THE PERSONAL LIABILITY OF INSURANCE BROKERS

Transcription

1 THE PERSONAL LIABILITY OF INSURANCE BROKERS (and other financial lines professionals) Prepared by David Leggatt, Partner, DLA Piper Melbourne and presented by DLA Piper Lawyers Nationally

2 TABLE OF CONTENTS Introduction 02 The Basics of Professional Liability 03 What Happens in Litigated Claims involving negligence by an employee? 05 An employee s right to indemnity from their employer for liabilities incurred 06 Insurance Considerations re past employees and insolvent employers 07 Sub contractors 08 Particular issues for insurance brokers 15 An employer s vicarious liability for the actions of employees Summary 1. INTRODUCTION 1.1 Most people work as employees. They expect to go to work to receive a pay cheque not to expose themselves to liability that can take their hard earned money and assets away from them. Employees are not usually receiving a reward, sufficient to take on additional risk. That is usually left to directors and officers and partners of professional firms. 1.2 However, the unfortunate reality for any professional person, is that they owe their clients a personal duty both at common law and under statute. If breached, the individual professional can be personally liable for loss and damage caused. 1.3 Usually an employer is obliged to cover any liability. There is usually also an insurance policy available, to cover individual professionals. This is not always the case though. 1.4 This paper is designed to assist insurance brokers in not only understanding their personal exposure, but also understanding the principles behind the personal exposure of many of their professional clients. 2 The Personal Liability of Insurance Brokers

3 2. THE BASICS OF PROFESSIONAL LIABILITY 2.1 Until the 1960s, the prevailing view was that a professional person could only be liable in contract and not in tort. This meant that retainer of a company to provide professional services, would only see the company liable. 2.2 That changed in Hedley Byrne & Co Ltd v Heller Partners Ltd [1964] AC465, where the court held that professional persons have a duty to take reasonable care to guard against causing pure economic loss. From the 1960s, medical negligence claims have also become a major industry, with law suits against doctors, dentists and other health professionals becoming extremely common. 2.3 Since then the liability of other professional persons - lawyers, accountants, valuers, estate agents, insurance brokers, stockbrokers and financial advisors has expanded considerably, such that tort law reforms were introduced in Australia between 2003 to The purpose of the reforms was to ease pressure on premiums for professional indemnity insurance. 2.4 It is important to keep in mind that cases against health professionals, are usually against the individual. It is true that clinics so as Medical One are working on establishing a brand, such that many of us can now remember the clinic we went to rather than the name of the doctor that treated us, but it is still the individual health professional that will be sued. 2.5 The principle is no different for what I will call financial lines professionals. It is the case that most business is conducted between corporations nowadays, most of the work being done by employees. However, this use of corporate entities does not alter the fact that a professional person always has a personal professional duty to people relying on that advice. They always have a personal exposure to claims for: breach of professional duty; and misleading and deceptive conduct, under the Trade Practices Act, now known as the Competition and Consumer Law. 2.6 The case of Houghton v Arms deserves specific comment. It concerned representations made by a corporation that were clearly penned by a particular employee. The issue of whether or not the employee could be personally liable for representations put on company letterhead went all the way to the High Court. The High Court was unanimous in finding that employees who directly engage in misleading conduct, may be primarily liable just as much as the corporation itself. 2.7 The case produced many howls of protest. An often quoted example to highlight this development in the law, was the tie salesman at David Jones. He innocently (and incorrectly) represents that a tie is silk when it is not. He is just as liable for the damage suffered as his employer, David Jones. How can that be the law? 2.8 Well, it is. The High Court has spoken. But hold on before we all transfer our assets into bankruptcy remote zones. The employee is entitled to an indemnity from the employer, so rest easy or should you? What if you defame someone? Someone says you have been dishonest? Or your employer gets sold? Or you leave and go to a competitor? Or you are the subject of disciplinary action by the regulator? Will there always be insurance for you if this happens? 3

