PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq)
[2020] FCA 137
•19 February 2020
FEDERAL COURT OF AUSTRALIA
PC Case Gear Pty Ltd v Instrat Insurance Brokers Pty Ltd (in liq)
[2020] FCA 137
File number(s): VID 336 of 2018 Judge(s): ANDERSON J Date of judgment: 19 February 2020 Catchwords:
CONTRACTS – insurance brokerage – where insurance broker engaged by client on annual basis – where client operates business supplying computer hardware and software – where broker advised on risks and procured cover – consideration of nature and terms of retainer – where client paid settlement sum to settle claims of copyright infringement by third party – where client could not recover settlement sum under insurance policies due to exemption for copyright infringement – whether broker breached contractual duty to act with reasonable skill and care
NEGLIGENCE – insurance broker – whether broker failed to act with reasonable skill and care by making insufficient inquiries of the client’s business – whether broker failed to act with reasonable skill and care by failing to identify, and advise client of, risk of copyright infringement
INSURANCE – obligations of an insurance broker – expert evidence on the conduct of a reasonably competent insurance broker generally, and in the circumstances of client in present case
DAMAGES – causation – whether breach of contract and tort by insurance broker caused payment of settlement sum by client – whether client would have obtained relevant cover but for broker’s breach – reasonableness of settlement sum paid by client – remoteness – mitigation – loss of opportunity – contributory negligence – whether client’s failure to raise risk of copyright infringement negligently caused own loss – whether client’s actions comprising alleged breach of copyright negligently caused own loss
Held: insurance broker breached duties owed to client in contract and tort to act with reasonable skill and care by failing to identify risk of copyright infringement and advise client – client entitled to damages in the amount of settlement sum paid to third party
Legislation: Australian Securities and Investments Commission Act 2001 (Cth)
Civil Liability Act 2002 (NSW)
Copyright Act 1968 (Cth) ss 115(2), (3), (4)
Corporations Act 2001 (Cth)
Judiciary Act 1903 (Cth) s 79
Wrongs Act 1958 (Vic) Pt V, ss 26, 26(1), 26(1)(a), 52, 62(1), 62(2), 63
Wrongs (Amendment) Act 2000 (Vic)
Cases cited: Ackland v Commonwealth of Australia [2007] NSWCA 250; (2007) Aust Torts Reports 81-916
Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310
Anderson v Eric Radio & TV Pty Ltd [1965] HCA 61; 114 CLR 20
Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2011] UKHL 51; [2001] 2 All ER (Comm) 929
Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1
BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72
Brooklyn Lane Pty Ltd v MIC Australia Pty Ltd [2001] VSC 33; 11 ANZ Insurance Cases ¶61-487
Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; 161 CLR 653
Caldwell v JA Neilson Investments Pty Ltd [2007] NSWCA 3; 69 NSWLR 120
Carradine Properties Ltd v DJ Freeman & Co (a firm) (1982) 126 Sol J 157; (1982) 5 Const LJ 267
Caswell v Powell Duffryn Associated Collieries Limited [1940] AC 152
Claude R Ogden & Co Pty Ltd v Reliance Fire Sprinkler Co Pty Ltd [1973] 2 NSWLR 7
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64
Con-Stan Industries of Australia Proprietary Limited v Norwich Winterthur Insurance (Australia) Limited [1986] HCA 14; 160 CLR 226
DOQ17 v Australian Financial Security Authority (No 3) [2019] FCA 1488
Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909; 124 FCR 1
Fanhaven Pty Ltd v Bain Dawes Northern Pty Ltd [1982] 2 NSWLR 57
Ferrcom Pty Ltd v Inbush (NSW) Pty Ltd (1997) 9 ANZ Insurance Cases ¶61-339
Fine’s Flowers Ltd v General Accident Assurance Co of Canada (1977) 81 DLR (3d) 139
Geoffrey W. Hill & Associates (Insurance Brokers) Pty Limited v Squash Centre (Allawah North) Pty Limited (1990) 6 ANZ Insurance Cases ¶61-012
Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Limited [2000] QCA 254; [2002] 1 Qd R 17
Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm)
Horsell International Pty Ltd v Divetwo Pty Ltd [2014] NSWCA 368; 18 ANZ Insurance Cases ¶61-991
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; 247 CLR 613
Joslyn v Berryman [2003] HCA 34; 214 CLR 552
Kotku Bread Pty Ltd v Vero Insurance Ltd [2012] QSC 109
La Trobe Capital & Mortgage Corp Ltd v Hay Property Consultants Pty Ltd [2011] FCAFC 4; 190 FCR 299
Marvin Manufacturers (Aust) Pty Ltd v Chambers of Manufactures Insurance Limited & Ors (1992) 7 ANZ Insurance Cases ¶61-122
McNealy v The Pennine Insurance Co Ltd [1978] 2 Lloyd’s Rep 18
Messagemate Aust Pty Ltd v National Credit Insurance Brokers (Pty Ltd) [2002] SASC 327; 85 SASR 303
Mount Isa Mines Ltd v Pusey [1970] HCA 60; 125 CLR 383
Mutual Life & Citizens’ Assurance Co Ltd v Evatt [1968] HCA 74; 122 CLR 556
Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd [1984] HCA 59; 157 CLR 149
Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; 77 ALJR 768; 196 ALR 257
Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541
Romero v Farstad Shipping (Indian Pacific) Pty Ltd (No 3) [2017] FCAFC 102
Rosenberg v Percival [2001] HCA 18; 205 CLR 434
Rybak v Senneh Pty Ltd [1996] NSWCA 460; (1997) ANZ Conv R 74 at 78–9
Sali & ors v Metzke & Allen [2009] VSC 48
Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332
Strategic Property Holdings No 3 Pty Ltd v Austbrokers RWA Pty Ltd [2012] NSWSC 1570
TC Industrial Plan Pty Limited v Robert’s Queensland Pty Limited [1963] HCA 57; 180 CLR 130
Tepko Pty Ltd v Water Board [2001] HCA 19; 206 CLR 1
Tosich v Tasman Investment Management Ltd [2008] FCA 377; 250 ALR 274
Townsend v Roussety & Co (WA) Pty Ltd [2007] WASCA 40; 33 WAR 321
Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited [1998] HCA 38; 192 CLR 603
Wyndham City Council v Terra Culture Pty Ltd [2018] VSC 81
Wyong Shire Council v Shirt [1980] HCA 12; 146 CLR 40
Date of hearing: 9-11, 25 September 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 216 Counsel for the Plaintiff: Mr J F Richardson Solicitor for the Plaintiff: Hope & Co Lawyers Counsel for the Defendant: Mr A M J Meagher Solicitor for the Defendant: Sparke Helmore ORDERS
VID 336 of 2018 BETWEEN: PC CASE GEAR PTY LTD (ACN 099 808 072)
Plaintiff
AND: INSTRAT INSURANCE BROKERS PTY LTD (ACN 088 119 297) (IN LIQUIDATION)
Defendant
JUDGE:
ANDERSON J
DATE OF ORDER:
19 FEBRUARY 2020
THE COURT ORDERS THAT:
1.Within 7 days, the parties are to file orders by agreement giving effect to the reasons for judgment or, if no agreement is reached, written submissions (of no more than five pages) as to the form of final relief to be ordered.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
VID 336 of 2018 BETWEEN: PC CASE GEAR PTY LTD (ACN 099 808 072)
Plaintiff
AND: INSTRAT INSURANCE BROKERS PTY LTD (ACN 088 119 297) (IN LIQUIDATION)
Defendant
JUDGE:
ANDERSON J
DATE OF ORDER:
24 FEBRUARY 2020
THE COURT ORDERS THAT:
1.The time by which the parties are required to file written submissions (of no more than five pages) as to the form of final relief to be ordered (including costs) is extended to 4pm on 4 March 2020.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
VID 336 of 2018 BETWEEN: PC CASE GEAR PTY LTD (ACN 099 808 072)
Plaintiff
AND: INSTRAT INSURANCE BROKERS PTY LTD (ACN 088 119 297) (IN LIQUIDATION)
Defendant
JUDGE:
ANDERSON J
DATE OF ORDER:
4 MARCH 2020
THE COURT ORDERS BY CONSENT THAT:
1.The defendant pay damages to the plaintiff in the sum of $250,000.00.
