SKM Industries Pty Ltd v Australian Reliance Pty Ltd
[2017] VSC 159
•31 MARCH 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S CI 2015 05472
| SKM INDUSTRIES PTY LTD | First Plaintiff |
| GLASS RECOVERY SERVICES PTY LTD | Second Plaintiff |
| v | |
| AUSTRALIAN RELIANCE PTY LTD | Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | MELBOURNE |
DATES OF HEARING: | 20–23 FEBRUARY 2017, 1–2 MARCH 2017 |
DATE OF JUDGMENT: | 31 MARCH 2017 |
CASE MAY BE CITED AS: | SKM INDUSTRIES PTY LTD & ANOR v AUSTRALIAN RELIANCE PTY LTD |
MEDIUM NEUTRAL CITATION: | [2017] VSC 159 |
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TORT – Negligence – Professional negligence – Insurance broker – Whether broker breached its duty to client – Whether broker’s explanation was ambiguous – Adequacy of explanation and enquiries of broker to insured.
CAUSATION – Whether client misunderstood the broker’s explanation – Whether further explanation would have caused client to change its instruction – Absence of evidence about counterfactual conduct.
DAMAGES – Prior settlement of dispute between insured plaintiffs and insurer – Principles relating to the assessment of damage where there has been a prior settlement.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J A F Twigg QC with Mr R A Harris | Harris Carlson Lawyers |
| For the Defendant | Mr L W L Armstrong QC with Mr T R Messer | Hall & Wilcox |
HIS HONOUR:
In this proceeding, the plaintiffs claim damages against their insurance broker. The claim is made on the basis of the alleged negligence of the defendant insurance broker (‘Australian Reliance’), in breach of its duty of care arising at common law and under an implied contractual term. The damages are alleged to have been suffered as a result of reduction in the plaintiffs’ entitlement to indemnity under their Industrial Special Risks policy (‘ISR Policy’) following a fire at the plaintiffs’ premises at 94 Maffra Street, Coolaroo (‘the Coolaroo premises‘) on the night of 5 November 2010.
The relevant facts
The first plaintiff (‘SKM’) has carried on the business of recycling general waste materials since July 2010. Before that time, a related entity, SKM Recycling Pty Ltd (‘SKM Recycling’) carried on the business from about July 1999 until SKM took over.[1] SKM operates its business from the Coolaroo premises and an adjoining premises at 82 Maffra Street, Coolaroo (‘the adjoining premises’) and more recently from 22 Wood Street, Geelong. It also has transfer stations at Laverton and Mornington.
[1]Other than noting this change for completeness in these reasons, no party contended that this was relevant to the determination of the issues in dispute in this proceeding.
The second plaintiff (‘GRS’) has carried on glass recycling business from the adjoining premises since 2011.
SKM and GRS, together with ITL Industries Pty Ltd (‘ITL’) and Roan Services Pty Ltd (‘Roan’), are part of a group of companies (‘the SKM Group’) with the same beneficial ownership. ITL owns most of the plant and equipment and Roan employs most of the staff required for the operation of the SKM Group’s activities.
Since 2005 or 2006, a Mr Keith Riddle has acted as the insurance broker for the group and, in 2008, Mr Riddle moved from his previous employer to Australian Reliance. By letter of appointment dated 3 December 2008 Australian Reliance was appointed as the insurance brokers for the SKM Group. Mr Riddle, as the account executive of Australian Reliance, remained principally responsible for the management of the SKM Group’s insurance policies.
By invoice dated 30 January 2009, Australian Reliance invoiced SKM Recycling for an ISR Policy with Vero Insurance Ltd (‘Vero’) for a period from 20 November 2008 to 31 March 2009. The ISR Policy included the following sections:
(a)Section 1 - the material damage section,[2] which defined insured property as follows:
All real and personal property of every kind and description [except as specifically excluded] belonging to the Insured or for which the Insured is responsible, or has assumed responsibility to insure prior to the occurrence of any damage, including all such property in which the Insured may acquire an insurable interest during the Period of Insurance.
(b)Section 2 - the business interruption section (described in the ISR Policy as Consequential Loss) which provided cover for loss resulting from interruption or interference to the business beginning with the occurrence of damage and ending not later than 12 months thereafter during which the results of the business shall be affected in consequence of damage caused by an insured peril under the material damage section.
[2]The material damage section of the ISR Policy was referred to in evidence variously as material loss and damage, property damage, plant and machinery and plant and equipment. I will refer to it as the material damage section unless an expression is being quoted.
The limit of the insurer’s liability for combined material damage section and the business interruption section was $26,000,000 and the sub-limits with respect to business interruption section were relevantly as follows:
Gross/Profit $2,000,000 Wages/Management Fee $2,650,000 Additional Increased Cost of Working $4,000,000 Professional Fees and Costs $150,000
By an Insurance Renewal Questionnaire prepared by Mr Riddle dated 25 February 2009, Australian Reliance asked various questions relevant to the renewal of the policies for the SKM Group. It contained the same warning about disclosure and same explanation about co-insurance referred to in the 2010 Questionnaire (see below at [21]). The ‘General Information’ inserted included:
(a) The inclusion of SKM and GRS as insureds, among others.
(b) The following capital investments to be made in the coming 12 months:
(i) ‘Glass Recovery machinery to proc[ess] Glass @ 82 Maffra’; and
(ii) ‘99 Maffra 2x new machines’.
However, in February 2009, Australian Reliance engaged, at its own expense, Mr Colin Chinner, a director of MSM Loss Management, insurance and loss valuation consultants, to review the business interruption section proposed for the SKM Group for the 12-month period commencing 31 March 2009. Accordingly, by email of 27 February 2009 to Mr Chinner, Mr Riddle attached the SKM Group’s ISR Policy schedule and confirmed arrangements for a meeting between Mr Chinner and Mr Robert Italiano, the business manager of the SKM Group, on the following Monday.
That Monday was 2 March 2009, when Mr Chinner met with Mr Italiano at the Coolaroo premises. Mr Chinner gave evidence that they talked ‘about his existing business, what was going to happen in the immediate or the foreseeable future and at that point Mr Italiano told [him] that the business was relatively static and that he wasn’t expecting significant growth for that next year’. Mr Italiano gave evidence that there were further meetings between Mr Chinner and Mr Mario Matheou (the SKM Group’s company accountant) at which Mr Italiano was not present.
By email of 19 March 2009 to Mr Riddle, Mr Chinner provided advice with respect to the renewal of the SKM Group’s business interruption section and in particular advised:
(a) The declared values should be as follows:
(i) gross profit excluding payroll $14,100,000;
(ii) dual based payroll[3] $3,400,000;
(iii) additional increased cost of working $2,250,000; and
(iv) claim preparation $250,000.
(b)He stated that ‘to produce a more detailed BI [business interruption] report [he] would need to meet with the client and look at the concept of disaster management in more detail’.
[3]Dual based payroll allows six months full cover or partial cover for a longer period if more appropriate in the circumstances of the particular interruption.
Attached to Mr Chinner’s email of 19 March 2009 was a Declared Value Calculation Worksheet which showed the declared value of gross profit of $14,100,000 for the various SKM Group companies was calculated as follows:
Turnover for the group $19,884,086 Less Uninsured Working Expenses/Cost of Sales Shipping Expenses $620,082 Wages $3,669,263 Workcover $77,168 Superannuation $311,858 Contract Work $1,949,092 Credit Card Payments $177,582 Total UWE $6,805,045 Insurable Gross Profit $13,079,041
To the Insurable Gross Profit was added an allowance for the following ‘Growth Trend’ to arrive at the ‘Expected Declared Value/Sum Insured’ of $14,100,000:
(a)1.73% for the period of nine months to 31 March 2009, the date of the commencement of the insurance, to allow for the increase in the turnover figures for the financial year ending 30 June 2008 (‘the prior period’);[4]
(b)3% for the insurance period being the 12 months commencing 31 March 2009 (‘the insurance period’);
(c)3% for the indemnity period being the 12 months after the insurance year commencing on 31 March 2010 (‘the indemnity period’).
