The Supreme Court of New South Wales considered a professional negligence claim against a broker pertaining to the failure to give advice in respect of an exclusion involving swimming pools in a homeowner's insurance policy.
In issue
- There were significant factual and legal issues in dispute in this matter. The key legal issues were whether the First Defendant breached his duty of care to the Plaintiff in respect of the advice provided to her as to her homeowner’s insurance policy (which was established), and whether relatively standard “defect” and “reasonable precaution” clauses in homeowner’s insurance policies impacted the Plaintiff’s ability to establish that insurance cover would have been available to her, for the damage resulting from the lifting of a pool.
The background
This matter involved the alleged negligence of an insurance broker, Mr Robert Bernasconi, in respect of advice provided to the plaintiff, Dr Sue Flanagan, for her homeowners’ insurance. Mr Bernasconi, the first defendant, was employed at the relevant time by Nadic Insurance Brokers Pty Ltd (Nadic), the second defendant. Mr Bernasconi and Dr Flanagan had a professional relationship lasting approximately 29 years, as well as a longstanding friendship. Mr Bernasconi had assisted Dr Flanagan and her former husband, Dr Oldfield, with complex business and personal insurance needs relating to the operation of businesses including a private hospital and cardiac testing business.
The plaintiff was the registered owner of a property in New South Wales (until 30 June 2013, jointly with her former husband Dr Oldfield, and thereafter, solely), being a large two-story house, with a garage, tennis court, standalone shed, concrete and fibreglass inground swimming pool and a building surrounding the pool, known as the Pool Building. In 2003, Mr Bernasconi recommended to Dr Flanagan and Dr Oldfield to take out a homeowner’s insurance policy with CGU Insurance Limited (CGU) for the property. Dr Flanagan accepted Mr Bernasconi’s advice and incepted the CGU Homeowner’s insurance policy to provide coverage to the buildings and contents on Dr Flanagan’s property. The CGU policy was renewed each year until 2012. On 5 December 2011, Dr Flanagan became the sole insured on the CGU policy, following the marital separation of Dr Flanagan and Dr Oldfield.
In 2012, the premium for the CGU policy increased to $15,414.94 (quoted), from $8,440.59 the previous year. The CGU quote was based on contents insurance of over $1million, which Dr Flanagan requested be reduced to $500,000 to reflect the contents that Dr Oldfield had taken from the house following their separation. On Mr Bernasconi’s evidence, Dr Flanagan was not prepared to pay the increased premium to CGU and as a result he asked Nadic staff to go to market to look for alternative quotes. As a consequence of the results of that search, Mr Bernasconi recommended to Dr Flanagan that she insure with Vero for the 2012 policy year, at a premium of $8,204.18 (which later increased to $8,562.16).
On Dr Flanagan’s evidence (which was preferred by the Court), Mr Bernasconi did not tell Dr Flanagan about the increased CGU premium and instead, recommended to her that she switch from CGU to Vero without advising her of the increased CGU premium, without advising her of other options on the market, and critically, without advising her of an exclusion in the Vero policy which excluded events involving swimming pools, including pool lifting or any area around the pool lifting (the Pool Exclusion Clause), which did not exist in the CGU policy.
After Mr Bernasconi was cross-examined, it was conceded by the defendants that Mr Bernasconi had breached his duty of care to Dr Flanagan. The Court considered the concession was properly made as it was announced by the defendants’ representatives that “a reasonably competent broker who held Mr Bernasconi’s view as to the significance of the pool exclusion would have drawn that exclusion to the attention of the plaintiff”. The duty required that Mr Bernasconi advise Dr Flanagan that the offer provided by the CGU policy was not available at the previous year’s premium and seek her alternative instructions, including by advising her that the Vero policy did not provide the full insurance CGU had provided (due to the Pool Exclusion Clause), while other available policies on the market did.
The Pool Exclusion clause became relevant because, by 2013, the pool was empty and following heavy rain in January and March 2013, the pool partially lifted out of the ground causing damage to the pool, the surrounding concrete and tile surface, the equipment connected to the pool and causing the collapse of a 30-metre eastern brick wall of the Pool Building (Pool Damage). Dr Flanagan’s claim on the Vero policy was denied on 8 October 2013 on the basis of the Pool Exclusion Clause. Dr Flanagan was unsuccessful in challenging Vero’s declinature with the Financial Ombudsman Service. Dr Flanagan demolished the damaged Pool Building and filled in the damaged pool with surrounding rubble in December 2014.