2.The defendant pay interest to the plaintiff pursuant to section 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth), in the sum of $44,030.06.
3.The defendant pay the plaintiff’s costs of and incidental to the proceeding, including any reserved costs:
(a)as between party and party up to and including 4.00 p.m. on 14 March 2019;
(b)on an indemnity basis thereafter.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
TABLE OF CONTENTS
Introduction and summary
[1]
Background
[8]
PCCG’s business
[8]
Insurance retainer with Instrat
[14]
The renewal process
[21]
Key aspects of the insurance plans
[27]
Renewal in 2015
[30]
Purchase of cyber risk and management liability insurance
[36]
The Microsoft claim
[42]
Settlement of the Microsoft claim
[49]
Subsequent insurance
[54]
Proceedings in this Court
[56]
PCCG’s claims
[56]
Instrat’s defence
[58]
Legal issues for determination
[60]
The trial
[63]
Expert evidence
[67]
Obligations of a reasonably competent insurance broker
[70]
Extent of Instrat’s compliance with its obligations
[72]
Mr Parnell
[73]
Mr Ellison
[80]
Factual findings
[84]
Credibility of key witnesses
[87]
Key findings
[88]
Absence of discussion regarding risk of copyright infringement
[89]
Breach of contract and duty of care
[99]
Obligations of an insurance broker
[100]
Instrat’s breaches
[111]
Causation
[130]
Relevant principles
[131]
Availability of cover for loss
[134]
PCCG’s actions but for Instrat’s breach
[137]
Reasonableness of PCCG’s settlement
[145]
Conceptual framework
[146]
Characteristics of a reasonable settlement
[151]
Reasonableness of the settlement in the present case
[161]
Conclusion on causation
[169]
Remoteness
[170]
Damages
[175]
Mitigation of loss
[176]
Loss of opportunity
[180]
Contributory negligence
[187]
Relevant principles
[189]
PCCG’s failure to inform Instrat of risk
[195]
PCCG’s failure to prevent unauthorised use of licences
[204]
Conclusion
[213]
REASONS FOR JUDGMENT
ANDERSON J:
Introduction and summary
PC Case Gear Pty Ltd (PCCG) carries on a business as a supplier of computer hardware and software. A focus of PCCG’s business is personal computers that are specially designed and assembled with components for the purposes of playing computer games. PCCG also assembles computers based on a customer’s specific design request.
PCCG’s business includes selling computers with Microsoft Corporation’s Windows operating system (Windows) pre-installed. Prior to 2016, PCCG purchased certain licences for Windows from a third party distributor and installed them on computers prior to sale. However, in January 2016, those licences were the subject of a letter of demand from Microsoft alleging breach of copyright by PCCG in relation to the licences (Microsoft claim). PCCG subsequently settled this claim by, amongst other things, paying an amount of $250,000 (settlement sum) to Microsoft.
From 2009 until 2016, during which the Microsoft claim was made, PCCG retained Instrat Insurance Brokers Pty Ltd (now in liquidation) (Instrat) as its insurance broker. Each year, at least one representative of Instrat met with PCCG to discuss the business’ insurance cover. Instrat would advise PCCG of its major recommendations. As a consequence, Instrat prepared and provided annual insurance plans to PCCG and procured for PCCG the cover described in those plans. However, the plans expressly excluded cover for copyright infringement. The result was that PCCG was covered for its defence costs in respect of the Microsoft claim, but was not covered for the payment of the settlement sum to Microsoft.
PCCG now sues Instrat for breach of contract and in negligence. PCCG alleges, broadly, that Instrat failed to act with reasonable skill and care by failing to advise PCCG of the availability of cover for copyright infringement. PCCG claims that it has suffered loss and seeks to recover damages from Instrat in the amount of the settlement sum. Instrat, however, denies liability. It says that it did not breach its duties to PCCG or, alternatively, that PCCG’s particular loss was not caused by its breach, or was otherwise not reasonably foreseeable by the parties. Instrat finally contends that any damages award should be reduced due to PCCG’s own contributory negligence.
My conclusion, as explained in detail below, is that Instrat acted negligently by failing to properly advise PCCG of its exposure to copyright infringement so as to enable PCCG to make an informed decision regarding that exposure. A reasonably competent insurance broker in the position of Instrat would have discerned a risk of copyright infringement from the nature of PCCG’s business and raised that risk, and options to address that risk, with PCCG. However, Instrat failed to do so. If that risk had been raised by Instrat, my view is that PCCG would have taken out relevant insurance cover, which was readily available for businesses in PCCG’s position.
As a result, Instrat is liable to compensate PCCG for the amount of the settlement sum. As explained below, the payment of that sum by PCCG to Microsoft was, as a matter of law, caused by Instrat’s breach. Contrary to Instrat’s submission, the settlement by PCCG of the Microsoft claim, including the amount of the payment under the terms of compromise, was reasonable in the circumstances. Moreover, there is no merit in the argument that PCCG’s own negligence wholly or partly caused its loss. In the context of their relationship, it was not PCCG’s responsibility to highlight for Instrat the risks that PCCG faced. And, finally, there is insufficient evidence to establish that PCCG’s original use of the Windows licences, which became the subject of the Microsoft claim, was negligent.
PCCG is accordingly entitled to damages of $250,000 from Instrat.
Background
PCCG’s business
PCCG commenced operations in 2000. PCCG operates an online business, selling and distributing, amongst other things, computer hardware, accessories and software. PCCG now sells approximately 4,500 products. PCCG’s website allows customers access to all of PCCG’s products, software and services. In addition, the website identified at all relevant times that PCCG provided, amongst other things, the following services:
(a)data storage, processing and warehousing;
(b)hardware maintenance and installation; and
(c)IT&T consulting, helpdesk and network support.
PCCG is also known in the industry as a “value-added reseller”. This refers to the fact that PCCG takes manufactured parts from other suppliers, puts them together as a package (including software installation) and tailors them to a customer’s needs. In this way, PCCG is different from a traditional retailer of computers. During the relevant periods, PCCG purchased approximately 20 per cent of its hardware and software directly from manufacturers, with the balance coming from third party distributors.
As indicated, one of the key areas of business for PCCG is gaming computers, which are designed and assembled by PCCG for the purposes of playing computer games. Gaming computers are comprised of a case, a motherboard, and an operating system, as well as various other components such as the central processing unit, memory and hard drive. The motherboard will be from any one of several suppliers. The price to customers for the computer package is determined by aggregating the retail price of the components, adding a build fee (representing the labour costs of assembling the computer) and then an adjustment depending on what is considered to be a competitive retail price.
The operating system in the computers sold by PCCG are always from Microsoft. Windows is a proprietary system created, owned and distributed by Microsoft. To install Windows on its gaming computers, PCCG is required to purchase licences, which it does from Microsoft approved distributors or sub-distributors. PCCG has never purchased Windows licences directly from Microsoft.