[4]Mr Chinner explained that 1.73% was based on 9 months of the existing growth rate of 2.3% per annum.
By email of 19 March 2009, Mr Riddle forwarded the email of earlier that day from Mr Chinner, to Vero.
By placing slip dated 31 March 2009 faxed to Mr Riddle, Vero acknowledged receipt of the renewal instructions for the ISR Policy for the period of 12 months commencing 31 March 2009 and confirmed the following terms:
(a) The limit of liability under Section 1 and Section 2 was $40,000,000.
(b)The declared values (in accordance with the Basis of Settlement) for Section 2 of the policy were:
· Gross profit $14,100,000
· Additional increased cost of working $ 2,250,000
· Professional fees $ 250,000
· Payroll – dual basis $ 3,400,000.
By email of 1 April 2009 to Mr Italiano, and copied to Mr Matheou, Mr Riddle attached Australian Reliance’s Insurance Manual and the business interruption section review calculations. The attached Insurance Manual dated 31 March 2009 confirmed that the Section One and Section Two Combined Limit of Liability had been increased from $26,000,000 to $40,000,000. It reported that the sub-limits under Section 2 – Consequential Loss relevantly included the following:
· Gross/Profit $14,100,000
· Payroll Dual Basis $ 3,400,000
· Additional Increased Cost of Working $ 2,250,000
· Professional Fees and Costs $ 500,000
The attached Insurance Manual also included the following statements relied upon by Australian Reliance:
Important points relating to this Report
This Report has been based on the information you provided to us and on which we have relied. If you have not provided to us all material information or you discover that the information you have provided is inaccurate, please advise us immediately so that we can reconfirm terms with insurers.
…
Changes and developments
You should advise Australian Reliance about anything that is likely to affect your insurance, for example:
·Purchase or occupancy of new premises
·Alteration, extension or demolition of existing premises
·Significant increase in replacement value
·Contractual Liability
·Granting of indemnity or hold harmless agreement
·Alteration or disconnection of fire or burglary protection systems
·Use of aircraft or waterborne craft except of ordinary travel
·Possible insurance claims
Please contact us if you have any questions or require any information about your insurance program.
…
Co-insurance
This policy condition is sometimes called "average". If the value of the insured property exceeds the amount of insurance, then your insurer may proportionately reduce his payment of a claim. It is therefore essential that values are regularly reviewed to ensure that sums insured represent the true value.
In early 2009, Mr Italiano and Mr Riddle had a conversation at the Coolaroo premises in which Mr Italiano informed him of the fact that the SKM Group was starting a glass recovery business. By that time, the business had placed the orders for the glass plant and Mr Riddle was asked to provide the marine insurance for the finance contract with the Bank of Melbourne. In evidence, Mr Italiano said that during the course of the conversation he said that the glass recovery business would start in about February 2011 and there was the following general discussion about what was happening with the business:
I highlighted to him certain things that were occurring in the business, so growth areas and one of them was the glass recovery business. … We discussed that it would – it was a growth part of the business. It was something we didn't do before so it was new to the business’.
By agreements signed in July 2009[5] (‘the Bellarine Contracts’) the Greater Geelong City Council, Surf Coast Shire Council, Colac Otway Shire Council, Golden Plains Shire Council and Queenscliffe Borough Council each accepted a tender[6] made by SKM Recycling in respect to the receiving and processing of recyclable materials within their respective municipalities.
[5]Each agreement (with the exception of the agreement with Golden Plains Shire Council, which is undated) appears to have been signed during July 2009.
[6]The tender was dated 22 June 2007. It was initially rejected but later accepted after issues arose with the originally accepted tender.
In late 2009, after entering into the Bellarine Contracts, Mr Italiano had conversations with Mr Riddle in which he requested Australian Reliance to arrange the necessary public liability insurance with respect to each of the contracts. However, he also spoke to him about the effect the contracts would have on the growth of the business. His evidence about those conversations was as follows:
I explained to him the growth of the business, what it meant to the overall impact on the business, it was about a 20 per cent increase just in that alone, for tonnes per day. I explained to him what we required as far as moving forward for the plant, the property and I also explained the story of how we came about the new contract.
He also said that he had discussions during late 2009 and early 2010 about the need to obtain public liability insurance and property insurance for the site, building and plant and equipment required for the performance of the Bellarine Contracts.
By email of 11 March 2010 to Mr Matheou, Mr Riddle attached an Insurance Renewal Questionnaire and noted the things that needed to be addressed at the meeting on Tuesday 16 March 2010 were:
·Sums insured on the various locations
·Vehicles we have insured are correct
·Turnovers.
The Insurance Renewal Questionnaire was dated 11 March 2010 and included under the heading ‘Important Information’ the following:
Change of risk or circumstances (Applicable to all policies)
It is vital that you should advise us of any departure from your ‘normal’ form of business (i.e. that which has already been conveyed to your insurers). For example, acquisitions, changes in occupation or location, new products, or new overseas activities.
In order to ensure proper protection, please consult with us if you are in any doubt as to whether your insurer should or should not be told of certain changes.
Average/Co-insurance
Material Damage Insurances
(Applicable to Industrial Special Risks, Fire, Consequential Loss, Special Risks, Marine Hull, Computer Electronic, Machinery Breakdown, Boiler Explosion, Aviation & Domestic Home policies)
These policies contain an Average/Co-insurance clause which means that you must insure for the full value of the property Insured. If you under-insure, your claim will be reduced in proportion to the amount of the under-insurance.
A simple example illustrating the basic principle, application and effect of the Average/Co-Insurance clause is as follows:
Full Value of the Property Insured = $ 1,000,000
Policy Sum Insured/Declared Value = $ 500,000
Therefore, you would be self Insured for 50% of the full value.
Amount of Claim = $ 100,000
Amount Payable by the insurer as a result of the application of the Average/Co-Insurance clause = $50,000 (50% of $100,000).
The questionnaire also included the form to be used for the calculation of the sum insured on gross profit (see completed form at [27] below).
By email of 18 March 2010 to Mr Riddle, Mr Matheou asked three questions to which, by email later that day, Mr Riddle replied as noted in italics:
In reference to page 17 (i.e. the contractors for SKM) what period should I look at?
Doesn't really matter as long as its within the last twelve months
Also, for page 26, (Declaration of actual sendings/turnover), what period should I use?
Same again but preferably as close the the policy expiry date as possible
And I don't have an overtime figure for page 15, do you want me to use a standard amount, or percentage?
Whatever is more accurate Mario.
By email of 23 March 2010 at 12:27 pm to Mr Riddle, Mr Matheou attached the Declarations of Estimated Sendings/Turnover. The declarations estimated the ‘Gross Sales Turnover’ as follows:
1 July 2009 to 30 June 2010 $19,000,000
1 July 2010 to 30 June 2011 $21,000,000.
With respect to each declaration, Mr Matheou signed a statement that ‘We hereby declare that the estimated figures supplied reflect a reasonable expectation for the next policy period’.
