|
|
Home
| Databases
| WorldLII
| Search
| Feedback
High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
CIV 2008-485-2603
BETWEEN GRAHAM STRATEGIC LIMITED
Plaintiff
AND STRATUS FINANCIAL SERVICES
LIMITED
Defendant
Hearing: 17-19 August 2009
Counsel: I R Millard QC for Plaintiff
P R
Rzepecky for Defendant
Judgment: 2 September 2009
JUDGMENT OF SIMON FRANCE J
Introduction
[1]
This case concerns a claim that an insurance broker (Stratus) failed to ensure
that the professional indemnity policy held by
its client (Graham Strategic Limited
"GSL") covered all the work done by GSL. As a consequence, when an event
occurred which caused
GSL a loss, GSL was not protected when it should have been.
[2] Stratus' position in response is that the scope of the insurance
cover was a
consequence of express instructions by GSL for it to be limited in the way it was.
Further, that limited coverage was
maintained despite Stratus advising GSL to take
wider coverage. Additionally, it is Stratus' position that even if the policy covered
the client in issue, what happened would never have fallen within the policy.
GRAHAM STRATEGIC LIMITED V STRATUS FINANCIAL SERVICES
LIMITED HC WN CIV 2008-485-
2603 2 September 2009
Facts
(a) The insurance contract is established
[3] In March 2000
Mrs Leigh Graham, who had worked in the media and
advertising industry for eighteen years, set up Graham Strategic Limited. It is
a
marketing and communications company, specialising in advertising. It was initially
a small business, but has proved successful
and has expanded significantly.
[4] Initially GSL carried no professional liability insurance, its insurance
protection being
limited to contents, buildings and the like. However, in 2003 GSL
secured a marketing contract with the Ministry of Education. The
terms of the
contract required GSL to have professional indemnity insurance.
[5] Mrs Graham approach Mr David Collins, who
is the principal of Stratus
Financial Services Limited. He had for many years provided insurance advice to
Mrs Graham's husband,
and had also assisted the couple with financial planning.
The primary business of Stratus is investment advice, mortgage broking,
and life and
general insurance. Professional indemnity insurance is not a core area of expertise
and so Stratus used another broking
firm, Marsh Limited, to assist it with the
placement of Mrs Graham's professional indemnity insurance.
[6] Mrs Graham initially
had dealings with an employee of Stratus who quoted
her a figure of $2,500 as the likely premium for the coverage required. This
was the
figure Mrs Graham used in her budgeting for the contract quotation. When
Mr Collins eventually obtained a quotation
the premium was in fact $13,500.
[7] Mrs Graham was unwilling to pay this much. She required Mr Collins to find
options to
reduce the amount. Eventually the position emerged that one insurance
company, Lumley, would provide professional indemnity coverage
limited to this
one contract.
[8] It had been difficult to obtain such coverage since insurance companies were
reluctant to
insure just part of the business risk. Nevertheless, Lumley did provide
cover, which was expressly limited to the:
Ministry
of Education contract only.
[9] The final cost, GST inclusive, was $4,275.
[10] In August 2004 GSL secured a contract with
the Ministry of Health. That
Ministry likewise required GSL to have professional indemnity cover. An extension
of the existing policy
with Lumley was negotiated, at a cost of an extra per annum
premium of $1,300 plus GST. Thereafter the policy carried
this business
description:
Provision of public relations, advertising, marketing and communication
services, in respect of the Ministry of Education and Ministry of Health
only.
[11] It is apparent, since the business had started three years earlier in 2000, that
GSL did work for other clients that
was never the subject of insurance cover.
(b) The policy never changed
[12] Over time GSL's business grew, and the client
base grew and changed.
Notwithstanding this the policy remained unchanged. The position of the two parties
as regards why this happened
is very different. At this point I intend only to set out
the general positions, and leave the detail to when it matters.
[13]
Stratus says that throughout their relationship, Mrs Graham was unwilling to
either discuss insurance or spend money on it. Professional
indemnity policies are
new contracts each year and the person seeking insurance has to complete a fresh
application ("proposal")
each year. Stratus says Mrs Graham was always late to
complete the proposal. Stratus would have to visit her to assist her to fill
it out.
Further, she was always querying the premium, and wanted to spend as little as
possible on insurance. She did not consider
she required professional liability
insurance, and wanted to have it only where a client required her to.
[14] In 2006 Mr Neil
Carter took over this aspect of Stratus' business from
Mr Collins. Mr Carter says that at the time of this 2006 renewal, he discussed
with
Mrs Graham the need to have full coverage. He obtained a quotation for full
coverage from Vero Insurance but the premium
of $25,000 proved unacceptable to
Mrs Graham. Mrs Graham had been looking to reduce premiums, not pay more, and
so the instruction
was to renew the existing insurance on the same terms.
[15] The policy was therefore renewed on this basis, and again in 2007
and 2008.
On those occasions Mr Carter did not renew his efforts to have GSL take a broader
coverage. In 2008 the discussions on
behalf of GSL were done by the accounts
manager, Ms Jodi Henry. However, Mr Carter says it was clear that Mrs Graham
was still calling
the shots as Ms Henry left the meeting on several occasions to
consult her. The 2008 renewal is the operative one in the sense that
the events
giving rise to the claim fall within that year of coverage.