Windows licences can be purchased in two ways. The first is a “Full Packaged Product” (FPP) licence, which is a physical packaged copy of Windows (which could be contained on a CD, DVD or a USB stick) and a sticker containing the product activation key. This is a more “user friendly” version of Windows, as it allows the end user to reinstall the program if there are any problems, and also to reinstall it on another computer should the end user upgrade their computer.
The second way a Windows licence can be purchased is with an “Original Equipment Manufacturer” (OEM) licence, which contains an envelope containing an installation disc and a sticker with the activation key. The OEM licence is intended for use by experienced system builders. The envelope does not contain any literature on how to install the software and, unlike the FPP licence, the OEM licence does not allow for the software to be reinstalled. As PCCG completes the installation of Windows before the gaming computer is shipped to the customer, those computers utilise OEM licences of Windows.
Insurance retainer with Instrat
During the relevant periods, lnstrat was the holder of an Australian financial licence pursuant to the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), and the provider of general insurance products advice. Instrat is now in liquidation, with the company members resolving to wind up the company on 9 January 2018.
Prior to 2009, James Cameron (Mr Cameron), the managing director of PCCG, obtained insurance for PCCG without the assistance of an insurance broker. However, from 2009 until 2016, PCCG retained Instrat to advise in relation to, and effect, liability insurance (insurance retainer). Luke Prior (Mr Prior) was Instrat’s principal contact for PCCG for the duration of this retainer. Mr Prior had been recommended to Mr Cameron as an experienced insurance broker with knowledge of the IT industry.
Mr Cameron decided to retain Instrat because, as PCCG’s business was growing very quickly, he was concerned that he did not have the time, nor the expertise, to understand what insurance cover was required by the business. Mr Cameron was also concerned with the increases in the level of stock on hand and wished to insure against stock losses, damage to stock, burglary and protection of PCCG’s business premises. In 2009, when PCCG first retained Instrat to give advice, Mr Cameron informed Mr Prior that PCCG was an online retailer that sold computer hardware and software, and that PCCG also provided advice in respect of hardware components, the installation of software and the compatibility of products for the customer’s application.
Mr Cameron gave evidence that, when he first met Mr Prior, he gave instructions to the effect that PCCG wanted “to be insured for best practice”. However, Mr Cameron accepted in cross-examination that it was possible that he was only using the phrase “best practice” because he had adopted that phrase in written notes made by him in 2016, being seven years after PCCG first retained Instrat and a year after the final annual meeting between PCCG and Instrat in 2015. In these circumstances, and given that PCCG did not rely on this particular evidence to inform the nature of the insurance retainer, I disregard this aspect of Mr Cameron’s evidence.
Mr Prior gave evidence that, when PCCG first retained Instrat, Mr Cameron had taken him around PCCG’s warehouse for the purpose of providing Mr Prior with an understanding of PCCG’s business. Mr Prior also explored PCCG’s website to obtain an understanding of the products being sold by the business. Mr Prior understood that the business sold computer hardware and software through its website and that the business built computers to the specifications of its customers. Mr Prior’s understanding was that only a small percentage of PCCG’s turnover related to the building of the computers. However, Mr Prior accepted that he was not aware that PCCG was providing IT&T consulting, IT helpdesk and IT network support. Mr Prior’s understanding was that PCCG’s business was more in the nature of retail. He did not understand that it was also involved in consulting and a value-added reseller service.
Mr Prior acknowledged that he held discussions with Mr Cameron about third party suppliers and imported goods. However, Mr Prior said that the purpose of those conversations was limited to ascertaining the business’ exposure as a manufacturer of imported goods, which had a direct bearing on the public liability premium and the cover available.
Mr Prior’s evidence was that he was predominately focused at this time on the amount of the software purchased by PCCG and the fact that it was being imported from overseas. His focus was less around the risk of copyright infringement. Mr Prior accepted, however, that selling goods obtained from third party suppliers (i.e. not the manufacturer) exposed PCCG’s business to the risk of copyright infringement. Mr Prior’s evidence was that copyright infringement was a risk of greater significance to software consultants, technicians and developers. He said that copyright infringement is not usually a significant risk to IT retailers, particularly those selling predominantly hardware, because they do not typically offer software products themselves. Mr Prior’s view was that PCCG was exposed to some risk of copyright infringement but that the exposure was less because they were retailing as opposed to altering software.
The renewal process
Around July or August each year, Mr Prior would arrange for a meeting with Mr Cameron to discuss PCCG’s insurance cover (referred to below as the “annual meetings”). The annual meetings always took place at PCCG’s offices. Mr Prior would always attend, often with a colleague. Mr Prior would ask general questions about the business. In particular, Mr Prior asked about the proportion of items imported by the business in comparison with the proportion that the business sourced domestically. There was also discussion about the particular location from which the business sourced its products. Mr Prior described the objective of these meetings as ensuring that Instrat provided cover that was going to meet PCCG’s needs, and to ensure that Instrat was properly informed as to the business that PCCG was undertaking.
Following the annual meetings, Mr Prior would provide PCCG an insurance plan. Each plan was in the same format. The insurance plan would record the premiums payable for the coming year, the sums insured, and would also include certain “Major Recommendations”, which was a topic of discussion at each annual meeting. Mr Prior explained that the major recommendations were based on what he identified as “holes” in PCCG’s insurance cover. The insurance plan also listed a range of “Uninsured Exposures”, as discussed further below.
The identification of the “Major Recommendations” in the insurance plans were based on Mr Prior’s experience in servicing similar clients in the IT industry. Mr Prior had advised a number of clients in the IT industry including importers, consultants, software engineers and software developers. For companies that were selling computers and providing advice to end users about what computers to purchase, Mr Prior would generally recommend a combined professional indemnity and public liability policy. This form of policy would cover a range of risks, claims for negligent professional advice, loss of data, claims for licence breaches and, potentially, claims for copyright infringement.
Similar to his assessment of PCCG’s business at the start of the insurance retainer, Mr Prior accepted that, during each year thereafter, there was an exposure to claims for copyright infringement. However, Mr Prior thought that this risk was low, and was less of an exposure because, according to his understanding, the business was simply on-selling software. Mr Prior’s understanding was that PCCG was a legitimate retailer that sold licensed versions of Windows with some of the computers that it sold. In these circumstances, Mr Prior was of the opinion that breach of copyright was only a minimal risk.
Mr Cameron gave evidence that at no time during the insurance retainer did Mr Prior, or any other representative of Instrat, explain to Mr Cameron, or any other representative of PCCG, either what copyright cover was and its relevance to PCCG’s business, or that PCCG was uninsured for the risk of copyright infringement. Mr Prior did not recall any discussion about copyright infringement either. Mr Cameron additionally said that at no time did Mr Prior discuss with him, nor did he take him through, the “Uninsured Exposures” section of the insurance plan that, as discussed below, identified copyright infringement as one of the uninsured exposures. Mr Prior’s evidence was that he would highlight that the “Uninsured Exposures” section was part of the insurance plan, but did not go through each uninsured exposure.
Mr Cameron expressed that, when he was provided a copy of the annual insurance plan after the annual meeting, he did not review the plans (and, in particular, did not read the list of uninsured exposures). He took the plans simply as a summary of the recent meeting.
Key aspects of the insurance plans
Although the evidence of Mr Cameron and Mr Prior was that the insurance plans were settled annually during the insurance retainer (which commenced in 2009), there was only four insurance plans in evidence, namely those plans for the following periods:
(a)31 July 2012 to 31 July 2013;
(b)31 July 2013 to 31 July 2014;
(c)31 July 2014 to 31 July 2015; and
(d)31 July 2015 to 31 July 2016 (2015-16 insurance plan).