By email later on the same day to Mr Riddle, Mr Matheou attached ‘the calculation of the sum insured on payroll and a calculation of the sum insured on Gross Profit sheets’ (‘the Calculation Form’). The email states:
Please note that in both instances I have put 10% for the increase as per Robert’s advice but I was unsure whether they needed to be added together and ultimately added back to the gross profit figure and payroll figure.
The reference to ‘Robert’ was a reference to Mr Italiano, who gave the following evidence of the ‘advice’ of the 10% increase given to Mr Matheou:
I was asked by Mario about what I thought was the change in turnover … I understood the question to be where the sale of products was going as in increase, decreases and so forth, including – because most of our product is exported overseas, we have an AUD/USD risk or gain from the sale of our product and my exact answer it’s impossible to tell exactly but add 10 per cent, just for a variance in the sale price or US dollar fluctuations on the previous year [to March 2010].
Mr Matheou had inserted handwritten figures in the attached Calculation Form, which are shown below in italics:
Calculation of Sum Insured on Gross Profit (Difference Method)
Renewal Estimate
Note: The list of Uninsured Variable Charges should be amended by deletion or addition as may be necessary by the circumstances and accounts of the business
Turnover (or Sales) for last Financial Year (ending 30 June 2009)
$19,000,000
Plus Stock on hand at end of that year
$ ¾
Less Stock on hand at beginning of that year
$ ¾
Adjusted Turnover
$19,000,000
Less Uninsured Variable Charges (i.e. expenses that may Cease or fall in proportion to a drop in turnover such as $ 4,845,000 a) Purchases, less discounts received
b) Freight and Cartage
c) Discounts allowedd) Wages, salaries, bonuses & overtime
e) Payroll tax
f) Provision for holiday pay, sick pay and long service leave
g) Workers' Compensation insurance premium
h) Workcare levy
i) Superannuation
$ ¾
$ ¾
$ ¾
$ 4,117,000$ 194,000
$ 116,000$ 111,000
$ ¾
$ 307,000Plus Percentage increase to allow for expected trend of business during the policy year
+10%
$1,415,500
$15,570,500
Plus Percentage increase to allow for expected trend of business during the Indemnity Period
+10%
$
$
Plus Percentage increase to allow for Indemnity Period in excess of 12 months (e.g. 50% for 18 months, 100% for 24 months)
+10%
$
$
Total Sum for Insurable Gross Profit $15,570,500
By email of 24 March 2010 at 4:09 pm to Mr Matheou and copied to Mr Italiano, Mr Riddle stated:
Attached is the declaration I lodged with the insurers as your renewal information based on the fact the FOB exports are covered by the purchasers.
Attached to this email were four declarations for the financial years 2010 and 2011, two of which were the same as had been sent by Mr Matheou on 23 March 2010 at 12:27 pm. The other two were the same except in each case the entry for ‘FOB export sales’ had been deleted, the name of the insured had been entered as ‘SKM’ and the policy number had been entered as ‘34-300010267-56’.[7]
[7]The fields for these latter two details had been left blank in the forms completed by Mr Matheou.
By email of 25 March 2010 to Vero, Mr Riddle attached the renewal slip for ‘renewal consideration’. Relevantly, the renewal slip provided for:
(a) a combined limit of liability for Sections 1 and 2 of $43,000,000; and
(b) the relevant sub-limits in Section 2 – Consequential Loss were:
· Gross/Profit $15,570,500
· Payroll Dual Basis $ 3,500,000
· Additional Increased Cost of Working $ 2,250,000
· Professional Fees and Costs $ 250,000.
The renewal slip included the renewal estimate which incorporated the figures in the form sent by Mr Matheou on 23 March 2010 and showed the Insurable Gross Profit at $15,570,500. This figure, however, did not include the ‘+10%’ noted by Mr Matheou for second and third periods noted in the Calculation Form.
By email of 29 March 2010 to Mr Riddle, Vero responded with renewal terms.
On 30 June 2010, the principal operating company of the SKM Group changed from SKM Recycling to SKM.
On 1 July 2010, SKM commenced the receiving and processing of solid waste materials under the Bellarine Contract.
By email of 16 July 2010 at 2:26 pm to Mr Riddle, Mr Matheou advised that the contents for the property at 22 Wood Street, Geelong would need to be insured for $1,000,000.
By email of 16 July 2010 at 5:39 pm to Vero, Mr Riddle requested that the ISR Policy include cover for ‘Contents, Plant and Equipment to the value of $1 million’ with respect to a new property at 22 Wood Street, Geelong, which were intended to be used with respect to the Bellarine Contracts.
By email of 19 July 2010 at 9:40 am Mr Riddle replied that Vero was ‘holding us covered’ but he needed to know details about the building including fire protection, security and the nature of the building.
By email of 27 July 2010 to Vero, Mr Riddle provided the details about fire protection, security, material and age of the building.
By email of 11 August 2010 at 12:19 pm to Mr Matheou and copied to Mr Italiano, Mr Riddle attached the endorsement to the ISR Policy for the addition of 22 Wood Street, Geelong and confirmed the company name had been changed to ‘SKM Industries Pty Ltd’, as requested.
On Friday 5 November 2010 at 10:00 pm, as a result of an electrical fault, a fire started in shed 3 at the Coolaroo premises and extensively damaged three of the four sheds that comprised the main building.
By a Memorandum of Understanding dated December 2010 between GRS and ACI Operations Ltd, it was noted that:
(a)’GRS is setting up a glass beneficiation optical sorting facility in Coolaroo Victoria. This facility is currently due to be commissioned in February 201l’; and
(b)’Representatives of GRS and [ACI] have been discussing preliminary commercial and technical aspects of the GRS facility with a view to entering into a long term agreement for supply of beneficiated cullet to [ACI].'
In 2012, by proceeding S CI 2012 05665, SKM, ITL and GRS (‘the Insureds’) filed proceedings in this Court against Vero (now named AAI Ltd) claiming amounts which the Insureds alleged were due under the indemnity provided by Vero in certain insurance policies, including the business interruption section, for losses sustained as a result of the fire on 5 November 2010.
By a report of 29 August 2012 (‘the 14th Crawford Report’), Crawford Global Technical Services assessed the Insureds’ claims for indemnity arising out of the fire on 5 November 2010. It noted that it had previously recommended payments of $24,690,000; but did not recommend any further payments. The schedule to the report shows the amount paid of $24,690,000 apportioned as follows:
(a) $11,390,627.12 to the material damage section; and
(b) $13,299,372.88 to the business interruption section.
The proceeding was ultimately referred for a mediation to be held on 1 April 2015.
Prior to the commencement of the mediation, Vero’s solicitors prepared a document entitled ‘Issues in Dispute’, which was notated as being ‘Table of Issues in Dispute as at 26.03.2015’. In summary, the document identified that the Insureds claimed that they were entitled to a further payment of $8,755,110.75 from Vero calculated as follows:
(a)‘Plant and machinery’ (being a reference to losses recoverable under the material damage section) totalling $15,808,004.75. The 14th Crawford Report identified that, of those sums, Vero had paid $11,166,714 (being part of the $24,690,000 sum paid by Vero to that time). Accordingly, the Insureds’ claim for indemnity with respect to the material damage section was a further $4,641,290.75.
(b)‘Business interruption loss’ (being a reference to losses recoverable under the business interruption section) of $17,758,242 being loss of gross profit, loss of payroll, increased cost of working and additional increased cost of working. The 14th Crawford Report recommends the sum of $13,644,422, referrable to the business interruption section of the policy, of which $13,299,372[8] had been paid as part of the total sum paid of $24,690,000. The Insureds claimed an additional sum of $4,113,820, referrable to the business interruption section, as follows:
[8]The reconciliation of the recommended sum of $13,644,422 in the 14th Crawford report; and the sum of $13,299,372 paid as part of the total sum paid of $24,690,000 is set out in Appendix 6 to the Report of Joe Willis.