[16] What happened in 2006 when Mr Carter first dealt
with renewing the policy
is the key factual dispute in the case. Mrs Graham says that such discussions about
taking fuller cover
never took place. This is an important dispute because
Mrs Graham's position is that by sometime in 2005 she had forgotten
altogether that
her coverage was limited. This failure of memory was replaced by a
belief/assumption that her professional
indemnity coverage applied to all her
business activities. Obviously this evidence is much harder to establish if
Mr Carter's
version of what happened in 2006 is correct since then the issue of
limited coverage would have been brought to Mrs Graham's attention.
[17] The case for GSL is that from this time in 2005, when Mrs Graham forgot
about the limits and so came to think that her coverage
was comprehensive:
a) Stratus did several things that positively reinforced that belief;
b) Stratus failed
to do several things it should have, any one of which
would have disabused Mrs Graham of her incorrect belief.
[18]
The position of GSL is that these acts and omissions by Stratus reflect a
reality that it too had forgotten about the limited nature
of the coverage.
[19] With that overview of the competing factual positions, I turn to the business
event that underlies this
case.
(c) The failed advertising campaign
[20] In 2006 GSL had entered into a three year contract with the Retirement
Commission
to provide advertising services. Within that primary contract, any
major campaigns would be subject to specific sign-off.
GSL's role in these major
campaigns is primarily as an organiser or project manager, although it also provides
creative input. One aspect of such campaigns
that was not under GSL's control was
the booking of television advertising time. This was done by another agency used by
the Commission.
The dates for such advertising are required to be settled in
advance, and cancellation penalties apply.
[21] In 2008 a new
campaign was planned. The first television date was to be
18 May 2008. The new campaign was to be based around the "My Way" song
made
famous by Frank Sinatra. Obviously copyright approval is required to use songs for
advertising campaigns. When the "My Way"
idea was first floated, GSL checked
with the appropriate music licence specialist as to availability. The song was
advertised
as being generally available for use, subject to specific consent being
provided.
[22] Once the Commission signed off on the
campaign on 3 April 2008, an
application was immediately formalised for the copyright. It was expected that the
timing would be fine.
Shooting of the advertisement took place over the weekend of
26/27 April 2008. By that time the copyright had not come through. This
was
known to contractors working on the campaign, but not to GSL. Those with
knowledge of the absence of copyright
approval were being advised that the consent
would come through in time for the campaign launch.
[23] As it happens copyright
was never obtained. The copyright holders are
resident in France. There are eight trustees who are related to each other, and the
approval of all eight is required. At the time of the GSL application it appears that
there were unresolved disagreements within
the trustees so only five would grant
approval. The end result of this conflict was that the advertising campaign could not
be used.
GSL only became aware on 6 May that the copyright licence was not to
hand.
[24] On 8 May it alerted the Retirement Commission
to the issue, but indicated it
was still optimistic that the problem could be resolved. The Retirement Commission
was understandably
not enthralled by the news, and made it clear that GSL was the
party responsible. GSL increased its efforts to obtain the licence,
but to no avail.
[25] On 9 May, the agency handling the television advertising aspect successfully
managed to move the booked
airtime without penalty. It is apparent that this was a
praiseworthy piece of negotiation that avoided what could have been substantial
penalties. The relevant "to air" dates were moved first to June and then to August.
Ultimately 24 August became the final date. As
part of the negotiations it had been
necessary to pay in advance for the advertisements. It became thereafter settled that
the 24
August date was fixed, and if the date was not used, the money would be
forfeited.
[26] Discussions continued with the Retirement
Commission. Eventually
planning started on a new campaign whilst efforts continued to get the licence.
30 June 2008
was set as the date by which the licence had to be obtained. If not, the
"My Way" campaign would be abandoned and a new concept proceeded
with. The
latter is what happened and a new campaign was filmed. It met the 24 August
deadline, and so aired on time albeit three
months later than the original planning.
[27] The arrangement reached with the Commission was that the Commission
would pay
for the new campaign which had a similar budget to the "My Way"
campaign. It would not pay for anything to do with the "My Way" campaign,
and
any money it had already paid would be credited to the cost of the new campaign.
This is what occurred and the final cost to
the Commission for this campaign was in
fact slightly less than the budget for the "My Way" campaign.
[28] Subsequently the Commission
has billed GSL for $8,450 for other wasted
costs it incurred in relation to the "My Way" campaign.
[29] The outcome of all this
is that GSL was paid for the advertising campaign
that was accepted by the Commission and which aired. It has however been left to
carry the cost for the unusable
"My Way" campaign. This loss includes both its own
time and the payments it made to other parties who worked on the project. It is
this
loss that GSL seeks to recover by these proceedings.
[30] The proceedings allege that if the Retirement Commission contract
had been
included within its professional indemnity cover, as it should have been, the insurer
would have been required to indemnify
GSL for this loss. The sum claimed is
$413,918.55, the breakdown for which is:
GSL fees
45,866.25
External costs 377,421.05
Reimbursement to Commission
10,631.25
433,918.55
Less policy excess
20,000.00
413,918.55
These proceedings
[31] It is common ground that the insurer was correct to reject the claim on the
basis that work that GSL was doing in relation
to anyone other than the Ministries of
Health and Education was not covered. The case against Stratus is pleaded as a
breach of contract,
it being alleged that it breached an implied term of the contract by
failing to ensure GSL was covered.
[32] The plaintiff words
the implied term in this way:
Stratus would be reasonably familiar with GSL's business and would
exercise reasonable
care and skill in advising on and placing such insurance
and in managing any claims that arose under any resulting policy.