The insurance plans were materially in the same form. As explained, the “Major Recommendations” section outlined the key recommendations by Instrat in relation to the insurance cover that PCCG ought to consider obtaining. Although the content of the major recommendations altered slightly from year to year, the common recommendations by Instrat were public liability insurance, fire and/or business interruption insurance, management liability and directors and officers liability insurance, product recall insurance and marine cargo insurance.
The “Uninsured Exposures” section of the insurance plans listed a range of classes of insurance (typically around 50 different classes) for which PCCG was uninsured. The excluded classes of insurance were wide-ranging, and included oddities (from PCCG’s perspective) such as “Aviation Hull & Liability”, “Crop”, “Livestock” and “Marine Hull”. Most relevantly for current purposes, the “Uninsured Exposures” section of each insurance plan included the following exclusion:
Infringement of Copyright or Patent Provides you with protection against being sued for such infringements, including amounts awarded by courts.
Renewal in 2015
In early August 2015, Mr Prior and his colleague, Jordi Dower (Ms Dower), attended PCCG’s offices for that year’s annual meeting. On this occasion, Ms Dower asked questions regarding the PCCG group’s financial performance, as well as undertaking a questionnaire with Mr Cameron. Discussion at the meeting included that in relation to the level of stock on hand and the maximum sum to insure against theft and burglary.
By the time of this meeting, PCCG’s business had grown to earn a total annual revenue of approximately $80 million. As of 2015, the business was selling about 4,000 products. The vast majority of PCCG’s sales comprised the sale of computer hardware and software for the customer to assemble or install into existing gaming systems or “ready to ship” gaming computers based on PCCG’s own designs. Nearly all goods sold by PCCG were subject to copyright laws. All the gaming computers sold by PCCG required an operating system and the only operating system sold by PCCG was Windows. The sale of Windows was one of the top five products sold by PCCG.
As indicated, Mr Cameron’s evidence was that he never asked Mr Prior, or anyone else at Instrat, for cover in relation to copyright infringement. Mr Cameron said that he relied upon Instrat to advise him of the types of cover that PCCG ought to acquire given the risks faced by the business. Mr Cameron said that the risk of copyright infringement was not discussed at the annual meeting in 2015.
Mr Prior’s evidence about the annual meeting in 2015 was that it occurred on or about 10 August 2015 and lasted for approximately half an hour. Mr Prior explained that he was particularly concerned that PCCG was at risk in respect of management liability, as PCCG had not accepted his previous advice and recommendations to procure a management liability policy. Mr Prior was also concerned that PCCG faced a risk of cyberattacks that could shut down PCCG’s website, and therefore cause substantial disruption and loss to PCCG’s business. Mr Prior understood that the Christmas period was a particularly busy time for PCCG’s business, and was becoming more concerned about the lack of cyberattack policy as Christmas approached. Mr Prior raised these concerns with Mr Cameron at the meeting.
Mr Prior gave evidence that he did not recall raising the risk of copyright infringement at the meeting in August 2015. He also accepted that he did not specifically take Mr Cameron to the “Uninsured Exposures” section of the insurance plan that expressly excluded cover for copyright infringement. Mr Prior said that his role as a broker was to highlight major risks. He said that it was impossible to eliminate all risks and that, as a broker, he concentrated on exposure that could have a catastrophic impact on the business. Consistent with his evidence regarding previous renewals, Mr Prior accepted that PCCG’s business was exposed to a risk of a breach of copyright because it sold computer software, but his understanding was that PCCG did not alter the software (and just installed it in computers). This meant, in Mr Prior’s view, that the extent of the risk of copyright infringement was lesser than if changes were being made by PCCG to the software.
Mr Prior also accepted in cross-examination that he was not aware at this time that PCCG’s business provided IT consulting services or a valued-added reselling service. For instance, in the course of examination-in-chief, Mr Prior was taken to the “Brooklyn policy” (as introduced below at [55]), being the IT liability cover that PCCG procured after the end of its insurance retainer with Instrat. Part of Mr Prior’s evidence included the following:
[COUNSEL FOR PCCG:] But you haven’t looked at this, or the equivalence, have you?---I didn’t – I didn’t provide an option on a IT liability cover.
HIS HONOUR: And why was that, Mr Prior?---Again, my understanding was that it was more retailing – online retailing and I thought the exposure was more around public liability and, probably more importantly, the importing and being deemed a manufacturer of these products. And my main concern from a liability point of view was a bit of hardware coming into the country that caused a fire or something like that and damage to property and potentially being liable for that. I – I didn’t understand that the business was so involved in the consulting and the value-added reselling service. That’s the first I’m hearing of that term.
Purchase of cyber risk and management liability insurance
Two major concerns raised by Mr Prior at the meeting in August 2015 were certain risks faced by PCCG that could be covered by cyber liability and management liability insurance. Consistent with these discussions, the major recommendations section of the 2015-16 insurance plan added a new (but brief) section, which read as follows:
Extensions Very Important in your Industry:
Cyber Liability (We would recommend extending your policy to include this cover)
Tax Audit (We would recommend extending your policy to include this cover)Instrat had in fact advised PCCG to take out management liability insurance since 2012, but PCCG had declined to take out cover. Mr Cameron and Emma Quigley (Ms Quigley), PCCG’s operations manager, explained that this was because the business was initially much smaller, and that they were the only two people making major decisions for the business. As a result, they felt that such cover was unnecessary. However, as the business grew, and they started to hire a management team, the need for such cover became greater.
On 12 August 2015, two days after the annual meeting, Ms Dower sent Mr Cameron an email that attached a proposal form in relation to the management liability insurance. Ms Dower had completed basic information in the form, but requested that Mr Cameron complete the remaining questions. However, there was no immediate response from Mr Cameron.
Mr Cameron recounts that, as Christmas approached in 2015, he held a conversation with PCCG’s warehouse manager, in which the manager expressed his concern that he could be personally sued for matters such as negligence, unfair dismissal or discrimination. On 10 December 2015, Mr Cameron emailed Mr Prior the following:
Have just been informed that warehouse manager can be fined up to $250k in negligence. Can you please advise if we could mitigate this risk, as it seems unfair.
In response, Mr Prior and Ms Dower again raised with Mr Cameron the cyber risk and management liability insurance policies available to PCCG.
On or about 23 December 2015, Mr Cameron instructed Mr Prior to purchase the cyber risk and management liability insurance policies. Mr Prior consequently arranged for Instrat to purchase a Chubb management liability policy (Chubb policy) and a cyber insurance policy with DUAL, with an effective start as at 23 December 2015. Relevantly, the Chubb policy covered PCCG for defence costs in defending, investigating, settling or appealing any claim against the business up to $250,000.
The Microsoft claim
Prior to 2016, in approximately 15 years of operation, PCCG had never been subject to an allegation or claim of copyright infringement. Indeed, Ms Quigley said she and Mr Cameron had never discussed the risk of a copyright infringement prior to the Microsoft claim.
On 8 January 2016, PCCG received notification of a claim for damages from Microsoft Corporation and its Australian subsidiary, Microsoft Pty Ltd, (collectively, Microsoft) in respect of an alleged breach of copyright by PCCG. The Microsoft claim concerned PCCG’s purchase from a Microsoft sub-distributor, LJ IT Service & Consultation Pty Ltd, of Windows licences that: (i) were only available for use in “refurbished” (i.e. second hand) computers; (ii) were sold at a lower price; and (iii) were only available to companies that are members of Microsoft’s “Authorised Refurbisher Program”. However, PCCG did not trade in “refurbished” computers and, according to the evidence of Mr Cameron, PCCG was unaware of this category of licences as the distinction was not apparent from the stickers (or loose certificates of authenticity). It transpired that there were 4,000 such licences that had been installed as a component of PCCG customers’ computers.