Insured’s claim Amounts paid as allowed in the 14th Crawford Report Balance of claim Loss of gross profit $ 3,232,530 $ 1,841,319 $1,391,211 Loss of payroll $ 730,232 $ 424,930 $ 305,302 Increase in cost of working and additional increase in cost of working $13,795,480 $11,378,173 $2,417,307 $17,758,242.00 $13,644,422 $4,113,820.00
In the Issues in Dispute document, Vero stated that it did not consider itself bound by the opinions expressed in the 14th Crawford Report with respect to the value of the Insureds’ claims; and reserved the right to submit that the Insureds were entitled to less than the amounts recommended in the 14th Crawford Report.
At the mediation on 1 April 2015, the negotiations proceeded (adopting the terminology as recorded in the contemporaneous notes of the Insureds’ solicitor) as follows:
(a) Vero offered $3,000,000 all in.
(b)The Insureds offered $7,057,000 calculated (at least by the Insureds) as:
(i) plant and machinery $3,600,000;
(ii)agreed sums of $1,457,000 (being an approximation of material damage at $466,567.76 plus extra cost of reinstatement at $990,872.19); and
(iii) business interruption loss at $2,000,000;
but not inclusive of costs and interest, which the Insureds sought.
(c)Vero then offered a further payment of $2,060,000 just with respect to the plant and machinery claim.
(d)The Insureds offered $6,162,000 ‘net of certain other figures’.
(e)Vero then made an all-in offer with respect to the plant and machinery and the business interruption of $4,230,000.
(f)The Insureds offered to settle on the basis that their total entitlement for the business interruption loss was $13,000,000; but Vero would not offer more than $12,000,000. Mr Settle, solicitor for the Insureds, gave evidence that the Insureds’ offer of $13,000,000 was ‘obviously reflecting the advice of Mr Chinner that the claim had reduced dramatically from what [the Insureds] were seeking prior to the concession of the policy issue [being the definition of the Uninsured Working Expenses]’.[9] Mr Chinner had assessed the claim under the business interruption section at no more than $13,020,000.
(f)The Insureds final offer at the mediation was $4,950,000 plus $662,000 interest and $1,100,000 for costs.
[9]See [53(b)] below.
By email of 2 April 2015 at 9:26 am to Vero’s solicitors, Mr Settle confirmed that his clients accepted that the definition of the Uninsured Working Expenses for the relevant policy was as contended for by Vero.
By email of 2 April 2015 at 10:44 am to Vero’s solicitors, Mr Settle stated that the Insureds’ offer of $4,950,000 plus interest of $662,000 and costs of $1,100,000 would remain open until 5:00 pm on that day.
On 2 April 2015, the solicitors for Vero updated the ‘Issues in Dispute’ paper, which showed the total amount claimed by the Insureds as $7,376,154.75. In summary, the paper maintained the same claim for indemnity with respect to the material damage section at $4,641,290.75. However, the Insureds’ claim under business interruption section was reduced to $2,734,864 calculated as follows:
Insured’s claim Amounts paid as allowed in the 14th Crawford Report Balance of claim Loss of gross profit $ 3,071,846 $ 1,841,319 $ 1,230,527 Loss of payroll $ 730,232 $ 424,930 $ 305,302 Increase in cost of working and additional increase in cost of working $ 12,577,208 $ 11,378,173 $1,199,035 $16,379,286.00 $13,644,422.00 $2,734,864.00
On the basis that the sum of $13,644,422.00 had only been recommended, and the amount then actually paid with respect to the business interruption section was $13,299,372.88[10], the balance claimed would increase to $3,149,913.12.
[10]As shown in the 14th Crawford report (see [44(b)] above).
Vero subsequently made a final offer of $5,400,000 all in (‘the Vero settlement sum’) which was accepted by the Insureds. Australian Reliance does not contend that the Vero settlement was unreasonable.
Questions to be resolved
The questions to be resolved in this proceeding were agreed to be as follows:
1)Did the plaintiffs suffer any loss with respect to the reduction of $1,738,041 in the amount payable under its 2010-11 the business interruption section consequent on the admitted negligence in failing to ensure the declaration included a Gross Sales Turnover:
a)with the 10% sales trend applied to all three relevant periods; and
b)calculated in accordance with the correct allowance for Uninsured Working Expenses;
after allowing for the amounts paid by Vero including the settlement monies paid under the Agreement for Release dated 7 April 2015?
2) As to the SKM additional trend and GRS claims:
a)Did the defendant breach its duty of care or the implied term by failing, in March or July 2010, to advise or make inquiries of the plaintiffs about including an increased declaration of Gross Sales Turnover to Vero with respect to the business interruption section?
b)Did such breach cause the plaintiffs to not declare any and if so what increase in the projected growth estimate of the plaintiffs’ business?
c)If yes to parts 2(a) & 2(b), by what sum was the plaintiffs’ entitlement to indemnity under the business interruption section diminished by such breach?
3) In respect of any losses identified in 2(c):
a)Are the losses to be reduced by any and if so what amount on account of the monies paid by Vero under the Agreement for Release dated 7 April 2015?
b)Was there any contributory negligence, and if so to what extent, on the part of the plaintiffs that contributed to such losses?
It was also agreed between the parties that the relevant duty of care owed by Australian Reliance to the plaintiffs both at common law, and under the term implied in the contract was as follows:
A duty to exercise the reasonable care and skill of a competent insurance broker in advising with respect to and effecting insurance for the client so as to avoid economic loss.
Question 1
Australian Reliance admitted that it was negligent in the following respects:
(a)Australian Reliance calculated the insurable gross profit with a 10% increase. On the basis of the instruction given in the Calculation Form, Australian Reliance accepted that it was negligent in calculating the Insured Gross Profit by failing to also apply the 10% per annum increase to each of the following periods (‘the three relevant periods’):
(i)30 June 2009 to 31 March 2010 (7.5%).
(ii)31 March 2010 to 31 March 2011 (10%).
(iii)31 March 2011 to 31 March 2012 (10%).
The result was the Insured Gross Profit was increased by 10% from the figures for the 2009 financial year but should have been increased cumulatively by 30.07%.
(b)Australian Reliance accepted that it was responsible for a reduction in the plaintiffs’ entitlement to indemnity under the business interruption section consequent on a change in the items included as Uninsured Working Expenses between the 2009 ISR Policy and the 2010 ISR Policy.
As a result of the above negligence, it is agreed that the plaintiffs’ entitlement to indemnity under the ISR Policy was reduced by $1,738,041. However, Australian Reliance contends that the plaintiffs’ claim for this sum is extinguished or, at least, reduced by the amount of the Vero settlement which is properly attributable to the plaintiffs’ claim under the business interruption section of the ISR Policy.
The plaintiffs’ submissions
The plaintiffs submitted that the Court should infer that the plaintiffs received no compensation from the Vero settlement with respect to the business interruption section for the following reasons:
(a)The Vero settlement sum of $5,400,000 included:
(i) $1,161,204.31 attributable to legal costs and disbursements;
(ii) $662,000.00 attributable to interest; and
(iii)$1,457,000 attributable an undisputed claim under the material damage section consisting of a claim for the building of $466,000 and an Extra Cost of Reinstatement claim of $900,090, which had been admitted by Vero.