[33] Stratus accepts a modified form of the implied term, and denies a breach. It
says the implied term is that Stratus:
would exercise a reasonable standard of care and skill in advising the
plaintiff and following its instructions in
relation to the placing of its
insurance instructions.
[34] The primary difference is that Stratus' version emphasises
the role and
centrality of a client's instructions.
[35] GSL submits that Stratus breached the implied term of the contract
in that:
a) it ought to have advised GSL that its policy was limited to two clients
the Ministries
of Health and Education;
b) it was negligent in how it responded to situations in that the manner of
its response not only failed to alert GSL to the limited coverage, it
positively reinforced GSL's mistaken belief
that it was covered.
These responses also form the basis of a Fair Trading Act claim.
[36] GSL submits that
had the proper advice been given, GSL would have taken
out insurance that applied to all its clients. Armed with such cover, it is
claimed that
it would be able to turn to the insurer to cover its losses on the "My Way" campaign.
[37] Stratus says it did
advise GSL of its limited coverage, and that GSL
instructed it to maintain the same limited coverage that had been in place from
the
outset. Alternatively it submits that if it did not advise GSL, any failure to advise
was not causative of loss because GSL would
not have taken coverage despite such
advice. Finally it submits that the policy would not in any event apply to indemnify
GSL's losses
on the "My Way" campaign. This is because that sort of loss does not
fall within the coverage provided by a professional indemnity
insurance policy, or
alternatively if generally within the policy, three exclusions were applicable. Stratus
also submits that it
can claim contribution in relation to any loss, and that GSL's
own default was a primary cause of its losses.
Issue one breach
of implied term
[38] It is not easy to resolve the factual conflict between the parties. On the one
hand GSL originally instructed
the coverage to be limited. Thereafter there is no
claim by GSL that it positively altered this position or ever told Stratus to increase
the cover. Rather it says it erroneously thought this
had somehow happened. On the
other hand there is no document sourced in Stratus which brings the limited cover to
the attention of
GSL subsequent to the 2004 extension of the policy to Ministry of
Health. Stratus forwarded on documents such as policies and policy
schedules that
contained this information, but never itself brought them to GSL's attention.
[39] In my view Stratus did breach
the term of the contract which requires it to use
reasonable skill and care in advising GSL. I base this primarily on two matters:
a) the response it gave to certain requests by Mrs Graham;
b) the manner in which it dealt with annual
"renewals" of the policy.
(a) The deficient responses
[40] Part of GSL's business was to tender for new work. This would
require it to
complete application on tender forms. The process led Mrs Graham to seek
assistance from Stratus.
[41] First,
on 3 October 2005, some fourteen months after the adjustment to add to
the Ministry of Health, Mrs Graham emailed Stratus:
Can you please advise how I would respond to the question in an RFP about
insurance. The question is:
Please
provide details of types of relevant insurance held and
amount of cover, i.e. Public Liability Professional Indemnity.
[42] Stratus (Mr Carter) replied:
You can confirm you have both:
Public Liability cover limit $1,000,000
Professional Indemnity limit $2,000,000
[43] It is to be noted this answer was only true as regard the Ministries
of Health
and Education. Mr Carter did not know to whom the tender was being made. It was
in fact either for IRD or the Reserve Bank
(Mrs Graham cannot now recall which it
was).
[44] Next, on 16 May 2006, Mrs Graham emailed:
I'm just doing another
tender at the moment. Can you please confirm what I
can say about our Professional Indemnity and Liability insurances please?
The answer was:
You can confirm current cover limit of indemnity $1,000,000.
Insurer Lumley General .... Current
to 1.4.07.
Let me know if you need to confirm anything further or if you need a
certificate/confirmation sent to
anyone.
[45] Finally, on 23 October 2007, Mrs Graham emailed:
We are currently doing a new business pitch. What kind
of wording could I
use to answer the following question please:
Specify whether we have or will obtain adequate
insurance to cover
any liabilities that may arise from providing the required services,
including
details of insurer, type(s) and level(s) of cover.
The answer received was:
Not sure exactly what the business pitch is
... but presuming it is in your
normal fields then ...
You can confirm that you both hold professional indemnity
and public
liability covers relative to your profession.
Professional Indemnity Lumley limit $1,000,000.
Public Liability AMP limit $5,000,000 including statutory and
employers liability to $500,000 limit.
Increases
can be arranged if specifically required.
[46] In my view the answers provided by Mr Carter fell below the standard of
skill
and care one could reasonably expect of a broker. The answers were incorrect
unless the business pitch related to one of the two
Ministries (none of them did).
[47] Mr Carter's evidence is that they were just an inquiry and he answered what
was asked. However,
that is not so in that the answer is wrong. On none of the
occasions did Mrs Graham have this coverage. The expert called by Stratus
agreed
that he regarded the answers as less than fulsome. Whilst seeing the nature of the
answers as reflecting the dangers of doing
these things by email, the effect of his
evidence was, quite properly, that the answer should have referred to the contractual
limits. In my view, in failing to provide
proper responses, Stratus breached its duty.
The effect was that on three occasions when the client should have been clearly and
firmly reminded of the contractual limitation to the two Ministries, this was not
done.
[48] A point made during the trial by
Stratus is that it was entitled when replying
to such inquiries to rely on Mrs Graham having read the documents sent to her each
year and which set out the contractual limit. However, the documents Stratus refer
to equally set out the financial information Stratus
provided in its answers. There
was no basis to think Mrs Graham was unaware of the financial limits but was aware
of the client limitations.