On the same day, Mr Cameron emailed Mr Prior and Ms Dower. He attached the letter of demand from Microsoft’s solicitors, Holman Webb Lawyers, and sought Instrat’s advice about how to claim under PCCG’s insurance policies.
On 11 January 2016, Mr Prior and Casey Caldera (Mr Caldera) of Instrat attended PCCG’s offices to discuss the Microsoft claim with Mr Cameron. Mr Caldera had begun transitioning into Mr Prior’s role at Instrat in late 2015, although Mr Caldera had no interaction with PCCG until around the time of this meeting. Mr Prior and Mr Caldera advised Mr Cameron that the Microsoft claim would be covered by the Chubb policy, however, because of the coincidental timing of the claim (only a short period after PCCG had taken out the Chubb policy), the issue needed to be escalated to Chubb’s assessor.
Over the subsequent months, Instrat engaged with Chubb on behalf of PCCG. Mr Cameron’s evidence was that at no time during this period did Instrat indicate to PCCG that coverage would be limited to defence costs, as ultimately transpired. Ms Quigley, who had day-to-day responsibility for the Microsoft claim on behalf of PCCG, and Mr Cameron remained of the belief that the only issue to be resolved with Chubb was the coincidental timing of the claim.
On 11 April 2016, Instrat forwarded to Mr Cameron a letter from Chubb to Instrat which confirmed that PCCG would be covered for its defence costs in respect of the Microsoft claim, but would not be covered for any other loss “based upon, arising from or in consequence of any actual or alleged assertion or infringement of copyright”.
On or about 6 May 2016, Mr Caldera suggested that Instrat put in a claim under PCCG’s separate liability policy with Zurich in respect of the Microsoft claim. That claim was soon thereafter lodged with Zurich. However, on 11 May 2016, Zurich rejected PCCG’s claim to indemnification under that policy.
Settlement of the Microsoft claim
After receiving the Microsoft claim on 8 January 2016, PCCG responded to the claim with the assistance of its lawyers, Clayton Utz. Over the next nine months, Clayton Utz had ongoing communications with Microsoft’s solicitors regarding the claim. In broad terms, Microsoft claimed that the relevant licences purchased by PCCG were unauthorised and therefore the installation of those licences onto the computers sold by PCCG was unauthorised. Microsoft expressed that it was entitled to damages under s 115(2) of the Copyright Act 1968 (Cth) (Copyright Act) in relation to PCCG’s alleged breach of copyright. According to initial communications, Microsoft’s solicitors contended that the appropriate damages award ought to be calculated by reference to the full recommended retail price of each certificate, being $178. As such, according to Microsoft, the starting position for any financial settlement between the parties would be a payment by PCCG to Microsoft in excess of $700,000.
PCCG responded that it had no reasonable grounds for suspecting that its use of the Windows licences constituted an infringement of Microsoft’s copyright. PCCG consequently argued (but Microsoft denied) that Microsoft would not be entitled to damages for any infringement by reason of the defence under s 115(3) of the Copyright Act. For reference, that provision provides as follows:
Where, in an action for infringement of copyright, it is established that an infringement was committed but it is also established that, at the time of the infringement, the defendant was not aware, and had no reasonable grounds for suspecting, that the act constituting the infringement was an infringement of the copyright, the plaintiff is not entitled under this section to any damages against the defendant in respect of the infringement, but is entitled to an account of profits in respect of the infringement whether any other relief is granted under this section or not.
The subsequent discussions and negotiations between the parties centered on PCCG’s entitlement to rely on the defence under s 115(3), the availability of additional damages under s 115(4) and, to the extent damages were available, the appropriate calculation of the damages owed by PCCG to Microsoft.
Throughout this period, a series of offers of compromise were made by each party. The terms of the compromise discussed by the parties included an amount payable by PCCG to Microsoft, although the quantum was in dispute. On 11 March 2016, Microsoft said it would accept $360,000. On 24 March 2016, and later on 31 May 2016, PCCG offered $130,000. On 11 April 2016, and then on 28 June 2016, Microsoft said it would accept $320,000.
On or around 26 September 2016, PCCG settled the Microsoft claim. This required, amongst other things, the payment by PCCG to Microsoft of $250,000. In accordance with the terms of settlement, PCCG paid the settlement sum in five instalments as follows:
(a)$50,000 on 6 October 2016;
(b)$50,000 on 3 November 2016;
(c)$50,000 on 2 December 2016;
(d)$50,000 on 4 January 2017; and
(e)$50,000 on 1 February 2017.
Subsequent insurance
On 11 April 2016, Mr Cameron had instructed Instrat to cancel PCCG’s cyber liability insurance policy. In May 2016, Mr Cameron contacted Tom Knox of Business Insurance Specialist Pty Ltd (BIS) to transfer PCCG’s insurance brokering from Instrat. Mr Knox, having considered PCCG’s business and the existing insurance policies, made recommendations in a report dated 21 July 2016. The recommendations were accepted by PCCG, and BIS put in place a suite of insurance policies for PCCG, including business insurance, cyber liability and privacy protection insurance, ISR insurance, management liability insurance, marine transit insurance and motor vehicle insurance.
Mr Knox also recommended that PCCG take out professional indemnity and liability insurance. Mr Knox’s report expressed that “[a] significant reason for adding Professional Indemnity coverage is the extensions this coverage includes, such as Unintentional Breach of Copyright”. With the IT sector in mind, Mr Knox identified four suitable policies for this purpose, all of which were available at the time of the annual meeting between PCCG and Instrat in August 2015. PCCG ultimately settled on purchasing a “Combined Information Technology Liability Insurance Policy: Professional Indemnity and Liability Insurance” with Brooklyn Underwriting (Brooklyn policy). Relevantly, the Brooklyn policy covered PCCG for the risk of unintentional infringement of the intellectual property of third parties.
Proceedings in this Court
PCCG’s claims
PCCG commenced proceedings in this Court against Instrat on 23 March 2018. PCCG claims, in summary, that Instrat breached its insurance retainer, and was otherwise negligent by failing to advise PCCG of the availability of cover for copyright infringement (which would have provided cover against the Microsoft claim). PCCG seeks to recover the loss it suffered as a result of Instrat’s breaches, being the settlement sum paid by PCCG to Microsoft.
PCCG also initially alleged contraventions by Instrat under the ASIC Act and the Corporations Act 2001 (Cth) for misleading and deceptive conduct. However, counsel for PCCG advised the Court during final address that PCCG no longer pressed its statutory claims.
Instrat’s defence
Instrat denies that it breached the insurance retainer or was negligent in providing the advice leading to the 2015-16 insurance plan. In particular, Instrat asserts that it is likely that the risk of copyright infringement was discussed at sometime between the parties, but that no witness can remember it due to the elongation of time. According to Instrat, it is mostly likely that Mr Cameron considered the risk of copyright infringement, but characterised it as minor because, at that time, PCCG had not faced a copyright infringement claim and, in Mr Cameron’s view, PCCG only sourced its products from reputable suppliers.
Instrat further contends that, even if it did breach its duties to PCCG, then PCCG’s loss (the payment of the settlement sum to Microsoft) was not caused by Instrat because, even if PCCG had been appropriately advised, PCCG would not have taken out any relevant insurance cover. Instrat additionally argues that the loss was not caused by Instrat, or was otherwise not reasonably foreseeable, because the settlement reached by PCCG was unreasonable. Instrat finally argues that any liability owed to PCCG should be reduced by reason of PCCG’s contributory negligence. Instrat says that PCCG’s original unauthorised use of the Windows licences was negligent, as was its failure to inform Instrat about the risk of copyright infringement to PCCG’s business.