4 3. WHAT HAPPENS IN LITIGATED CLAIMS INVOLVING NEGLIGENCE BY AN EMPLOYEE? 3.1 The rest of this paper will only deal with financial lines professionals. 3.2 Usually a plaintiff that has suffered loss, only sues the employer. Most litigation involves commercial decisions. Generally a plaintiff would rather deal with solvent and well resourced employers and their insurers, rather than put the reputation of an individual person on the line by naming them in a writ. A professional defendant can (justifiably in my view) treat an allegation of negligence against them as a matter of principle requiring a vigorous defence. This can greatly complicate settlement of the claim, for no real benefit to the plaintiff as the settlement sum will usually be insurance money anyway. 3.3 However, this is not always the case. In defamation cases, plaintiffs will sue an employer and the author of the libel, usually out of spite - ie you attacked me so I ll attack you. And I am starting to see professionals being named as defendants again as GFC losses are starting to get to the thin edge of the wedge. Exactly why I am not sure, but I suspect that plaintiffs feel the insurer behind the professional firm, will be held to account if an individual s name and assets are on the line. There is also the prospect that, when there are a few years between the allegedly negligent act and the claim, the professional has possibly moved on and may have separate insurance cover to the previous employer, which could increase the available limit. 3.4 For the most part, naming an individual as a defendant makes no difference and is usually more annoying for defendants rather than having any practical significance. The reality is that the PI policy of the employer, will usually cover the corporation and the employee. But there can be problems for past employees, sub contractors and liabilities that may have been incurred outside the scope of employment. 4 The Personal Liability of Insurance Brokers

5 4. AN EMPLOYEE S RIGHT TO INDEMNITY FROM THEIR EMPLOYER FOR LIABILITIES INCURRED 4.1 Curiously the case law starts from the position that an employer is not obliged to indemnify an employee. The House of Lords in Lister -v- Romford Ice Cold Storage Pty Ltd, refused to find that an employer was obliged to organise insurance for liabilities incurred by an employee. It also found that it was implied into the employment contract that an employee had a duty to avoid negligently causing the employer loss and damage. 4.2 This led to the insurer of Romford Ice succeeding in a recovery action against the negligent employee. 4.3 This case has not been well received in Australia. It has been reversed by legislation in NSW, South Australia and the Northern Territory. In Tasmania, there is an obligation on employers to insure employees against such liabilities. Most importantly, s.66 of the Insurance Contracts Act, prevents an insurer of an employer from pursuing a subrogation action against a negligent employee. So, if there is insurance, the employee cannot be the subject of a recovery action by the insurer. 4.4 However, there are some important points to note: all jurisdictions provide exceptions for serious and wilful misconduct by an employee. So if an employee has been dishonest, or deliberately caused damage, he or she is not entitled to an indemnity from an employer. Employers can and regularly do take action against employees who have engaged in such conduct; the most obvious actions involving employee theft or other dishonesty offences. there is no specific legislation in WA and Victoria that reverses Lister, so in these jurisdictions it is still the law that employees have a duty to avoid causing their employer loss by negligent actions. As such, if the loss is uninsured, an employer can still claim against an insured personally. Importantly, this applies to the policy excess. The insurer is prohibited from recovery against the employee by s.66 of the Insurance Contracts Act, but an employer that has paid a $50,000 excess because of the professional negligence of an employee can, if it wishes, ask the employee to pay that excess if the employee is sued separately, the employer does not necessarily have the obligation to pay the employee s legal expenses; and if an employee is the subject of disciplinary action, an employer is not obliged to cover the defence costs incurred in defence of that disciplinary action. 4.5 An employer that takes legal action against an employee for making a mistake, is obviously unpopular. An employer that takes such action against professional staff, is likely to find it difficult to attract talent. 4.6 In my view, professional employees should insist on their contract of employment expressly providing that: The employer will organise professional indemnity insurance to cover any and all liabilities incurred by the professional during the course of employment The employer will indemnify the employee against any such liability; and Specifically, the employer will pay the applicable excess in relation to any claim and will not seek recovery from the employee. They otherwise run the risk of a stressful and nasty time should a claim ever arise. 5