If she needed reminding about some limits she plainly
should have been reminded about this fundamental one.
[49] Reflecting
on the answers given by Stratus, it is a convenient moment to note
one of the central themes advanced by the plaintiff. It is GSL's
proposition that
Mr Carter was equally unaware of the client limitation. I mention that at this point
because some support for it
is found in the last line of the third answer. Having set
out the monetary limits, Mr Carter says to Mrs Graham:
Increases
can be arranged if specifically required.
[50] The GSL theory that Mr Carter was unaware of the client limitation could
provide
some explanation for what is otherwise a somewhat inexplicable offer to
increase the monetary limits, without mentioning the more
important fact that except
for two clients, there was no coverage at all let alone worry about the size of the
amounts.
[51]
At this point one can also observe another feature of the evidence. Each year,
GSL was required to complete a new insurance proposal.
It was assisted in this by
Stratus. One of the questions required the insured to list its five major contracts.
The contracts listed
by GSL changed over time:
2005 : Health and Education were the only two listed.
2006 : Education,
Health, Health Sponsorship, Quit Group, Cancer
Society.
2007 : Health Sponsorship, Quit, Health,
Retirement, AXA.
2008 : Health Sponsorship, Health, Retirement Commission, Quit
Group, AXA.
[52] These contracts are listed above in order of the monetary value of the
contract. It is to be noted that for the last two
years Education was not there at all.
Related to the previous point, it is quite puzzling given this profile, for Stratus to be
mentioning
that the monetary limits could be increased. After all they applied only
to Health, and to the disappearing Education client. The
far more obvious query
must have been about the scope of the coverage.
[53] Against this background I consider the three email
answers were negligent.
They were incorrect and they failed to draw attention to a major problem in the
scope of the coverage. Whether
or not the scope of the coverage had been raised in
2006 (a disputed point), one would still expect a reasonably competent insurance
agent to return to the topic. Interestingly the insurance expert called by Stratus noted
that in the circumstances of this case he
would have proffered a quotation for full
cover every year, regardless of whether GSL had previously indicated its preference
for
limited coverage. The standard shown by Stratus in its dealings falls
significantly below that careful approach, and failed
to meet the necessary standard.
(b) The "renewal" process
[54] As noted, each year a professional insurance policy must
be reissued in the
sense that it is a fresh policy rather than the automatic renewal of the existing. The
insured is required to
complete a new application each year.
[55] The process for GSL was conducted this way. The broking firm used by
Stratus, Marsh
Ltd, would send the application form to Stratus every January.
Stratus would forward that on to GSL. It has to be observed that Stratus lacked
timeliness in this regard.
The dates the material was sent by Marsh, and then
forwarded on, were in 2006, 20 January and 16 February; in 2007, 17 January
and
8 March; in 2008, 16 January and 28 February.
[56] On each occasion, Stratus forwarded the proposal forms for completion.
In
2006 nothing specific was said at the time the forms were forwarded on. In 2007
Mr Carter said he would like to get the forms
sorted properly this year. This was a
reference to an on-going issue as to whether the proposal should declare GSL's
turnover, or
its actual income. In 2008 the emphasis of the covering letter was on
highlighting the need to identify any claims, or significant
changes.
[57] The forms having been sent to GSL, there was thereafter a meeting arranged
at GSL's offices. Mr Carter would attend
and assist. Prior to Mr Carter taking
responsibility, Mr Collins had done likewise. The forms were completed at that
meeting. It
is apparent that there was often a difficulty in having Mrs Graham
commit to having the meeting, and then engaging in the process.
At times there
would be discussion about the premium, usually initiated by Mrs Graham's desire
for the lowest possible. At one point
options were obtained for different monetary
levels, and the effect that would have on premiums. GSL chose a lower but not the
cheapest
option. Once the forms were complete, Stratus would send them off to
Marsh and the new policy would be issued.
[58] On receipt
of the completed proposal forms, Marsh would send to Stratus
what were called "renewal terms". These were in turn forwarded on to
GSL under a
covering fax, the total number of pages to the fax being six. Mrs Graham was
required to sign the renewal terms and
return them to Stratus.
[59] The renewal terms were a four page document. Taking the 2007 version,
page 1 was a cover page. Pages
2 and 3 set out the key terms. Page 4 constituted the
formal quotation which was to be signed. Page 3, the second of the key terms
pages,
contained only one topic which was an offer on instalment payment:
[60] Page 2 had four paragraphs, the headings for which
were:
1. Introduction
2. Renewal terms
3. Policy coverage
4. Professional Liability Renewal Terms summary.
[61] The last of these paragraphs included the business description,
the policy
date, the indemnity limit on one claim, the aggregation limit on more than one claim,
the excess and the premium. It was
the business description that contained the
limitation "in respect of the Ministry of Health and Ministry of Education only".
[62]
There were some variations in this document in other years but it was
essentially in similar terms. Paragraph 4 or its equivalent
set out reasonably
prominently the limits applying to the policy.
[63] I turn to the covering letter Stratus sent when forwarding
these renewal terms.
Looking first at 2006, Mr Carter discussed the premiums and his efforts to obtain
reduced premiums. There
was no mention of the client limits. He sought
instructions by tomorrow. (On this occasion Stratus had only received the
document
from Marsh the day before so in this aspect there was no delay).