Legal issues for determination
The parties provided a statement of agreed facts and a list of legal issues shortly prior to trial. As mentioned, PCCG no longer pursues its statutory claims for misleading and deceptive conduct. The remaining causes of action are PCCG’s claim in contract and tort.
It was common ground between the parties that, under the terms of the insurance retainer, Instrat was required to exercise all due care and skill of a competent provider of general insurance products in advising PCCG in relation to the appropriate liability insurance for its business. It was also common ground that, in providing these services, Instrat owed PCCG a duty to exercise due care and skill.
According to the parties, the legal issues in dispute could be distilled to the following questions:
[1].Did Instrat breach its duty of care and/or its contractual obligation as PCCG’s insurance broker by failing to advise in relation to and/or procure for PCCG insurance for breach of copyright?
[2]. If the answer to question (1) is yes:
a. was PCCG’s loss reasonably foreseeable?
b. is PCCG required to prove the settlement sum it paid to settle the Microsoft claim as reasonable, and if yes, has it done so?
c. has PCCG failed to mitigate its loss in a way that effects its entitlement to damages or compensation from Instrat?
d. is PCCG in the circumstances of this case entitled to damages for loss of the opportunity to purchase the copyright insurance cover?
[3].If PCCG is prima facie entitled to damages or compensation from Instrat, should Instrat’s liability be reduced pursuant to its claim for contributory negligence against PCCG?
The trial
The trial of PCCG’s claims was held on 9, 10 and 11 September 2019, with the parties returning on 25 September 2019 for closing addresses.
A court book was tendered on behalf of PCCG. The court book contained a range of documents, the authenticity of which were not in dispute.
PCCG called Mr Cameron and Ms Quigley to give lay evidence by affirming their witness statements and giving further oral evidence. PCCG also tendered an affidavit of Mr Knox. Instrat in turn called Mr Prior and Mr Caldera to give lay evidence by affirming their witness statements and giving further oral evidence. Except for Mr Knox, each of these witnesses were cross-examined. The material aspects of the lay evidence has been summarised above. An assessment of the credibility of these witnesses, in addition to an analysis of their evidence, is set out below, starting at [84].
Each party also called an expert in support of their respective cases, as now discussed.
Expert evidence
In Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 (Provincial Insurance), Kirby P expressed (at 556) that it will ordinarily be necessary for a court to receive expert evidence to determine what a reasonably competent insurance broker would have done in particular circumstances. In the present case, Lyndon Parnell (Mr Parnell) was called by PCCG and Paul Ellison (Mr Ellison) was called by Instrat. Mr Parnell and Mr Ellison each provided reports outlining their opinions on certain questions, and also provided a separate joint report that outlined the areas of their agreement and disagreement. Both experts also gave oral evidence concurrently in a “hot tub” format, which enabled the critical differences between their opinions to be highlighted and explored.
Both experts had significant experience and expertise. Mr Parnell has over 50 years’ experience working in the insurance industry, both in the public and private sectors. Mr Ellison has over 40 years’ experience working in the insurance industry, including extensive experience in the insurance broking sector.
The experts were asked a range of questions, both in advance of trial and at trial, regarding the duties and obligations of a reasonably competent insurance broker generally and whether, based on the material provided, Instrat met those duties and obligations on the facts of the present case.
Obligations of a reasonably competent insurance broker
The experts largely agreed on the general obligations of an insurance broker. For instance, in their joint report, the experts expressed that they agreed that the obligations of a reasonably competent insurance broker included the following:
·An insurance broker when instructed to arrange insurance should make reasonable enquiries as to his client’s needs. The role of the reasonably competent broker will then ideally be expressed in a Retainer.
·The client’s needs include an analysis of the risk exposures associated with the particular industry and specific business.
·The insurance broker has a duty to attempt to offer a programme of insurance suitable to the client’s business and its particular needs.
·The insurance broker has a duty to follow the client’s instructions and arrange appropriate cover and maintain it in force and to attend to the renewal of insurances effected by him.
·The insurance broker has a duty to take reasonable steps to ensure effective and appropriate cover is offered to the client.
·The insurance broker has a duty to advise the insured of any relevant exclusions or limitations under the policy.
·The relationship between an insurance broker and his insured is usually that of a professional insurance broker and a lay client. It is the insurance broker’s role is to collect such information regarding the nature of the insured’s business so as to offer the client appropriate and effective insurance cover.
·Every [qualified practicing insurance broker] as part of their qualifications and training would have been educated of the above principals and obligations.
…
·We agree that Unintentional Breach of Copyright Insurance can usually be procured as an additional protection in IT Liability insurance policies which main function is to provide Professional liability protection and Product liability protection.
The general obligations of an insurance broker at common law are discussed below, starting at [100].
Extent of Instrat’s compliance with its obligations
The experts were in disagreement, however, in relation to the responsibility of an insurance broker in the position of Instrat to make reasonable enquiries in the circumstances of Instrat’s retainer with PCCG. They were also in disagreement about the degree of risk of copyright breach that a reasonably competent insurance broker in the position of Instrat would have identified in the context of PCCG’s business. The ultimate result of their disagreement was that Mr Parnell believed that, in the circumstances of the present case, and based on the material provided to him, Instrat did not perform its duties to PCCG with reasonable skill and care, while Mr Ellison’s view was to the contrary. A summary of their evidence is set out below.
Mr Parnell
Mr Parnell’s view was that Instrat did not meet its obligations as a reasonably competent insurance broker because Instrat failed to arrange appropriate and effective insurance cover for PCCG, including cover for copyright infringement. Mr Parnell’s explanation as to how he reached that conclusion was as follows.
Mr Parnell expressed that an insurance broker needs to make enquiries sufficient to understand the nature of the client’s business and the likely risks to which the business is exposed (a general obligation with which Mr Ellison agreed). To demonstrate, Mr Parnell accessed PCCG’s website to ascertain the nature of its business. The website identified that the business provided services including data storage, hardware maintenance and installation, IT helpdesk, IT consulting, value-added retail sales and customised hardware and software as an integrated product.
Mr Parnell stated that, having identified the nature of the products and services sold by PCCG, a reasonably competent broker would then ask PCCG further questions to better understand the risks to which the business was exposed. By way of example, Mr Parnell said that, in respect of data storage, he would want to know what contracts existed with PCCG’s clients, and whether there was any limit on liability. In respect of the IT help desk, Mr Parnell said that he would wish to know the type of advice that was being provided. He would moreover seek to understand what the value-added retail sales were, and what advice was being given with respect to the integration of various components to produce a customised product for the client.
Mr Parnell expressed that these enquiries would have led a reasonably competent broker to understand that PCCG’s business was part of the IT industry, and to consequently consider insurance policies specifically designed for that industry. According to Mr Parnell, these policies would provide traditional professional indemnity insurance in addition to product liability insurance and cover for copyright infringement. Mr Parnell said that the Brooklyn policy was an example of a combined IT industry policy that would have provided appropriate insurance cover for PCCG, including cover for copyright infringement.
Mr Parnell’s view was that PCCG faced a high degree of risk associated with unintentional breach of copyright. This was because PCCG’s business involved the purchase, sale, distribution and installation of copyright protected products, such as Windows and other licensed software. Where a business has such a principal focus on the use of products subject to copyright, there was, in the opinion of Mr Parnell, an ongoing risk of unintentional breach of copyright.