6 5. INSURANCE CONSIDERATIONS RE PAST EMPLOYEES AND INSOLVENT EMPLOYERS 5.1 It is obviously important for brokers to ensure, that professional indemnity policies cover current and past employees. It is often the case that there is a lag of years between the work being done and a claim being made. 5.2 Your clients expect insurance will cover the employee for work they did whilst an employee. However, I have had cases where the policy is limited to current employees. A client would roundly criticise a broker for agreeing to a wording that is so limited. 5.3 There can be some very difficult issues though, when a business restructures, is sold or simply wound up because the head of the business retires. Professional employees can end up with a gap in cover. If a former employer stops paying for a policy that covers past employees, the position is quite simple - that employee has no cover for claims that might arise whilst they worked for that employer. Even if they have the benefit of a statutory or express indemnity as described above, the thing about indemnities is that they are only as good as the person providing them. If the company has nothing, the indemnity is worthless. 5.4 So professional employees that move jobs, obviously need to consider some stop gap or run off type cover, for any claims that might come their way from work done for a previous employer. Relevant considerations are: If the employee has an indemnity from a previous employer, then provided that employer is still solvent and in business, the risk of personal exposure to a past claim is low If there is no indemnity, the employee will need to be confident that the past employer will still maintain a PI policy that covers past employees. As all brokers know, this cover is written on a claims made basis. If there is no cover for past employees at the time the claim is made, the professional could find themselves without cover. And I have seen cases where a professional has gone to a competitor and the former employer - out of spite - has expressly written that person out of the firm s policy If the company that formerly employed the professional is no longer trading - ie is now insolvent or wound up - then again any indemnity could be worthless, unless that entity has purchased run off cover that continues to cover past employees. Those employees should consider purchasing additional coverage for claims that may arise for work done for a now insolvent former employer. 6 The Personal Liability of Insurance Brokers

7 6. SUB CONTRACTORS 6.1 Professionals that do work on a sub contract basis, are treated completely differently to employees. The presumption is that they are independent contractors who are liable for their own actions. 6.2 The default position for any sub contractor, is that they should have their own insurance. They should also understand that the principal giving them the work will have their own insurance and that insurer can and is likely to seek recovery from them in the event of a claim. 6.3 This can make defence of claims difficult. For example, in valuer cases, it will involve the firm being sued then joining the sub contractor as a third party. This can make cases more difficult and expensive to defend. 6.4 As such, key issues to be considered for principals and sub contractors to consider are: Does the principal want to have one policy that covers the sub contractor as well? If so, the policy will need to specifically name that sub contractor as an insured. If not, consideration should be given to who will have conduct of a claim should one be made. Employers can ask the sub contractor to assume responsibility to notify its insurer and assume conduct of the defence, but the circumstances in which this is to be done should be clearly stated and cleared by the sub contractor s insurer. Consideration will be given to the excess payable. Principals are often very unhappy about having to pay a much higher excess, and may pursue recovery from a sub contractor who usually has a lower excess. This risk can be ameliorated by a clear claims control clause in the agreement between principal and sub contractor. However, the insurers would need to approve this. 6.5 Overall, any professional doing work on a sub contract basis, even for the one principal, should not assume that the principal is looking after them. Many such people have come to my office and received a nasty shock. It is up to brokers to educate their clients that operate as sub contractors, as best they can, about this personal exposure. 7