[64] In 2007 the focus was likewise on the premium,
and on the monetary limits
of the coverage. Mr Carter observed that "the cover is about minimum premium
level for your business".
This was to reflect Marsh's comment to him that the
premium is "pretty much on the border of the minimum premium offered by
Lumley".
[65] In 2008, the letter referred to the existing monetary levels and expressed the
view that it was a good premium "only a
6% increase against a 50% increase in
turnover". As regards this comment Mr Millard QC observes it again shows that
Mr Carter is
not aware of the client limits because the 50% growth in GSL's
turnover was not linked to work with the relevant Ministries but to the business's
overall growth.
[66] The picture
of the renewal process can be completed by observing that when
the actual policies were sent there was no reference to any of the
terms. The
covering letter just enclosed the policy each time.
[67] It has been necessary to spend some time on this topic to
illustrate the dearth
of any written reference to the client limits. As noted, there is debate about 2006 in
that Mr Carter says
he had a discussion about full coverage, but if it occurred it was
oral only. Assuming for the moment that Mr Carter's recollection
is correct, in my
view the process followed by Stratus throughout this period was deficient and in
breach of the implied term to
use reasonable skill and care in advising GSL.
[68] I note again the evidence of Mr Jones, the insurance expert called by Stratus.
In cross-examination he accepted various matters which are significant. First, he
said he would expect there to have been a discussion
with the client about changes in
the business. Second he would have reinforced each year his advice for full
coverage. Third,
his covering letter would have referred the client specifically to a
limitation of the type in issue here. Its importance was such
that it should always be
highlighted separately.
[69] It is, I believe, a remarkable feature of this case that through this period
Stratus never in writing at any point highlighted to GSL this limitation. The best that
can be said is disputed evidence that it
was raised once orally.
[70] Turning to that debate, it seems common ground that Mr Carter did in 2006
obtain an alternative
quotation from Vero for full coverage the quoted figure was
$25,000. A point of interest is why such a quote was not obtained from
Lumley
since it was already providing the limited coverage. Mr Carter says it was because
of the tight time-frames and he called
on a favour from a contact at Vero.
Mr Millard observes that getting the quote from Vero is consistent with an incorrect
belief that
the Lumley figure already related to full coverage.
[71] The quote from Vero followed upon a telephone conversation with
Mrs
Graham. Mr Carter's file note of that conversation records:
Alternate costings for lower limits other issues if time! Still
doesn't
believe she needs cover ... only does for contracts!
[72] The last line is supportive of the proposition that Mr
Carter did know of the
limited coverage, but if so what follows is perplexing. Why, given that instruction,
was the only alternative
pricing for full coverage? One would have thought it would
be an attempt to see if another firm would provide limited coverage at
a cheaper
price. Mr Carter seemed unable to explain why he obtained a full coverage quote.
The uncertainty this generates is reinforced
when one considers the terms of
Mr Carter's subsequent letter to Mrs Graham where he explains the Vero quote:
Following our
discussions I have also sought alternate options in an effort to
reduce the premiums. This has been difficult in the short
time frame
allowed, however I did get alternate indications. Unfortunately these have
confirmed the existing option
remains easily the best available. Sorry.
Vero Liability have indicated a premium of $25,000 plus GST for cover for
$1,000,000 with a $10,000 excess. Yes that is $25,000 this is minimum
they were initially looking for more.
[73]
It is impossible to read this other than as suggesting Mr Carter thinks the
Vero quote is for the same risk that Lumley is insuring.
This conclusion, namely
that Mr Carter was unaware of the limited coverage, is reinforced by three
subsequent facts I need only briefly
mention:
a) first, in 2007 Mr Carter wrote to Mrs Graham saying "We tested the
market last year and
could not get any better, or even near same".
This is consistent with the terms of the 2006 letter, and reflects the
same error;
b) second,
in 2008 a new person looked after GSL's side of things. The
limitation was never mentioned to her by Mr Carter, which
is
surprising if he was aware of it;
c) third, when GSL first alerted people to the "My Way" issue,
Mr Carter accepts he mistakenly believed the Retirement Commission
contract was part of the insurance
coverage. He now believes that
was a temporary oversight on his part, but I consider it reflects an
on-going mistake.
[74] It follows from this that I do not accept Mr Carter discussed the limited
coverage with Mrs Graham in
2006. He is mistaken in his recollection of events,
and Mrs Graham's recollection is preferred. It also follows that the default
of Stratus
in terms of its contractual obligations is clear, and really indisputable given its failure
to raise the limit with GSL
or to recommend a change in insurance position over a
period of four years. Indeed it is quite inexplicable why it did not do so
unless one
accepts, as I have held, that Stratus also forgot about the existence of the limit.
[75] I accordingly find that the
defendant breached its contractual obligation to
GSL. It was negligent in its advice, and I hold to this view by a considerable margin
over any other assessment of the facts. Before turning to assess whether the breach
was causative of a loss in the sense of whether
the policy would have protected GSL,
I first address a factual causation argument raised by Stratus. It is that if advice had
been
given to Mrs Graham, she would not have accepted it.
Issue two Would Mrs Graham have accepted advice if she had received it?