In the opinion of Mr Parnell, an objective risk analysis of PCCG’s business would have identified the high risk and potential consequences of a copyright breach. PCCG faced a higher risk of breach of copyright as it obtained its software, including Windows, from third party distributors (rather than directly from the manufacturer). In Mr Parnell's experience, software purchased from third parties have a higher risk of being unauthenticated, which equates to a higher risk of copyright infringement. A breach of copyright carries the risk of being sued for damages. In the circumstances of the present case, Mr Parnell viewed that Instrat should have brought the significant risk of copyright infringement to the attention of PCCG to enable PCCG to make an informed decision as to whether it wished to procure cover in relation to that risk.
Mr Parnell was particularly critical of the insurance plans provided by Instrat. Mr Parnell expressed that, for the purposes of explaining to the client the classes of risk for which the client’s business was uninsured, it was insufficient to simply include a section at the back of the insurance plan headed “Uninsured Exposures”, and then alphabetically list the uninsured exposures whether or not they were relevant to the particular client’s business. In Mr Parnell’s opinion, a reasonably competent broker would instead have specifically identified for the client the risks that were uninsured, and discerned whether any of them were risks for which the client sought cover.
Mr Ellison
Mr Ellison, in contrast to Mr Parnell, did not view that Instrat had failed to meet its obligations as a reasonably competent insurance broker in the circumstances of the present case. In Mr Ellison’s opinion, a reasonably competent broker, after conducting an appropriate assessment of PCCG’s business, would not have considered that there was a major risk of PCCG being subject to a claim for breach of copyright. His view was that breach of copyright insurance would normally be purchased by organisations involved in the creation of patents or other intellectual property.
Mr Ellison expressed the opinion that breach of copyright insurance normally only covers claims for “inadvertent” or “unintentional” breach of copyright and excludes claims arising from wilful behaviour. Mr Ellison said that insurance against inadvertent or unintentional breach of copyright is available in Australia, but usually only as an extension to other liability policies, such as those in relation to directors and officers liability, management liability, professional indemnity liability and IT liability insurance.
Mr Ellison noted that IT liability policies were developed to cover a gap in the market that had appeared in relation to professionals who would mix their professional advice with the sale of computer hardware and software. To meet the requirements of the IT industry, insurance underwriters developed policies which would provide combined protection of general liability, product liability, professional indemnity liability and indemnity against inadvertent or unintentional breach of copyright.
In relation to the circumstances of the present case, however, Mr Ellison’s view was that, where PCCG sold computers online for gaming, and otherwise provided a facility to people to customise computers and purchase software to enable the computer to operate, there was a very low risk to PCCG of copyright infringement. Mr Ellison said that, as far as he was aware, there were minimal copyright claims made against small and medium enterprises in Australia. Moreover, in contrast to Mr Parnell, Mr Ellison did not think there was an increased risk of copyright infringement claims in circumstances where PCCG purchased Windows software from third party distributors (and not directly from Microsoft).
Factual findings
The critical factual questions in dispute involve determining what was said by PCCG to Instrat, and vice versa, from the start of the insurance retainer in 2009 until the Microsoft claim in January 2016. This determination is important because it informs, most fundamentally, the nature and extent of the insurance retainer. That in turn facilitates a determination of whether Instrat met the expectations of that retainer.
The passage of time since the commencement of the insurance retainer poses difficulties in identifying what was discussed between the parties. By the time of trial, over a decade had elapsed since the start of the retainer. Moreover, as noted, the only insurance plans in evidence were those commencing on and from 31 July 2012.
Most of the material aspects of the lay evidence—notably that of Mr Cameron and Mr Prior—is summarised above in the course of outlining the background facts. However, there remains various ambiguities or inconsistencies in the evidence as to what was communicated between the parties. This section outlines my assessment of the credibility of the key witnesses and summarises my key factual findings having regard to the evidence presented at trial.
Credibility of key witnesses
The central witnesses at trial were Mr Cameron and Mr Prior. Mr Cameron presented as an honest witness. Although his recollection was imperfect, he impressed me as a witness who attempted his best to recall events that had occurred as far back as 2009. Likewise, Mr Prior also presented as an honest witness who did his best to recall past events. He made appropriate concessions when he could not recall the detail of matters discussed at meetings with Mr Cameron. In my assessment, however, Mr Cameron had a clearer and more detailed recollection of the relevant events. I accept Mr Cameron’s evidence in preference to Mr Prior’s evidence on the critical conversations concerning the insurance retainer, the renewal process and the annual meeting in 2015.
Key findings
As determined above, Instrat breached its contractual and tortious duties owed to PCCG by failing to raise the exposure of PCCG’s business to a risk of copyright infringement. To reach that determination, I found that Mr Cameron was not aware of PCCG’s exposure for risk of copyright infringement until the Microsoft claim in 2016. I also found that Mr Prior did not discuss or raise with Mr Cameron the risk to PCCG’s business of a claim for copyright infringement.
Subject to PCCG providing sufficient information to enable Instrat to perform its role, it was not PCCG’s responsibility to highlight to Instrat the risks faced by the business for which PCCG sought cover. According to the evidence presented, the insurance retainer imposed general obligations on Instrat to provide PCCG with advice in respect of the risks to which the business was exposed. The purpose of this advice was to enable PCCG to make an informed decision about its insurance requirements, and place PCCG in a position to instruct Instrat about the insurance cover which PCCG wished Instrat to procure on its behalf. As such, the heart of this relationship was PCCG’s reliance on Instrat’s own skill and judgment. It was incumbent on Instrat to make appropriate inquiries, not for PCCG to anticipate what Instrat ought to do: see Claude Ogden at 32.
Although I accept that there is no absolute rule that contributory negligence cannot arise where the relevant loss sustained by the plaintiff is the kind of loss against which the defendant should have protected the plaintiff, in the present case it was “proper for [the] plaintiff to rely on the defendant to perform its duty”: Astley at [30]. The argument that PCCG negligently contributed to its own loss, and that Instrat’s own responsibility ought be reduced as a result, because PCCG failed to inform Instrat of the risks to PCCG’s business, fails to recognise, and is inconsistent with, the nature of the very duties which Instrat owed to PCCG in contract and negligence. There is accordingly no failure by PCCG in this respect to protect its own interest in a manner that would reduce its entitlement to damages.
PCCG’s failure to prevent unauthorised use of licences
Instrat finally argues that PCCG negligently contributed to its own loss by failing to prevent the unauthorised use of the licences the subject of the Microsoft claim.
Upon first impression, there is attraction to this argument. The fact that PCCG had not subjectively considered the risk of copyright infringement prior to the Microsoft claim does not preclude the conclusion that a reasonable person in the position of PCCG would have ensured that the licenses were used for their authorised purpose, or at least implemented further mechanisms to reduce the risk of unauthorised use. Given the nature of the business engaged in by PCCG, the unauthorised use of the licences that led to the Microsoft claim, albeit unintentional, may potentially be viewed as a lapse in reasonable conduct by PCCG.
As Instrat observes, there is minimal evidence about the particular efforts that were undertaken by PCCG to minimise or eliminate the risk of authorised use of the licences. Evidence from Ms Quigley in cross-examination included the following:
[COUNSEL FOR INSTRAT:] … you are aware, from your position, that the software you purchase and sell needs to be licenced properly?---Yes.
Yes. And is it you who is responsible for insuring that within the business?---No.
Who is responsible for that?---Our purchasing team.
Okay. So, neither you nor, I take it, is Mr Cameron directly responsible for that?---No.
No. But presumably, as the operations manager, you’re responsible for ensuring that that’s done properly, and all tasks done by the purchasing team are done properly?---I audit their work, yes.
…
The cross-examination of Ms Quigley moved to other topics before returning to PCCG’s auditing processes:
[COUNSEL FOR INSTRAT:] … And you said earlier in evidence that you audit your purchase team?---Yes.
