Your Duty of Care – The Importance of Placing Appropriate Cover
The key points of this article are to clarify two critically important responsibilities Brokers have under the legislation that governs Broking, being the Corporations Act – and the many occasions we encounter where they go hand in hand – the responsibilities of accurate documentation and record-keeping. Carrying out these tasks can show conclusively that you have placed cover in accordance with the clients’ instructions, and thus fulfilled your duty of care.
As is true in most cases relating to the Corporations Act, these obligations are implicit rather than black letter obligations; nowhere will you find a direction saying you are required to do either of those things, but they are implied by the three main tenets of the legislation, being honesty, fairness and efficiency. So making certain you have procedures and effective documentation will keep you compliant whereas not doing so will cost you a truckload. Which option would you prefer?
There are many tools available to guide you in your daily activities that will ensure you carry out these responsibilities effectively and even automatically if they are routinely followed. But nobody will be able to tell how compliant your operations are unless you can demonstrate it. The processes and procedures which underpin the activities are how you demonstrate your compliance.
Here’s a fictitious example to illustrate the point…
…some years ago you sold a property cover to a client (also a mate) who owns a car yard. He generally does pretty well – he carries a nice mix of late model prestige vehicles and does a steady line in repeat business.
The policy had a specific exclusion related to storm damage to vehicles in the open air. You talked to your client/mate about it at the time and let him know that if a storm hit the area he wouldn’t be covered for any damage that might be caused. At the time, you recall there were no trees that could cause damage to the premises. The whole area was quite barren; your client/mate only had a few vehicles in the yard at that point too and none near the fence-line. So not having storm cover didn’t seem to matter.
You know you talked to him about the exclusion and remember the conversation like it was yesterday. Because of the casual context of the conversation though, you can’t remember if you put a note on the file either about your conversation or any documentation, like an email exchange with the client that will protect you from a future challenge.
Q1. What could you have done better at that point?
A1. You could have emailed him rather than having a casual conversation, and asked him to confirm in writing or by return email that he was happy to accept the exclusion and kept the note on file.
Fast forward eight years, during which you have not revisited or revised the property cover; effectively, you set it and forgot it. The council planted a gum tree on the nature strip in the meantime which grew very rapidly, but you hadn’t been back to the place in all those years so you didn’t know. You had of course reviewed cover in that time but you didn’t ask if any trees had been planted; why would you?
Q2. What could you have done in that intervening eight years?
A2. You could have visited the client yearly and observed the surroundings for yourself; alternatively you could have completed a new needs analysis which specifically asked if the circumstances remained the same at the property and if the exclusion was still OK with the insured.
One Sunday night a storm hits the area. On the Monday morning following you get a call from your client/mate to tell you one of the fences around his property was damaged by a falling gum tree on the nature strip outside of the property. The tree had dropped a major branch which took out the fence, badly damaged a Bentley and a Jag and felled half of his office.
On the phone and trying to make him feel better, you tell him “no worries mate, she’ll be right, I’ll put in a claim for you, you’re covered for that” but you do have a sinking feeling, as in “what gum tree? How did the cars get into that spot where there weren’t any last time I was there?” You recall that there was an exclusion but he told you to issue the cover anyway as he didn’t think it would ever happen to him, so the exclusion was OK.
Q3. What could you have done differently in that phone call?
A3. You could have not mentioned that he was covered and that he’d be OK. It raised an expectation that you were ultimately unable to fulfil and which you already had a suspicion was not going to hold up.
When you get to the office, you look up his policy and sure enough it’s there in black and white – no cover for storm damage to vehicles in the open air. So then you have to go back and tell him that actually he’s not covered for storm damage to those vehicles, and he emphatically doesn’t recall you talking to him about it at the time. His words were “why would I take out a cover that didn’t cover me in a storm?” You have no record of your conversation about it. Then he logs a complaint at AFCA and next thing you know, you’re up for a substantial sum of money. He’s not your client/mate any more, he’s just a client.
At the time the policy was issued, it was OK and it covered the clients’ needs. But somewhere in the interim, circumstances changed and nothing had been done to ensure that the cover was current and relevant.
In the days before the current regulatory environment, the outcome of this case may have been different and the onus would have rested more on the insured to disclose the changed circumstances. It is becoming more frequent now, however, that the Broker is considered to be the one with whom the duty rests.
In a recent case, AFCA ruled that the Broker must compensate a claimant for storm-related damage, adding that the panel considered the Broker “breached its duty” and they were “of the view the responsibility for ensuring the appropriate cover is obtained rests with the broker”. The damage was extensive and expensive.
Having documentation on file that covered the original set of circumstances and that the cover was appropriate at the time would have been useful; even better if you had subsequent documentation to show the needs had changed and the policy reissued as appropriate.