[76] This would normally seem a rather optimistic submission for a negligent
party to make. However, on the facts of this case
I do consider it requires serious
consideration. The relevant facts in support can be succinctly stated:
a) from its
establishment in 2000 until the Ministry of Education insisted
in 2004, GSL never had any professional liability insurance;
b) in 2004 Mrs Graham was unwilling to pay a $13,500 premium and
specifically instructed Stratus to
obtain coverage only for the one
client who insisted on her taking such insurance;
c) in 2006 she repeated
similar sentiments to Mr Carter. His file note is
a contemporaneous record and there is no reason to doubt it. In
it
Mrs Graham is recorded as saying she still does not believe she needs
cover;
d) Mrs
Graham never instructed Stratus to broaden the coverage.
Obviously this was because she wrongly believed she had it.
However, it remains the case that the only specific instruction is for
limited coverage;
e)
throughout the period in dispute Mrs Graham consistently queried the
level of the premium. In this regard one
is talking about a premium
around the $4,000 level. It is difficult to accept that she would
therefore
agree to a premium in the order of $25,000. The one
occasion when a more expensive option was selected by
GSL does not
really undermine this general pattern. At best there was $800
difference involved,
a figure far removed from the five-fold increase
in premium likely for full coverage.
[77] I am troubled on this
topic by the absence of direct evidence either way. In
her evidence Mrs Graham does not assert she would have taken full coverage
if
given that advice, or that she would have been willing to pay the level of premium.
It is of course implicit in her evidence as
it is in the claim, but it is not said. Nor,
however, was it directly put to Mrs Graham in cross-examination that she would not
have paid it if full coverage had been suggested.
[78] The issue here is whether the plaintiff has satisfied me that had the defendant
advised it to take full coverage, or at
least coverage that would embrace the relevant
claim by the Retirement Commission, GSL would have done so. I admit to some
uncertainty
but consider that Mrs Graham's evidence is implicitly an assertion of that
proposition, and she was never challenged on it.
[79]
In particular in her brief Mrs Graham records she had discussions with
Mr Collins about the level of cover "and the possibility
of extending cover if
something went wrong". Mrs Graham also is clear she assumed that she did have
full coverage; that carries an
inference that that is what she wanted. She was not
challenged on that belief and there is no evidence that Mrs Graham, armed with
a
mistaken belief that GSL had full coverage, ever sought to have that reduced to
limited coverage. Although there was considerable
material available to mount a
challenge on this topic of causation, none was put directly to Mrs Graham and
accordingly I find the
plaintiff has established the necessary link.
Issue three would GSL's loss have been covered?
[80] The competing positions
concerning the issue of whether the policy would in
any event have helped GSL resolve into two arguments; first, a broader issue
of
whether the policy applies to this sort of loss; second, three specific disputes about
clauses in the insurance contract.
(a)
Is this type of loss covered at all?
[81] It is convenient to begin by setting out GSL's analysis of why it would have
been
able to recover under the policy.
[82] The scope of the policy is found in clause 2.1 which provides that:
Lumley shall
indemnify the insured for any civil liability.
[83] This apparently wide coverage is immediately circumscribed by the
definition
of civil liability, which is:
legal liability arising from any claim for compensation arising out of the
professional
business.
[84] It is common ground that the contract with the Retirement Commission fell
within the requirement that the claim
arise out of the "professional business" of GSL.
[85] Finally, regard must be had to the definition of "claim" which is:
a) legal proceedings instituted and served upon the insured; or
b) any threat or intimation that legal proceedings
will be issued against
the insured.
[86] The plaintiff's argument commences with the definition of claim.
It is
submitted that the communications between GSL and the Retirement Commission
satisfy the alternative definition of
claim, namely an intimation that legal
proceedings will be issued against the insured. Although that is disputed by the
defendant,
it can be assumed to be correct for present purposes.
[87] The existence of a claim having been established, GSL submits it incurred
loss in avoiding a claim eventuating. It absorbed the "My Way" costs and proceeded
to do a new campaign. The fact that it was paid
for the new campaign should not
affect its right to recover the "My Way" costs.
[88] Before addressing this, I note that Mr Millard
identified a possible alternative
claim, namely breach of copyright. The policy extends cover to unintentional
infringement
of copyright, and it is submitted by GSL that the very filming of the
commercial before the licence was obtained was a breach of
copyright. This
therefore is also a claim. There are, however, difficulties with this proposition.
First, there
is no basis to say there has been a claim in relation to copyright. The
infringing commercial was never going to be aired without
a licence. Further, even
if the filming is itself a breach, no-one has instituted proceedings or intimated
proceedings concerning
that breach. Second, the plaintiff would I suggest face
insurmountable hurdles concerning the requirement of "unintentional" breach since
those doing the filming and those seeking
to obtain the licence knew at the time of
filming they did not as yet have a licence. Far from unintentional, it was a knowing
and
deliberate breach at that point, and GSL could not hide behind its own failure to
check the position with its agents.
[89] I
turn therefore to the only claim in issue, namely the claim by the Retirement
Commission. Assuming that the requirement of a claim
is satisfied, one still has to
be seeking indemnity in relation to:
legal liability arising from any claim for compensation.
[90] The existence of an intimated claim triggers the policy, but not the right to
indemnity. There must ultimately be legal liability
in relation to a compensation
claim for which indemnity is sought. GSL has no legal liability to the Retirement
Commission concerning
the failed "My Way" campaign. The Retirement
Commission suffered no loss. It might have for
example, if penalties were
imposed for cancelled television bookings. But they were avoided. There is no
claim for compensation by
the Retirement Commission and nor could there be.1
[91] The Retirement Commission did not suffer a loss because GSL put together
a
new campaign which prevented the cancellation of the air time. But in doing that all
GSL was doing was completing its contractual
obligation, and indeed the
Commission paid it for that work. GSL incurred no unpaid expenditure at all in
relation to the new campaign.