Accordingly, it was submitted that only approximately $2,183,000 was attributable to settlement of the claims under the material damage section and business interruption section.
(b)The amount of $13,299,372.88 had been paid for the claims under the business interruption section.
(c)At the mediation on 1 April 20015, Mr Chinner had assessed the claims under the business interruption section at no more than $13,020,000.
(d)The evidence of the negotiations was that neither party valued the total amount claimed under the business interruption section at greater than about $13,000,000. It was to be inferred from the notes and evidence of Mr Settle that the sum of $4,230,000 offered by Vero at the conclusion of the mediation did not include any sum for the claims under the business interruption section.
(e)The Insureds’ claims under the material damage section was for an amount in excess of $4,500,000 and the only substantial basis upon which Vero relied in disputing this claim was a ‘betterment’ argument in respect of which it bore the burden.
(f)In the joint report dated 14 February 2017, Mr Willis and Mr Chinner agreed that the amount payable under the business interruption section of the policy as it stood was $13,821,991; and the amount paid prior to the mediation was $13,299,372.88. Accordingly, no reduction should be made with respect to the plaintiffs’ claim for the loss of the indemnity entitlement of $1,738,041 unless the Court found that more than $500,000 (being the approximate difference between the above figures) of the Vero settlement sum was referrable to the claims under the business interruption section.
The defendant’s submissions
Australian Reliance contended that the amount of the Vero settlement which related to the material damage section of the ISR Policy and the business interruption section of the ISR Policy (which they contended was about $2,500,000 – see [57]) should be apportioned in accordance with the amounts respectively claimed under:
(a)the material damage section of $3,730,717.88 (amount shown as claimed $15,121,345 in the ‘Issues in Dispute’ document of 2 April 2015 less amount paid on the recommendation of the 14th Crawford report – $11,390,627.12).
(b)the business interruption section of $3,149,913.12 (as calculated in [49] above).
Australian Reliance did not dispute the plaintiffs’ assessment of the components of the Vero settlement sum, except that it submitted that the costs component should be reduced by 30% to allow for costs on a solicitor/client basis. Accordingly, Australian Reliance contended that a total of approximately $2,500,000 was paid as compensation for the disputed claims for indemnity under the material damage and business interruption sections.
Australian Reliance submitted that, although Mr Chinner’s calculation of the entitlement to indemnity under the business interruption section at the mediation was $13,020,000, the calculation assumed the operation of the averaging provision in the ISR Policy. However, at the mediation, the Insureds had argued that the averaging provision was not applicable because of ‘the Cawthorn point’, as it was referred to in this Court.[11] ‘The Cawthorn point’ was that the indemnity under the business interruption section of the policy was not limited to approximately $13,000,000 because the effect of the averaging clause could be overcome by the Insureds making an amended declaration of the gross profit under the Adjustment of Premium provision in the policy - which provided as follows:
[11]A reference to the Insureds’ senior counsel at the mediation, Mr Cawthorn QC, who had identified the argument.
ADJUSTMENT OF PREMIUM
(a)The Premium shown is provisional and is calculated on the Declared Values of:
(i) Property Insured,
(ii) Gross Profit and Insured Payroll,
on the day of commencement of each Period of Insurance.
(b)The Insured undertakes to declare to the Insurer(s) within a reasonable time after the day of expiry of the Period of Insurance:
(i)the value of Property Insured on the day of expiry of the Period of Insurance. For the purpose of this declaration, stock-in-trade and/or merchandise shall be taken at its average value during the Period of Insurance;
(ii)the amount of the Gross Profit earned and Payroll paid, in accordance the cover afforded in the respective items of Section 2, in the course of/the Business during the accounting period of 12 months most nearly concurrent with the Period of Insurance.
(c)The provisional premium shall be adjusted by payment to the Insurer(s) of an additional premium or by allowance to the Insured of a return premium, as the case may be, calculated at the agreed rate on:
(i)fifty per cent (50%) of the difference between property declared in accordance with clauses (a)(i) and (b)(i);
(ii)the full agreed rate hereunder on the difference between the amounts declared under clauses (a)(ii) and (b)(ii).
The fact that the Cawthorn point was still pressed by the Insureds at the mediation is confirmed by the entry in the schedule to the Issues in Dispute document dated 2 April 2015 which noted the following:
6.5The plaintiff contends that as a matter of construction of the policy the coinsurance proviso to Item 1 of the Business Interruption Basis of Settlement:
(a)applies to “Annual Turnover”, as qualified by the bracketed definition of that term on page 18;
(b)is qualified by the Adjustment of Premium provision on page 26, the effect of which is that the “Declared Value of Gross Profit”, is an adjusted amount, adjusted, in this case, upwards;
(c) with the consequence that underinsurance is not relevant.
Although the Insureds had not declared to the insurer ‘within a reasonable time after the day of expiry of the Period of Insurance’ in accordance with sub-cl (b), the Insureds had contended that the failure could be remedied under s 54 of the Insurance Contracts Act 1984 (Cth).
Further, with respect to the Insureds’ submissions referred to in [55(f)], it was submitted by senior counsel for Australian Reliance that, if the Insureds ‘settled short in the Vero proceeding by $500,000’ any amount properly attributable in the Vero settlement to the claim under the business interruption section should nonetheless reduce Australian Reliance’s liability for the claims based on its admitted negligence.
Principles relating to the assessment of damage where there has been a prior settlement
The principles to be applied on the assessment of damages against a broker, where there has been a prior settlement with an insurer relating to the same loss, were not in dispute and can be stated as follows:
(a)The plaintiffs’ damages should be calculated by reference to the difference between:
i.the amount that the plaintiffs would have been recovered under the insurance that the defendant should have arranged (ie without negligence); and
ii.the amount the plaintiffs recovered from the insurer.[12]
As was said by Hayne J in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd:
It is clear, of course, that to avoid double recovery, the amount recovered by the insured under a settlement must be taken to account in assessing the damage suffered by the insured as a result of the broker’s breach.[13]
(a)The plaintiffs have the onus of proving the extent (if any) that the plaintiffs’ claim was satisfied by the Vero settlement.[14]
(b)In determining what, if any, amount of the Vero settlement money should be applied in reduction of the claim made by the plaintiffs in this proceeding, the Court must apply the law to the facts,[15] and do (as the defendant submitted) ‘the best it can’.
(c)A court should approach the task objectively having regard to the circumstances existing at the time of settlement including the material available to the parties; the legal and other advice proffered, the course of negotiations; and an assessment of the chances of the parties succeeding in their respective claims.[16]
[12]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, 608 [4] (Brennan CJ); 652–3 [128] (Hayne J).
[13]Ibid 650 [120].
[14]Boncristiano v Lohmann [1998] 4 VR 82, 89–90 (Winneke P, Charles and Batt JJA).
[15]Morris v Riverwild Management Pty Ltd (2011) 38 VR 103, 116 [52] (Nettle and Redlich JJA) referring to Banque Keyser Ullmann SA v Skandia (UK) Insurance Co [1988] 2 All ER 880, 884 (Steyn J).
[16]Adapting the principles noted by the Court of Appeal in Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG [2014] VSCA 338 [742]–[760] (Tate, Santamaria and Kyrou JJA) with reference the approach to be adopted in determining the reasonableness of a settlement.
Decision
I accept Australian Reliance’s submission that the costs component of the Vero settlement sum should be reduced to reflect the fact that it was not disputed that Vero would only have been liable to pay costs on a standard basis. I therefore accept that, of the Vero settlement sum, approximately $2,500,000 was attributable to the claims under the material damage section and the business interruption section.