8 7. PARTICULAR ISSUES FOR INSURANCE BROKERS 7.1 So for the employee brokers reading this paper, how are they feeling about their position? You almost certainly have an employer that has organised insurance cover for your negligent acts, but a few of you that have changed jobs or previously worked for now defunct businesses might have a few concerns. 7.2 The reality is that claims against brokers that name the individual are rare. I cannot remember one happening. This is usually because, unlike valuers who sign a valuation report, or accountants that sign audit reports or solicitors that sign advices, brokers are usually part of a larger team involved in receiving and carrying out a client s instructions to place cover. 7.3 As such, it is quite difficult for a plaintiff to point to one particular individual, to work out what they have done and whether or not they have been negligent. The difficulty is usually not worth it for plaintiffs and it is far easier for the claim to be made against the employer company and not the individual. 7.4 These are practical issues though. It does not alter the fact that each of you have a professional duty, to take reasonable care in providing advice to your clients. You also have a duty not to engage in conduct that can be considered misleading and deceptive. So if you withhold information relevant to a risk from an insurer when negotiating cover, you could be held personally liable for any loss this causes. If you give negligent advice to a client that a policy provides cover that it does not, you could find yourself named in a writ. 7.5 At that point, you will be hoping that your employer has done the right thing by you and has insurance to cover you. I am pleased to say that for brokers, in my experience, this has always been the case. The same cannot be said for your professional clients though, so you have a duty to them to examine their personal exposures and give advice as to the available options in the market to cover them. 8 The Personal Liability of Insurance Brokers

9 8. AN EMPLOYER S VICARIOUS LIABILITY FOR THE ACTIONS OF EMPLOYEES 8.1 Employer s have a vicarious liability to people that suffer loss by reason of the conduct of their employees. So if a brick falls from a construction site and hits a person on the street, the construction company will be liable. A law firm will be vicariously liable for incorrect advice provided by an employee solicitor. A valuation firm that provides a negligent report signed by an employee, will be similarly liable. 8.2 I have dealt above with circumstances where the employer can pursue recovery from the employer for that liability. The most common situation is where there has been serious and intentional misconduct. But can there be situations where the employer is not vicariously liable at all? 8.3 The short answer is yes. In Lepore, the High Court held that a school was not liable for a teacher that had engaged in criminal sexual conduct. Similarly, an employer will not be liable to a staff member that defames another person in relation to a matter completely outside the scope of employment. However, an insurance broker has been held liable for defamatory statements made by a contractor, as there was held to be a sufficient connection between the retainer and the statements made. 8.4 This issue is important for professional indemnity and fidelity policies. As a general rule, an employer is not vicariously liable for the criminal acts or intentional misconduct of an employee. To use an extreme example, if an employee is dealing drugs from the office, an employer could hardly be liable to a client of the employee that gets ripped off in a drug deal. 8.5 To quote from the High Court in Lepore: Gummow and Hayne J: Vicarious liability, in the case of an intentional tort of an employee, may only be established in two types of case: first, where the conduct was in the intended pursuit of the employer s interests or in the intended performance of the contract of employment and, secondly, where the conduct was in the ostensible pursuit of the employer s business or the apparent execution of the authority which the employer held out the employee as having. 8.6 It is pretty clear from this analysis, that a school would hardly consider sexual assault of a student to be in the intended pursuit of the employer s interests or within execution of authority. 8.7 The decision of French v Sestili: Sestili v Triton Underwriting Insurance Agency Pty Ltd [2007] SASC 241 is the most detailed consideration of vicarious liability for criminal acts of employees since NSW v Lepore. 8.8 The plaintiff was a quadriplegic who suffered serious injuries in a motor vehicle accident that meant she was unable to walk or use her hands properly. She was entirely reliant on her carers for her day to day needs, including her shopping needs. The defendant provided a personal care hiring service and assigned a carer by the name Ms Brown to provide care services to the plaintiff. 8.9 The plaintiff provided Ms Brown with the PIN for her credit card, and Ms Brown would take this credit card to do the shopping for the plaintiff. The plaintiff did not accompany Ms Brown on shopping trips. Between July and September 2000 Ms Brown appropriated $33,350 from the plaintiff before the fraud was uncovered. The plaintiff issued proceedings against Ms Brown (who did not defend the action and was subsequently convicted of a criminal offence) and the defendant employer. The defendant also had insurance cover for public liability, products liability and professional indemnity. Indemnity was denied by her insurer. Therefore, the defendant joined the insurer as a third party in the action The Magistrate, at first instance, held that the defendant employer was not vicariously liable for Ms Brown s criminal conduct because Ms Brown was acting on a frolic of her own. The plaintiff appealed to the Supreme Court of South Australia where Gray J held that the employer was vicariously liable; and the insurance policy responded to provide the employer indemnity. 9