[92] It is to be noted that the Commission had paid money to GSL as progress
payments on the "My Way" campaign. The arrangement
reached was that such
payments would be credited to the new campaign. However, any liability that GSL
had to the Commission to refund
those payments would not fall within the policy's
definition of "civil liability". The liability of GSL would be to repay money it
was
not entitled to keep because it had failed to complete the contract. Any claim by the
Commission for repayment of such money
would not be a "claim for compensation".
1
In saying this I put to one side the belated claim by the Commission for $8,000
in
miscellaneous wasted costs it incurred. I am unsure of the detail of those, and the figure is
well below the policy's
excess.
[93] This analysis of the particular insurance contract is consistent with the
general scope and purpose of professional
indemnity insurance policies. They are
not designed to provide payment for work done. They provide protection for loss
caused to
a third party, such loss almost always being due to neglect. In this case
there is no loss suffered by a third party, just a claim
by the insured to recover its
wasted time and costs for inadequate work which the client did not have to pay for.
Professional indemnity
policies are not about covering those losses.
MacGillivray on Insurance Law (11th ed, Sweet and Maxwell, London 2008)
[94]
says of professional indemnity policies (at 28-072):
It is essential to appreciate that the purpose of the usual professional
indemnity policy ... is to afford cover in respect of the liability of the
insured for negligence on the part of himself
or his employees. Accordingly
it does not cover ... the assured against loss suffered in his business due to
his negligence
... where that negligence does not give rise to liability
towards a third party.
[95] That applies to the present situation.
Accordingly I am of the view that the
plaintiff's breach of contract claim must fail because the losses it seeks to recover
would
not fall within the policy even if the Retirement Commission contract was
included in the contract. For completeness, however, I
briefly address the issues
raised concerning the actual terms of the contract.
(b) Was there a claim?
[96] When the copyright
problem arose, the Retirement Commission indicated to
GSL that it would hold GSL responsible for the situation. In my view this was
enough
to come within the alternative definition of claim, namely an intimation that
legal proceedings would be issued. I am sure an insurer
would see such advice as
triggering the duty on an insured to report.
[97] The indication by the Commission was obviously conditional
in that it was
saying, in effect, if we suffer loss because of this, we will be looking to you for
payment. However, it was quite
context specific. It was said at a time when it was
known that a difficulty had arisen with the copyright, thereby jeopardising the
campaign. And it arose in an industry where all the players are aware of the
significant liability that can be incurred in relation
to cancelled television time.
Against that background I consider the facts come within the policy's definition of
claim.
(c)
Voluntarily assumed contractual risks
[98] Clause 5.4 of the contract provides that Lumley will not indemnify the
insured
in respect of liability arising from a claim that arises:
out of or [is] connected with any contractual liability, warranty
or guarantee
assumed or provided by the insured except if the insured would have been
liable in the absence of
the contractual liability, warranty or guarantee.
[99] It is Stratus' submission that this provision applies. If GSL had liability
to
the Retirement Commission, that liability would arise solely because of a contractual
obligation. If, for example, the Retirement
Commission had incurred television
penalties, it is submitted that GSL would be liable for those only because of a breach
of some
contractual term. There is no suggestion GSL was itself negligent
concerning the failure to obtain copyright; indeed it
is possible no-one was. There is
no other cause of action that might make GSL liable for the Commission's losses
other than its contractual
obligations with the Retirement Commission.
[100] Stratus disputes that such an interpretation would rob the policy of any effect.
The normal situation arising under these policies is when the professional insured is
negligent in the course of business, and thereby
causes loss to a third party. In such
circumstances, even if the case is pleaded in contract, there will be concurrent
tortuous liability
and so 5.4 would not apply.
[101] However, as Mr Millard notes, the wording of 5.4, and the policy generally,
does not expressly
limit liability to situations of negligence. The television
advertising penalties, had they eventuated, would be a
liability to a third party arising
directly from a default in the performance of the insured's professional business. If
that is
not protected, then the coverage is severely curtailed. Mr Millard submits the
clause should be read as applying solely to contractual
obligations occurring outside
the norm of professional relationships.
[102] Whilst I see the attraction in that, the difficulty
that arises is that work outside
the norm will most likely not be covered anyway, since it will be a liability not
arising in the
course of the professional business.
[103] This clause is potentially quite important. The arrangements with the
Commission
were structured so that GSL met the costs of the production, and passed
them on. It might have been, however, that the arrangements
were that the
Commission paid these people directly, in which case it would have no doubt looked
to GSL for reimbursement. GSL's
liability in that regard would arise solely because
of its contractual arrangements with the Commission.
[104] I am reluctant to
rule on this issue since the evidence about the purpose of
this presumably common clause is scant, or indeed non-existent.
Had it been
necessary to decide it, my view is that the respondent's interpretation represents the
plain reading of the clause
and is correct. It is consistent with and indeed
complements the analysis I have earlier reached on the scope of the policy.
(d) Professional
fees
[105] Clause 5.12 of the policy excludes liability, arising out of any claim:
for a refund, by way of damages or otherwise,
of professional fees or in
respect of any claim that the insured is not entitled to professional fees.