I accept the plaintiffs’ submission that on the basis that:
(a)the Insureds’ claims under the business interruption section as it stood[17] was $13,821,991; and
(b)the Insureds had only been paid $13,299,372.88 with respect to its claims under the business interruption section;
if I am satisfied that no more than $500,000 of the Vero settlement sum is referrable to the claims under the business interruption section, there should be no reduction in the damages referrable to Australian Reliance’s admitted negligence.
[17]Ignoring ‘the Cawthorn point’ at this stage.
In my opinion, no reduction should be made for the amount received by the Insureds under the Vero settlement for the following reasons:
(a)The amount paid with respect to the claims under the business interruption section prior to the mediation was $13,299,372.88. However, despite the payments being made, Vero specifically reserved the right to contend that the Insureds’ entitlements under the ISR Policy was less than the amounts that had been paid.
(b)On the day of the mediation, Mr Chinner had calculated the Insureds’ entitlement with respect to the claims under the business interruption section at no more than $13,020,000.
(c) Although it is not possible nor appropriate for this Court to make a detailed assessment of the viability of ‘the Cawthorn point’, there was no attempt to persuade this Court, by argument or evidence, that what appears to be a novel legal argument was seriously considered by the negotiating parties to have a real prospect of success.
(d)The fact that neither party to the mediation considered that the Insureds had a viable claim in excess of the amount already paid under the business interruption section is demonstrated by the fact that towards the end of the mediation:
(i)the Insureds offered to settle the claim under the business interruption section for $13,000,000; and
(ii)Vero rejected the offer and indicated that it would pay no more than $12,000,000.
Australian Reliance submitted that it was ‘not at all clear from Mr Settle’s notes or his recollection that the reference to the $12,000,000 was a position that had been communicated by the insurer as opposed to the plaintiffs’ internal assessment of where the insurer might be likely to go’. I reject this submission and find that, on the balance of probabilities, the offer of $13,000,000 to settle the claims under the business interruption section was made and rejected at the mediation for the following reasons:
(a)Although Mr Settle’s recollection was understandably very vague, the events in issue having occurred almost 2 years ago, his contemporaneous note is clear:
Robert offered $13m on BI
Response: Insurer won’t pay any more than $12k (sic).[18]
(b)The uncontested evidence of Mr Settle was that, during the course of the mediation, there were attempts by the parties to separately settle the respective claims under the material damage section and the business interruption section.
[18]It was not disputed that ‘$12k’ was intended to be a reference to $12m.
Accordingly, I am satisfied on the balance of probabilities that the Vero settlement sum did not include any sum with respect to the claims under the business interruption section; and, a fortiori, it did not include any sum that would result in the Insureds recovering more than the sum of $13,821,991 on its claim.
In the circumstances, I answer question 1:
Yes, the plaintiffs suffered a loss in the sum of $1,738,041.
Question 2
The plaintiffs submitted that the Australian Reliance was negligent in three respects:
(a)The Calculation Form in the Insurance Renewal Questionnaire dated 11 March 2010, which asked for ‘Percentage increase to allow for expected trend of business’ (‘the Expected Trend Increase Percentage’) in each of three relevant periods, was ‘sufficiently unclear to be negligent’.
(b)The statement by Mr Matheou in his email of 23 March 2010 questioning whether to compound the increases should have resulted in Australian Reliance making inquiries to ensure that he understood the purpose of the Expected Trend Increase Percentage.
(c)The information communicated to Mr Riddle about the proposed increases in turnover as a consequence of:
(i) the start of the Bellarine Contracts; and
(ii) the processing of glass by GRS;[19]
(together, ‘the Expansion’) should have resulted in Australian Reliance inquiring as to whether the 10% increases noted in the Calculation Form were sufficient.
[19]See [17] above.
Calculation Form was ambiguous
The plaintiffs submitted that the words ‘expected trend’, in the Expected Trend Increase Percentage inquiry, were open to be read as a reference to the movement in the SKM Group’s historical figures (‘Historical Trend’) and not to the expected increase in actual growth consequent on substantial new contracts, such as the Bellarine Contracts, or an expansion into a new operation, such as glass processing by GRS (‘Actual Growth’). In particular, it was submitted that the inquiry in the Calculation Form was insufficient because there had not been an adequate explanation of the effect of the co-insurance provision; and therefore the reader of the Calculation Form would not have understood the importance of the answer to the inquiry as to the ‘expected trend’.
The distinction between Historical Trend and Actual Growth was demonstrated by reference to the definitions in the ISR Policy which states, with respect to ‘Turnover’ and other terms, that ‘adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business’. Accordingly, it was submitted that the ISR Policy recognised the distinction between:
(a) ‘the trend of the Business’, being a reference to Historical Trend, and
(b)‘variations in or other circumstances affecting the Business’, being a reference to Actual Growth.
The email of 23 March 2010
In his email of 23 March 2010, Mr Matheou stated that he was ‘unsure whether [the 10% increases] needed to be added together and ultimately added back to the gross profit figure and payroll figure’. The plaintiffs submitted that the statement demonstrated that Mr Matheou had insufficient understanding that the Expected Trend Increase Percentage was inquiring about Actual Growth.
The information about the Expansion
As at March 2010, Mr Italiano had informed Mr Riddle that the result of the Expansion would be about a 20% increase in tonnages received.[20] Mr Riddle had also made arrangements for:
(a)GRS to be included as an insured and glass processing equipment to be insured;[21] and
(b)placement of public liability insurances[22] and insurance of the plant and equipment and premises at 22 Wood Street, Geelong relating to the Bellarine Contracts.[23]
[20]See [19] above.
[21]See [8] above.
[22]See [19] above.
[23]See [34]–[35], [38] above.
The plaintiffs submitted that, with knowledge of the Expansion, Mr Riddle should have been prompted to give further advice about the completion of the Expected Trend Increase Percentage.
Causation
If Mr Riddle had made an appropriate inquiry or properly explained the purpose of the Expected Trend Increase Percentage as relating to Actual Growth of the businesses, the plaintiffs submitted that the Court should infer that:
(a)The plaintiffs would have reconsidered the 10% trend increase estimate and had regard to the fact that the Bellarine Contracts would commence from 1 July 2010; and the projected increase in turnover consequent on the start of glass processing by GRS.
(b)On reconsideration, Mr Matheou and Mr Italiano would have taken into account:
(i) the Bellarine Contracts would result in a 20% increase in tonnages from 1 July 2010; and
(ii) a substantial increase in turnover from the glass processing by GRS based on the fact that:
a. about 30% of all tonnages consisted of glass;
b. SKM had only sold 892 tonnes of unprocessed glass in the financial year 2009-10 for a price of about $77 per tonne; whereas SKM could sell 53,000 tonnes (being 30% of 177,000 tonnes of material) of processed glass at a price of about $140 per tonne.
(iii) a calculation of the Uninsured Working Expenses based on ‘the historical records’.
(c)After such reconsideration, Mr Matheou and Mr Italiano would have increased the Expected Trend Increase Percentage beyond the 30% total increase (being the effective cumulative product of the three 10% per annum increases that Mr Matheou instructed) in the Insurable Gross Profit under the ISR Policy for 2010-11 to a percentage, which was not specified, so that the co-insurance provision would not have operated.
Principles relating to the exercise of reasonable care of an insurance broker
What a broker is required to do to satisfy the standard of exercising reasonable care to prevent economic loss will depend upon the circumstances of the particular case.
