Facts
Nonpareil Pty Limited, an insurance broker, arranged for insurance cover for an existing client, Elilade. The policy contained a clause excluding loss or damage to property caused by flood:

"Material Damage (Fire and Extraneous Risk)" the following:
"Fire Policy - Covers loss or damage by Fire, Lightning, Explosion, Storm and Tempest and other extraneous risks. Excludes among [sic] FLOOD. PLEASE REFER TO POLICY FOR FULL DETAILS."

Severe tropical rainstorms deluged the Katherine area from 25 January 1998. On 26 and 27 January, water flowed into Elilade’s premises, damaging the business’ stock and plant. Elilade made a claim under its insurance policy for loss and damage to its property. The insurer relied on the flood exclusion clause to contend that it was not liable to indemnify Elilade in respect of the damage caused by the flood.

Elilade also claimed that Nonpareil, as its insurance broker, failed to exercise reasonable care towards Elilade in contract and tort by failing to advise Elilade about the availability and desirability of flood insurance.

Judgment
The Court divided the events into two distinct periods of inundation. The initial inundation was said to have commenced in the late afternoon of January 26. From this time water entered the business premises to a depth of in excess of 300mm, causing some damage to stock and plant. At 6am on 27 January the Katherine River broke its banks and the second inundation began. Water rose to a depth of some 1.8 metres inside the premises and did not abate fully for some days.

Mansfield J found that Elilade was entitled to indemnity under the policy for the damage to its stock, plant and equipment which had occurred up to 6am on 27 January 1998, that is, up until the time of the second inundation. Once the river broke its banks the event transformed into a flood, triggering the flood exclusion clause.

Mansfield J said that the broker, in the proper performance of its duty, was required to raise expressly with Elilade whether it required flood insurance, and to make it aware that flood was exempted from the defined events under the policy. The broker, through its previous dealings with representatives of Elilade, was aware that it was not well experienced in addressing the insurance requirements of the business. It knew that there was not an insignificant risk of flooding in Katherine. Indeed, it sought to inform its clients of that risk by displaying in its office the brochure "Flooding Katherine".

Mansfield J found that the broker did not discharge its duty to Elilade, as it did not raise the specific matter of insurance against flood. Instead the broker made a business judgment on Elilade’s behalf and then notified it in writing of the terms of the policy. Mansfield J found that Elilade’s directors, by reading with any degree of care any of the schedules of insurance sent to them, had the opportunity to learn the flood cover was not included in their insurance. However, the directors’ failure to read the documents outlining the insurance cover did not discharge the broker’s duty to advise on the availability of flood insurance.

Mansfield J then considered whether Elilade would have in fact instructed the broker to secure flood cover over its business and assets had it been properly informed or advised. Mansfield J concluded that Elilade would not have taken out flood cover. The reference in materials sent to Elilade did not register with its directors as a matter requiring attention.

Mansfield J found the directors had not been concerned about securing flood cover. He also had regard to the budgeted amount for insurance of $2500, this being significantly less than the sum required for a policy including flood insurance.

The judge relied on the conclusion of Kirby P in Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541at 556.
"The insured must prove that it was a breach by the broker of the duty of care to the insured which caused the loss complained of. Usually this involves proof that the insurance policy obtained by the broker does not cover the risk that had occurred and that proper care and skill would have ensured that a policy was obtained which did cover those risks."

Mansfield J concluded that Elilade’s claim against the broker must fail because it had not proved that it would have obtained insurance cover without a flood exemption if it had been properly advised.

Comments
The decision is an example of a case in which, while a breach of a professional’s duty is established, loss does not necessarily follow having regard to causation issues. In this case, the court was satisfied that even if the broker had brought the issue of flood cover to the attention of the insured, the evidence did not demonstrate the insured would have been prepared to purchase a policy without a flood exclusion.