[106] Stratus argues
that everything claimed by GSL in relation to the "My Way"
campaign falls within this clause and so is excluded. That was also the
evidence of
Mr Jones as to his understanding of the meaning of the provision. Conversely,
Ms Young, the expert called by the plaintiff,
tended to the view that the "external
costs" (i.e. things other than GSL's own fees) would be met by an insurer who would
then look
to the contractors to see if liability could be attached to them.
[107] A difficulty for this Court is that if the earlier interpretations
are correct, this
provision is largely unnecessary because the wasted work is not caught anyway.
That could, of course, mean that
the earlier interpretations are wrong but I prefer the
view that this exclusion largely reinforces the existing scope of the contract
rather
than truly represents an exclusion. Accordingly, it is preferable that I not seek to
rule on the meaning of the clause when
not presented with facts where it truly arises.
Issue four contribution?
[108] Stratus argues that if it has breached the implied
duty to use reasonable skill
and care, and if that breach has caused loss, there should be an apportionment of
liability due to Mrs
Graham's own default. In response, Mr Millard queries the
availability of contribution where the case is pleaded in contract, and
anyway
submits the Court should be wary to place responsibility on a lay person where the
neglect of the professional adviser is
so clear.
[109] Concerning the availability of contribution on a claim in contract, it seems
clear in this case that liability
would exist in both negligence and contract. Both
parties in their closing submissions accept that is the position. Given that, I
refer to
the following passage from Burrows, Finn and Todd (Lexis Nexis, 2007, at 21.2.5):
Even on the view that the [Contributory
Negligence] Act requires that the
defendant be liable in tort, there can be little doubt that where there is a
co-extensive
liability in contract and in negligence, and the plaintiff brings
his or her claim in negligence, the Act does then apply.
The existence of a
liability in contract is immaterial. The position is the same where liability in
negligence exists,
but the plaintiff chooses to frame his or her action in
contract.
[110] Mr Millard did not strongly advocate for the contrary,
instead pointing his
submissions to the observation that the law is not settled, and that the High Court of
Australia has taken a
different view. Accepting that to be so, I am content to adopt
the learned authors' view as the correct statement of the law. Burrows
observes that
there has been an extensive legislative response in Australian states to the decision of
the High Court of Australia,
in each case reversing the effect of the decision.
[111] Mr Millard next submits that the particulars of the defendant's pleading
on
contribution have not been met. These particulars are:
a) insisting on limited cover from the outset rather than
general broad
cover;
b) signing off on the Lumley renewal of the professional indemnity
policy when it knew or ought to have known that cover was limited to
its work for the Ministry of Health and the
Ministry of Education;
c) failing to exercise a reasonable standard of care and skill in the
conduct
of its business so as to look after its own interests.
[112] Of these I consider the first particular is invalid. The defendant's
breach is in
failing to advise the plaintiff to reconsider its position as the nature of GSL's client
base changed and as the business, to its general
knowledge, grew. The reasons why
the plaintiff initially chose limited coverage could not properly reduce the
defendant's fault.
[113] There is merit in points (2) and (3) combined in relation to the position of
GSL. It is surprising that Mrs Graham forgot
completely about her initial
instructions. It is also clear that she was generally unwilling to engage in discussions
on insurance
and simply did not read anything sent to her. Had she done so the
on-going limits would have been obvious. A reluctance
to read contractual
documents is far from unique, although here one is really only talking about having
to skim over a two page summary
sent to her every year. However, whilst it is not
unique and therefore reasonably easy to be understood and accepted, that cannot
absolve a person from all responsibility.
[114] Mr Millard drew support from Gilbert v Shanahan [1998] 3 NZLR 528
where in a different context the Court of Appeal reversed the lower court and
apportioned 90% of the blame on the professional.
[115] Here I think the default on the part of the defendant was clear and significant.
It is not a compelling argument to suggest
that the client should have avoided the
consequences of the defendant's negligence by herself being more careful. It is not a
situation
where the client provided misleading information or failed to disclose.
Stratus was armed with all it needed to be able to discharge
its contractual obligation
to have and use reasonable skill in advising GSL. My earlier conclusion is that
Stratus failed to do so
because it failed to keep itself acquainted with the nature of
the client's insurance cover. In such circumstances I would not have
considered it
just and equitable to apportion responsibility.
Fair Trading Act
[116] The plaintiff pleaded a cause of action
under this Act. The focus was the
incorrect answers provided on three occasions to Mrs Graham concerning the scope
of her coverage
(see paragraph [40][45] above). It is said the failure to provide the
full picture misled Mrs Graham into believing she had coverage.
[117] The pleading is that because Mrs Graham was misled into believing GSL had
full coverage, GSL did not take the steps it would
otherwise have taken and thereby
suffered a loss, namely the "My Way" campaign costs. For the reasons already
given, this claim must
fail as the alleged breach of the Act did not cause a loss. The
action it is said GSL would have taken if not misled would not have
prevented the
loss in relation to the "My Way" campaign.
Conclusion
[118] The plaintiff's claim fails. I have found the defendant
to be in breach of the
implied term of the contract which required it to use reasonable skill and care in
advising GSL. However,
even if GSL had the broader insurance coverage it says
Stratus should have advised it to have, in my view that insurance coverage
would not
apply to the losses suffered by GSL in relation to the failed "My Way" campaign.
[119] The parties may file costs memoranda
if agreement cannot be reached.
____________________________
Simon France J
Solicitors:
I R Millard QC, Wellington, i_millard@xtra.co.nz
P R Rzepecky, Barrister, Auckland, email: przepecky@bar.co.nz
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZHC/2009/1162.html