In December 2011, after a large increase in her water bill, Dr Flanagan’s plumber (Mr Houghton) advised her that he thought the leak was coming from the pool. After further investigation, this appeared to be confirmed and Dr Flanagan asked Mr Houghton if she could empty the pool, which he advised that she could. Dr Flanagan emptied the pool but did not investigate the cause of the leak further. At the time, following Dr Flanagan’s marital separation and financial circumstances, there was a risk that the bank would repossess the property and decide to sell it which influenced some of her decision making at the time. In January 2013, Dr Oldfield emailed Dr Flanagan to warn her that there was a risk that the pool would crack and pop out as the clay underneath dried out and he would hold her responsible for the damage if it was not at least half filled. It was accepted that Dr Flanagan did not consider there was a risk that the pool could lift, based on the information provided to her at the time.
Dr Flanagan also did not consider that leaving the pool empty in 2012 and 2013 involved an insurance risk. She remained unaware of the Pool Exclusion Clause in the Vero policy at this time. The evidence as to the construction of the pool established that the pool was designed to withstand hydrostatic groundwater pressure when empty so that it could be left empty without the pool being at risk of lifting out of the ground, so long as the valves were functioning correctly. The evidence also established however that the valves not functioning correctly could have caused the leak. Dr Flanagan did not take steps to investigate the cause of the leak, which was possibly a defective hydrostatic valve, which meant it could not be safely left empty and the pool should have been half filled to ensure it did not lift.
Breach having already been conceded, the Court also accepted that the loss was causally connected to the breach and was the kind of loss that would have been in the contemplation of a reasonable person in Mr Bernasconi’s position. The Court then had to consider “whether Dr Flanagan could have established her claim, had she had full cover under a policy such as that which CGU offered, given what it in issue in relation to the defect and reasonable precautions provisions.” In respect of defect, the CGU policy contained a clause that read as follows: “We will not cover your buildings and contents for any accidental damage or accidental loss caused by: ... water entering the buildings because of a structural defect, faulty design or faulty workmanship when the buildings were constructed” [or] “a defect in an item, faulty workmanship, structural defects or faulty design.” It was then in question as to whether there was an existing defect in the pool which would have affected cover under a notional policy. In respect of reasonable precautions, the CGU policy contained a provision that the insured take reasonable precautions to prevent anything that could result in a claim under the policy and it was in question as to whether Dr Flanagan had failed to take reasonable precautions with respect to the pool.
The decision at trial
Firstly, the experts agreed that the defects and reasonable precautions provisions contained within the CGU policy, would also have been contained within other policies offering the same cover provided by the CGU policy.
Dr Flanagan’s case as to defect was that in short, that there was insufficient evidence to establish a defect, particularly in circumstances where the valve could not be inspected (because the pool had been filled in). Dr Flanagan also considered that the CGU or a similar policy did not exclude the damage suffered, on the basis of the defect clause. Conversely, the Court accepted on the balance of probabilities that the valve had developed a defect, causing the valve to fail to function as it was designed and resulting in the pool lifting because the hydrostatic pressure could not be relieved. On that basis, the Court concluded that Dr Flanagan’s case in this respect could not be accepted.
As to reasonable precautions, the Court also considered that Dr Flanagan failed to take reasonable precautions `to prevent anything which could result in a claim in relation to the pool. This was particularly in circumstances where there it was established that a faulty valve involving a leak had to be replaced when the pool was built, which Dr Flanagan and Dr Oldfield commissioned, and it was established that Dr Flanagan recalled the initial faulty valve. The Court quoted Bergin J, as she then was, in Zurich Specialities London Ltd v Thiess Pty Ltd [2008] NSWSC 1010, by reference to Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898, noting that the purpose of the requirement to take reasonable precautions is to “ensure that the insured will not refrain from taking precautions which he knows ought to be taken because he is covered against loss by the policy”: at [14]. The Court determined that in the context of a home and contents policy, the obligation to take reasonable precautions extended to a requirement to investigate the cause of a leak in a swimming pool. The obligation was essentially a pre-condition to indemnity meaning that when it was not satisfied, the insurer’s obligation to indemnify is not triggered.
On the basis of the defect and reasonable precautions provisions, the Court found for the defendants.
Implications for you
This case is a good reminder that establishing breach does not necessarily result in a successful finding for the Plaintiff. The Plaintiff in this case needed to establish that even in circumstances where her broker had breached his duty of care in advising her of the exclusions contained in her homeowner’s insurance policy, if a different policy had been in place, that policy would have responded to the damage. The failure to be able to establish key elements of that causation argument led to a finding for the Defendants, reminding us of the importance of establishing a causation defence even in circumstances where breach has been established.
Updated 6 July 2023: On 4 July 2023, the NSW Court of Appeal dismissed an appeal by the insured and a cross appeal by the broker in this matter.