In general terms, the reasonable broker will take reasonable steps to:
(a)understand the nature and extent of the client’s instructions for insurance cover;
(b)advise the client about the insurance cover available to meet the client’s instructions; and
(c) arrange the insurance as instructed.
In this case, the calculation of the Declared Values in the business interruption section required consideration of terms of art such as ‘Insurable Gross Profit’, ‘Uninsured Working Expenses’, ‘the insurance or policy year’ and the ‘Indemnity Period’. If the calculation of the Insurable Gross Profit is to be undertaken by the client, it may be necessary for a broker to provide a proper explanation of each of these terms.[24]
[24]Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep IR 491, [25] (Judge Grenfell); Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), [86(1)–(3)] (Blair J) (‘Eurokey’).
Similarly, if the client requests a particular level of cover for the Insurable Gross Profit, it may be necessary for a broker to explain the effect of co-insurance/averaging if the disclosed Insurable Gross Profit is less than the client’s actual Insurable Gross Profit.[25]
[25]Geoffrey W Hill and Associates (Insurance Brokers Pty Ltd) v Squash Centre (Allawah North) Pty Ltd (1990) ANZ Ins Cas ¶61-012 (Gleeson CJ, Kirby P and Mahoney JA).
However, in determining the steps to be taken, a reasonable broker would take into account all relevant circumstances including:
(a) the level of commercial sophistication of the client;[26]
(b)whether the relevant advice has been provided to the client in previous years; and, in particular, to the responsible person for the client;[27]
(c)whether the broker has taken responsibility for the calculation; and has simply requested that the client provide the financial information necessary for that purpose; and
(d)whether the broker has reason to suspect that the information provided is inaccurate.[28]
[26]Eurokey [2014] EWHC 2989 (Comm), [86(5)–(6)].
[27]Ibid [86(5)–(7)]; William Jackson & Sons Ltd v Oughtred & Harrison (Insurance) Ltd [2002] Lloyd’s Rep IR 230, [29] (Morison J).
[28]Synergy Health (UK) Ltd v CGU Insurance Plc [2011] Lloyd’s Rep IR 500, [206] (Flaux J); Eurokey [2014] EWHC 2989 (Comm), [86(8)].
Decision
With respect to the alleged negligence in the wording of the inquiry in the Calculation Form about the Expected Trend Increase Percentage, I do not consider that the plaintiffs have established, on the balance of probabilities, that:
(a) Australian Reliance was negligent; or
(b)any inquiry about the adequacy of the proposed Expected Trend Increase Percentage in the Calculation Form would have resulted in the Insureds increasing the Expected Trend Increase Percentage allowance.
Was the Calculation Form ambiguous?
In my opinion, the adequacy of the request for information contained in the Calculation Form must be assessed in all the circumstances including the following:
(a)Prior to 2009 renewal of the ISR Policy, Mr Chinner had been engaged to provide advice about the business interruption section and particularly with respect to the adequacy of the Insurable Gross Profit declaration. Mr Chinner had meetings with Mr Italiano and Mr Matheou for the purpose of assessing the financial position of the Insureds’ businesses including the appropriate declaration of the projected Insurable Gross Profit. Mr Italiano gave evidence that he understood that the business interruption section was intended to cover potential loss of profit. Mr Italiano also gave evidence that he understood the importance of providing accurate figures and that it was necessary ‘to be able to anticipate what was going to be the revenue’. The discussions included the fact that a substantial increase in the Insurable Gross Profit for the year would result in a significant increase in the insurance premium.
(b)The questionnaires for the 2009 renewal and the 2010 renewal, at least, both included written statements emphasising the importance of informing Australian Reliance of changes in circumstances and explaining co‑insurance.[29]
(c)Mr Matheou signed declarations for the 2010 renewal which disclosed ‘Gross Sales Turnover’ for financial years 2009-2010 at $19,000,000 and 2010-2011 at $21,000,000. He signed a declaration that these ‘estimated figures supplied reflect a reasonable expectation for the next policy period’.[30] These declarations were emailed to and read by Mr Italiano.
(d)Mr Matheou was a qualified accountant who had been charged by the plaintiffs with the responsibility of completing the necessary forms for the purpose of effecting both the 2009 renewal and the 2010 renewal.
[29]See [221] above.
[30]See [24] above.
Mr Matheou was not called to give evidence. Although I was not asked to draw a Jones v Dunkel[31] inference (and I do not do so), I have not had the benefit of any evidence of his discussions with Mr Chinner in 2009, his understanding of business interruption section or circumstances which may have caused him to be confused about the nature of the task that he undertook in completing the Calculation Form.
[31](1959) 101 CLR 298.
I reject the plaintiffs’ submission that the request for the Expected Trend Increase Percentage invites only an analysis of historical performance. The Calculation Form asks for an expected trend in the three relevant periods. In my opinion, it was not unreasonable for a broker in these circumstances to expect the client to read the ‘Percentage increase to allow for expected trend of business’ question in the Calculation Form as asking about the expected Actual Growth of the businesses conducted by the plaintiffs in the three relevant periods.
Should the email of 23 March 2010 have prompted Mr Riddle to give further advice about the ‘Percentage increase to allow for expected trend of business’ question?
I do not accept that a reasonable broker, on reading the email of 23 March 2010 sent at 1:39 pm, in the circumstances set out above at [82], would have concluded that Mr Matheou was confused about whether the Expected Trend Increase Percentage referred to in the Calculation Form was inquiring about Actual Growth. In my opinion, the following communications would have indicated to a reasonable broker that the estimates of 10% increase for each of the three relevant periods had been understood by the plaintiffs to inquire as to the Actual Growth:
(a)The Calculation Form completed by Mr Matheou plainly sets out the allowance of 10% increases for each of the three relevant periods.
(b)The email stated, correctly, that the calculation was to be applied to both payroll and ‘the calculation of the sum insured on Gross Profit sheets’.
(c)Mr Matheou signed a declaration, attached to another email to Mr Riddle at 12.27 pm on the same day (23 March 2010), that the ‘estimated figures [in the declaration of Actual Sendings/Turnover] supplied reflect a reasonable expectation for the next policy period’.[32]
[32]Emphasis added.
In my opinion, by the email, Mr Matheou queries whether the 10% increment should in each case be $1,415,500 and then added to the gross profit figure; or inferentially whether the percentage on each of the three relevant periods should be compounded on the previous periods. It is now accepted by the parties that the figure should have been compounded and Australian Reliance has admitted that it was negligent by not ensuring that the business interruption section provided cover based on an Insured Gross Profit, which was calculated by applying the 10% per annum to the three relevant periods.
Mr Matheou was not called to give evidence about any circumstances surrounding the email, which may have caused a reasonable broker to reach a different conclusion. Again I draw no adverse inference; but I do not have evidence as to whether he was under a misunderstanding and, if so, what matters caused him to misunderstand the nature of the inquiry.
Accordingly, I do not consider that the email would cause a reasonable broker to conclude that the client had not understood that it was being requested to estimate the Actual Growth for each of the three relevant periods.
Should the information about the Expansion have prompted Mr Riddle to give further advice about the Expected Trend Increase Percentage estimate?
As of March 2010, Mr Italiano expected that the Bellarine Contracts, which were to commence on 1 July 2010, would increase tonnages of material by 20%.
In December 2010, GRS signed a Memorandum of Understanding with ACI Operations Pty Ltd with respect to the sale of processed glass. The preamble of that agreement records that ‘GRS is setting up a glass beneficiation optical sorting facility in Coolaroo Victoria. This facility is currently due to be commissioned in February 2011’.