10 8.11 The decision was made on the basis that Ms Brown s dishonest conduct was sufficiently connected with the business of the employer. This decision was then appealed to the Full Court The judgment of the Full Court was delivered by Debelle J. His Honour stated that it was a settled principle that an employer is liable for the dishonest and fraud of his employee, if that dishonesty or fraud occurred in the course of the employment of the employee. The difficulty is working out what constitutes in the course of the employment. Debelle J considered the various judgments of the High Court in NSW v Lepore and considered that an employer will be vicariously liable if either the wrongful act is done in the intended pursuit of the employer s interest or where the wrongful act is done during the apparent execution of authority which the employer holds out the employee as having. The mere fact that the employee has intentionally engaged in criminal conduct is not of itself sufficient to allow the employer to escape liability Debelle J found that the employer was vicariously liable for Ms Brown s conduct. This was because the very nature of Ms Brown s duties was to have access to the home of the person being cared for and this opened the possibility for the carer to steal or engage in other fraudulent conduct. The employer was therefore liable because the theft was is closely connected with the task of caring. Further, the use of the credit for shopping purposes was clearly within the scope of the employment arrangement. Therefore the fraudulent use of that credit card was similarly closely connected to an authorised activity Otherwise, if the person that has suffered the loss can make out a civil claim against the employer, then, whether or not the conduct of the employee was criminal, the employer is unlikely to escape liability However, much turns on the facts. Employers can and do avoid liability In Trevor Blake v J R Perry Nominees Pty Ltd [2010] VSC 272, the Supreme Court of Victoria found that the criminal conduct of an employee did not render the employer vicariously liable The plaintiff was unexpectedly struck by a fellow employee whilst at work, causing the plaintiff a considerable injury. The injury occurred whilst the two employees, who were wharf workers, were waiting for a vessel to arrive at dock. Forrest J concluded that the employer was not vicariously liable, as the injury did not occur as a result of task that was incidental to the employee s usual course of employment (that is, hitting someone is not incidental to the task of waiting for the arrival of a ship) The case is useful as it tracks through all the recent decisions regarding vicarious liability for deliberate acts of employees. However, towards the end of the decision His Honour specifically observe that cases involving employee fraud are in a different class and attract somewhat different treatment by the courts. In particular His Honour footnotes an English decision Morris v CW Martin & Sons Ltd [1966] where Lord Denning described vicarious liability for employee fraud as baffling In short, employers will struggle to avoid vicarious liability for cases involving fraud. However, cases involving intentional injury frequently see employers avoiding liability. 10 The Personal Liability of Insurance Brokers

11 9. SUMMARY The key messages from this paper are: 9.1 Every professional person has a personal duty to use reasonable care when acting for their clients; and avoid making misleading statements. 9.2 Personal liability is usually protected by employers and their insurers, so rest easy. However, particular attention should be paid to employees that have changed jobs, or have concerns that a former employer may not have maintained a professional indemnity policy that covers them. 9.3 Professionals that work on a sub contract basis, are in a completely different category and should carefully consider their insurance requirements. Any obligation on a principal to organise insurance cover for them, should be carefully recorded in writing. 9.4 Whether or not an employer is vicariously liable for the misconduct of an employee is a difficult area of law that will turn on the facts. However, courts will more readily find an employer liable for intentional misconduct that causes a client financial loss. Courts are less likely to make an employer vicariously liable for personal injury caused by the intentional misconduct of an employee. 9.5 However, if you have been dishonest, or wilfully breached a duty to your employer, be concerned. Employers and clients alike, are entitled to recovery and no policy of insurance will come to your aid! 11

12 For more information To learn more about DLA Piper, visit or contact: David Leggatt Partner David.Leggatt@dlapiper.com DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at Copyright 2012 DLA Piper. All rights reserved. MAY 12 LAT03 DLA673