And did you audit your purchase team prior to this incident arising?---Yes.
And how often did you audit them?---Periodically. It changes depending on how busy we are and if we have – taking on a new supplier, for example, or a new brand.
So, it’s not programmed in to happen once a week or once a month, or - - -?---No.
It’s from time to time as you feel the need?---Correct.
And those periods of time might be in – between some audits might be much longer than they are at other times?---Yes.
And that’s still the case?---Yes.
And you sell how many products, would you estimate?---We have around 5000 active skews.
Yes. And you conduct your audit on all of them?---Different product groups at different times.
And your products, do you do them by random samples?---Basically, we have a calendar, so we will go through brands or product types or by supplier for those different periods and we will have a look at things like margin mix and the products available.
And you do that yourself?---Yes.
Yes. On your own?---No.
You do it with Mr Cameron?---Yes.
Shortly afterwards, the cross-examination turned to the impact that the Microsoft claim had on the auditing processes. Ms Quigley’s evidence was as follows:
[COUNSEL FOR INSTRAT:] I suggest to you that the risk of breach of copyright occurring is quite low in your business?---It’s difficult to quantify because we rely on third party suppliers and their suppliers vary from time to time. It’s impossible for us to quantify that risk.
But you agree the risk is not significant enough for you to increase the number of audits you perform?---Correct.
Even in light of this incident, your evidence is you haven’t increased the number of audits you perform?---Correct.
Mr Cameron’s evidence did not address the specific auditing processes undertaken by PCCG. He conveyed, however, that PCCG’s greatest protection from the risk of purchasing unauthorised licences was to buy from trusted suppliers. In relation to the acquisition of the licences that gave rise to the Microsoft claim, Mr Cameron gave the following evidence in cross-examination:
[COUNSEL FOR INSTRAT:] I understand that when you purchase software you ensure that it’s properly licenced?---We hadn’t even – it hadn’t even crossed our minds that this sort of thing could happen.
So, you didn’t check prior to this incident?---Well, you could argue that we did check because we were buying from a trusted supplier who actually had come from one of the largest distributors and then he was the country manager for a leading video – graphics card brand. He had been in the industry for five to – at least five years. He was well known. And the crux of it, we – as soon as – these are little certificates of authenticity – little stickers, sorry. You put it on there and when you actually install it you actually have to type something in at the Microsoft website. You have to type in the code. There was no indication that these were of a refurbisher program or anything like that. We figured, you know, it’s going to throw an alert or it’s going to say – well, it didn’t even cross our mind to even suspect that because this was a trusted supplier, but they acted or behaved in exactly the same manner that our normal stock would act or behave. To us the only difference was you’re buying a sticker and not a sticker plus disc, and we didn’t need the disc.
The closing written submissions filed on behalf of Instrat expressed the following about this form of alleged contributory negligence on the part of PCCG:
128. As has already been discussed in these submissions, Mr Cameron gave evidence that by purchasing from trusted suppliers [PCCG] took sufficient care to negate the risk of an infringement of copyright. As already set out, Mr Cameron’s evidence that he did not know that pirated or unlicenced goods were sold in the IT industry is not credible. Mr Cameron also accepted, as did Ms Quigley, that [PCCG’s] customers relied on it to sell properly licenced goods, in this case software.
129. Little detail was provided by Ms Quigley as to how often and how fulsome the auditing undertaken by [PCCG] was to ensure goods were properly licenced. The court cannot be satisfied it was done to a reasonable standard.
130. In all likelihood, [PCCG] was aware of the risk that it may purchase goods not properly licenced for the purposes it used them for. It should have checked to ensure it was using them for the purpose they were licenced for, as Microsoft asserted in the Microsoft Claim. The fault for selling incorrectly licenced goods therefore in all probability lay with [PCCG], not the supplier who sold the software to them. Although Mr Cameron and Ms Quigley did not accept that when it was put to them, the inference should be drawn from the matters above that all the fault, or a significant percentage of the fault in selling the wrongly licenced goods, was [PCCG’s] mistake and not anyone else’s.
It may be that PCCG could have done more to ensure it was not using the relevant licences for unauthorised purposes. But, for current purposes, the problem for Instrat is that the lack of evidence regarding PCCG’s internal auditing processes works against Instrat, not in its favour. This is because the onus of proving that a plaintiff’s conduct contributed to its own loss rests on the defendant. Thus, the burden in the present case was on Instrat to adduce evidence to support any contention that PCCG’s own negligence had wholly or partly caused its own loss. However, Instrat’s argument inverts the onus of proof. This is evident from paragraph 129 of Instrat’s closing written submissions, as extracted above, which stated that, given Ms Quigley had not adequately explained PCCG’s auditing processes, “[t]he court cannot be satisfied it was done to a reasonable standard”.
Given the lack of direct evidence, Instrat was ultimately asking the court to draw an inference that PCCG had acted negligently by engaging in unauthorised use of the licences such that the quantum of damages ought to be reduced: see paragraph 130 of Instrat’s closing written submissions, as extracted above. Although it may be possible in some cases to discharge that onus solely by reference to the evidence adduced on behalf of the plaintiff (Anderson at 43 per Windeyer J), my view is that the evidence on this issue is insufficient to justify such an inference in the present case. For these reasons, Instrat’s claim of contributory negligence against PCCG fails.
Conclusion
For the reasons set out above, PCCG has successfully established that it is entitled to damages from Instrat to compensate PCCG for the payment of the settlement sum to Microsoft.
My answers to each of the questions posed by the parties for determination are as follows:
(1)Did Instrat breach its duty of care and/or its contractual obligation as PCCG’s insurance broker by failing to advise in relation to and/or procure for PCCG insurance for breach of copyright?
Yes.
(2)If the answer to question (1) is yes:
(a)was PCCG’s loss reasonably foreseeable?
Yes.
(b)is PCCG required to prove the settlement sum it paid to settle the Microsoft claim as reasonable, and if yes, has it done so?
PCCG is required to prove that Instrat’s breach caused PCCG’s loss, and that the loss was reasonably foreseeable. The reasonableness of the settlement sum paid by PCCG to settle the Microsoft claim was relevant to establishing those elements of its causes of action. On the facts, the settlement by PCCG was reasonable, and PCCG is successful in satisfying those elements.
(c)has PCCG failed to mitigate its loss in a way that effects its entitlement to damages or compensation from Instrat?
No.
(d)is PCCG in the circumstances of the present case entitled to damages for loss of the opportunity to purchase the copyright insurance cover?
It is misleading to characterise PCCG’s entitlement to damages as based on the loss of an opportunity. Nevertheless, PCCG is entitled to damages by reference to the sum that a hypothetical insurer would have paid PCCG but for Instrat’s breach of the insurance retainer and duty of care owed to PCCG. That sum is $250,000.
(3)If PCCG is prima facie entitled to damages or compensation from Instrat, should Instrat’s liability be reduced pursuant to its claim for contributory negligence against PCCG?
No.
As PCCG has been successful in its claims against Instrat, Instrat will pay PCCG’s costs of, and incidental to, the proceeding, including any reserved costs.
I direct that, within 7 days, the parties are to file orders by agreement giving effect to these reasons for judgment or, if no agreement is reached, submissions of no more than five pages as to the form of final relief to be ordered.
I certify that the preceding two hundred and sixteen (216) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Anderson. Associate:
Dated: 4 March 2020
Key Legal Topics
Areas of Law
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Contract Law
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Tort Law
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Insurance Law
Legal Concepts
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Contract Formation
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Breach of Contract
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Unconscionable Conduct
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Duty of Care
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Causation
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Compensatory Damages
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Expert Evidence
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