent, misleading or deceptive, or constituted a breach of contract. Therefore, the primary issue for determination was whether or not Prosperity could recover damages from Strathearn. This required consideration of whether or not Prosperity suffered any harm as a result of the broker’s negligent advice.

read more > 1 2