As at March 2010, it is not in dispute that Mr Italiano had told Mr Riddle at least of his expectation that tonnages would increase by 20% as a result of the Bellarine Contracts and that the glass processing plant of GRS was expected to start in February 2011.
The plaintiffs submitted that, as Mr Riddle had been told by Mr Italiano about the proposal to start processing glass through GRS and that the effect of the Bellarine Contracts would be a 20% increase in tonnages, he should have inquired whether the 10% estimate for the Expected Trend Increase Percentage was adequate.
In my opinion, in the circumstances described above, a reasonable broker, who was aware of the proposed Expansion, was not required to query whether the proposed increases noted by Mr Matheou on the Calculation Form were adequate for the following reasons:
(a)Mr Riddle was informed that during the 2010/2011 insurance year there were expected to be significant increases in tonnages and presumably sales. However, there was no evidence that he was aware of, or should have been aware of, what would be the effect of the new contracts and business during the course of the insurance year on the profitability of the SKM Group, particularly after taking into account the expenses associated with such start-ups. Accordingly, he was not provided with all the information which would have enabled him to make an assessment of how the Expansion would have impacted on the Insurable Gross Profit.
(b)A reasonable broker would have understood that the estimates of 10% for the three relevant periods would have resulted in an increase in the Insurable Gross Profit of approximately 30%. It was reasonable for a broker to consider that this was a very substantial increase compared with the projected increase for the 2009 renewal period of approximately 8% (being the compounded effect of 1.75%, 3% and 3% increases).
(c)In his email of 23 March 2010, Mr Matheou had specifically stated that the increases he had estimated were ‘as per Robert’s [the business manager’s] advice’.
In the circumstances, I consider that it was reasonable for a broker to conclude that the client had provided the Expected Trend Increase Percentage in anticipation of substantial growth in the business, consistent with the developments of which Mr Riddle had been made aware.
Causation
Did Mr Matheou misunderstand the Expected Trend Increase Percentage?
I am not satisfied that Mr Matheou, by inserting the Expected Trend Increase Percentages of 10% for each of the three relevant periods, was not providing his estimate of the projected Actual Growth of the Insureds’ businesses taking into account the Expansion for the following reasons:
(a)The instruction to effectively increase the Insured Gross Profit by (approximately) 30% is consistent with him taking into account more than the mere Historical Trends.
(b)Mr Matheou was not called to give evidence. The plaintiffs submitted that I should infer that Mr Matheou had simply applied the 10% estimate suggested by Mr Italiano in the conversation referred to in [27] above. While it may be accepted that Mr Matheou took into account Mr Italiano’s estimate in completing the Calculation Form (and Mr Italiano may have misunderstood what it was that he was being asked), in the absence of evidence from Mr Matheou, I am unable to conclude that Mr Matheou was acting under a similar misunderstanding for the following reasons:
(i)Mr Matheou was a qualified accountant, who had been given the responsibility of arranging the renewal of insurances and, absent evidence to the contrary, it can be presumed that he read the questionnaires, including their warnings and explanations.
(ii)Although Mr Italiano gave evidence of his ‘understanding’ of the question he was asked by Mr Matheou in preparing the SKM Group’s response to the Calculation Form in the 2010 questionnaire, he did not give evidence that he communicated his understanding of the Calculation Form to Mr Matheou.[33]
[33]See [26] above.
(iii)Mr Italiano’s evidence was that his advice was to ‘add 10% … on the previous year’ to March 2010. Mr Matheou did not simply do that. He applied 10% for each of the three periods which resulted in an approximate 30% increase to the Insurable Gross Profit. Further, Mr Italiano’s explanation for the 10% increase to allow for currency risk and commodity prices does not explain why Mr Matheou made precisely the same allowances for the payroll Expected Trend Increase Percentages for the same periods — an expense which it would be expected would not fluctuate in response to currency risk or changing commodity prices.
(iv) In another email to Mr Riddle on the same day as he returned the Calculation Form (being 23 March 2010), Mr Matheou estimated the increase in turnover for the insurance year at approximately 10% and signed a declaration, stating the ‘estimated figures [in the declaration of Actual Sendings/Turnover] supplied reflect a reasonable expectation for the next policy period’. In my opinion, this declaration is not consistent with Mr Matheou’s understanding being that the 10% increase estimate related only to an Historical, and not an Actual, trend.
Would further inquiry about the 10% increase have caused the plaintiffs to change the estimate for the Expected Trend Increase Percentage?
I am not satisfied that, if Mr Riddle had informed Mr Matheou that the Expected Trend Increase Percentage should include an allowance for Actual Growth, Mr Matheou would have taken any different action for the following reasons:
(a) Mr Matheou was not called to give evidence as to what he would have done.
(b)Mr Italiano gave no evidence of what he would have done if he had been so advised.
Although counterfactual evidence of what someone would have done should be treated with ‘considerable care’;[34] and can sometimes be inferred from ‘objective considerations rather than the ex post facto subjective of an interested witness’,[35] I do not consider that such an inference can be drawn in the circumstances of this case for the following reasons:
[34]Deloitte Touche Tohmatsu v Cridlands Pty Ltd (2003) 134 FCR 474, 514–5 [161] (Selway J). Also see Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73, 76; Riley v Penttila [1974] VR 547, 572 (Gillard J).
[35]BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72, [46] (Handley JA).
(a)Although Mr Italiano suggested a 10% increase, based on currency risk and commodity prices, he did not give evidence about whether he would have decided to further raise the effective 30% increase in the Insured Gross Profit, as instructed by Mr Matheou (particularly, after considering the presumably commensurate increase in the premium). Mr Chinner’s evidence was that, for the 2009 renewal, he and Mr Italiano discussed the significant increase in the insurance premium and that Mr Italiano had said that there should not be a further allowance for provisional purposes. As a result, Mr Chinner made no allowance for foreign exchange movements. Mr Italiano gave no evidence as to how he would have resolved this issue for the 2010 renewal.
(b)Although there was evidence as to the actual performance of the plaintiffs’ businesses after the 2010 renewal, there was no evidence as to:
(i)what analysis would have been undertaken by Mr Italiano or Mr Matheou; or
(ii) what would have been the result of such analysis;
for the 2010 renewal, if advice from Mr Riddle had prompted reconsideration of the amount to be estimated for the Expected Trend Increase Percentage.
(c) Mr Italiano did give evidence that he thought in March 2010 that:
(i)he would have been in a position to give ‘sufficient information to somebody about what effect the [Bellarine Contracts may have] … on turnover’; and
(ii)the plaintiffs could have referred to the Memorandum of Understanding to make forecasts with respect to the effect of the glass processing plant.[36]
However, there was no evidence as to what would have been the result of such analysis or what, if any, the Expected Trend Increase Percentage would have been as a result of the analysis.
[36]In fact, the Memorandum of Understanding is dated December 2010.
Senior counsel for the plaintiffs made submissions about calculations that could have been made by reference to information that may have been available to the plaintiffs in March 2010. I consider that, in the absence of evidence, the Court can do no more than speculate as to any reconsideration which might have been undertaken by Mr Matheou and Mr Italiano; and whether any reconsideration would have resulted in an instruction for a different Expected Trend Increase Percentage.
Accordingly, I answer question 2 as follows:
(a) No.
(b) Assuming there was such a breach, no.
(c) Not applicable.
Question 3
As a result of the answer to question 2(c), question 3 is not applicable.
Order
I propose to give judgment for the plaintiffs and order that the defendant pay the plaintiffs damages of $1,738,041.00.
I will hear the parties on the question of interest and costs.
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