1. LIABILITY OF INSURANCE AGENTS TO
THEIR CLIENTS
SIR NINIAN STEPHENS MASTERCLASS
AILA
Mikaela Stafrace
T: +61 (0)3 8601 4513
mikaela.stafrace@hfw.com

2. Outline
 Definition of insurance agent
 Future of Financial Advice legislation (2012)
 Legislative position - Corporations Act (2001) and ASIC Act (2001)
 Common law position
 Caldwell v JA Neilson Investments Pty Ltd
 Horsell International v Divetwo
 ACN 068691092 v Plan 4 Insurance Services Pty Ltd

3. Definition of insurance agent
 Definition - A person who for reward and as an agent for one or more
insurers or as an agent for an intending insured arranges contracts of
insurance in Australia or elsewhere, and includes an insurance broker
(s11 Insurance Contracts Act (1984)
 Examples:
 Most familiar example – the AMP agent who sold life and building covers
 Employees of insurers;
 Agents who are ``tied'' to a particular insurer;
 Agents who act for more than one insurer (multi-agents);
 Loss adjusters;
 ``Casual agents'' who may arrange insurance but only as an incidental
part of their main business activity; and
 Spotters – frequently used by brokers to refer intending insureds in
return for a fee

4. Agents and the concept of sales or procuring an insured
 … between a person, firm or company which carries on an independent
business of placing insurance upon the instructions of clients and whose
basic relationship of agency is with the client, and the insurer's agent
whose function is to procure persons to insure with his principal, the
insurer, and whose basic relationship of agency is therefore with the insurer
Lush J in Norwich Fire Insurance Society v Brennans (Horsham) Pty Ltd
(1981) VR 981
 Basis of authority – actual, implied or ostensible
 Actual authority – evidenced in writing which sets out the actual tasks that the
intermediary has authority to undertake
 Implied authority– no formal arrangement but assumed from the actions and
behaviour of the agent or by the nature of his/her duties and evidenced by
uniform, letterhead and signage
 Apparent - agent does not actually have any authority but because implied or
actual representations by the underwriter to the insured, it would be inequitable to
deny the agency. The underwriter will be bound
 Don't ask what they are called but rather look at how they behave

5. Duties and responsibilities – Corporations Act
 A breach in contract or tort will permit the client to bring an action against
the agent but because of the agency relationship, they can also bring an
action against the principal (the insurer)
 The insurer is responsible for the actions of its agent at common law
provided the agent acted within the scope of its actual or ostensible
authority although the insurer may still be liable where the agent's acts fall
entirely outside the scope of his or her actual or ostensible authority, if the
insurer later ratified the agent's act
 The insurer will be responsible for the acts of their representative whether
or not the representative is acting within authority (s917B of the
Corporations Act )
 What is a representative? - any other person acting on behalf of the
financial services licensee (s910A of the Corporations Act)
 Multiple insurers – if agent acting within scope of their authority, that insurer
or those insurers are liable for the conduct (S917C of the Corporations
Act)

6. Duties and responsibilities - ASIC Act
 Duty not to make misrepresentations or engage in misleading or deceptive
conduct when a person is engaged in conduct concerning financial services
(s12DA ASIC Act)

7. Recent cases
 Caldwell v J A Neilson Investments Pty Ltd (2007) NSWCA3
 FACTS:
Caldwell a grazier from Cooma sued his insurance agent claiming damages in
negligence.
Mr. Neilson, an AMP agent had been approached to place insurance cover for the
grazing business. Caldwell had not used Neilson before and had an expiring
policy with CGU.
Dispute triggered when one of Caldwell's heifers escaped from a property and
collided with a car. The property was not noted as an insured situation under the
policy and in any event, the policy excluded public liability cover such as was
needed to repair the damage and injury caused by the escaping cow.
Caldwell claimed that Neilson was negligent for failing to arrange adequate
insurance and in recommending a policy that failed to respond to the claim

8. Findings in Caldwell case – Ipp J in Court of Appeal
 Traditionally the broker is the agent of the insured not the insurer (see Con-
Stand Industries of Australia Ltd v Norwich Winterthur Insurance (Australia)
Ltd (1986) 160 CLR 226);
 Neilson was the agent of AMP not Caldwell and so owed a duty of care to
AMP;
 The agreement by an agent of an insurer to obtain a policy of insurance for
the insured does not result in the assumption of a duty of care on the part
of the agent –there needs to be more;
 There is no difference in this context between the agent and an employee
of the insurer whose task it is to sell insurance;
 There may often be situations, where an insurance agent of ordinary
prudence and ability might be expected to show no degree of care and skill
to the insured

9. Findings in Caldwell continued…
 The court held that while Neilson's completion of the proposal form gave
rise to a duty of care, such duty was limited to filling in the form accurately
and in accordance with Kennedy's instructions. There was no suggestion
that Neilson had not done so. The mere act of completing the proposal form
did not require Neilson to take reasonable steps to give advice about the
quality, extent and conditions of the cover being sought
 Neilson was only authorised to sell AMP's policies. Those policies
contained exclusions. An agent is not expected to warn a prospective
insured about all such exclusions and to do so, would impose an
unreasonable expectation on the agent

10. Two other cases
 Horsell International v Divetwo (2013) NSWCA 368 although concerned with the
advice provided by an insurance broker not an agent, the case did confirm that
reasonable skill and care must be used to ascertain the customers needs and to
procure the cover that the customer has asked for
 ACN 068691092 Pty Ltd v Plan 4 Insurance Services Pty Ltd (2011) SADC 59
 FACTS: An AMP agent was engaged to place cover over commercial
properties owned by the Plaintiff and its Director Mr Scragg. The
properties had been destroyed in a fire and the sum insured was found
to be insufficient to permit reinstatement of the loss
 HELD: Agent had no incentive to mislead or deceive the plaintiff and had
not done so. The Court also found that the sum insured was at a limit
that the Plaintiff had instructed and that this had been documented and
confirmed in writing
 The Court confirmed that agents have a duty to exercise a reasonable
degree of care and skill in taking and executing the instructions of the
plaintiff but that in this case, they had not breached that duty

11. Future of Financial Advice
 See Corporations Amendment (Future of Financial Advice) Act 2012 and
the Corporations Amendment (Further Future of Financial Advice
Measures) Act 2012 (the FOFA Acts). They are supported by regulations
being the Corporations Amendment Regulation 2012 (No.4) and the
Corporations Amendment Regulation 2012 (No. 8).
 Agent owes a duty to act in the best interest of the client (s961B
Corporations Act)
 Representative has same definition as s910A (s960 Corporations Act) so
captures agents
 Best interest duty measured using objective test – what a reasonable
advice provider would believe that the client is likely to be in a better
position if the client follows the advice
 Regulatory guide 175 sets out considerations for the reasonable advice
provider

12. Reasonable provider test – RG175
 The position the client would have been in if they did not follow the advice,
which is to be assessed at the time the advice is provided
i. the facts at the time the advice is provided that the advice provider had,
or should have had, if they followed their obligations;
ii. the subject matter of the advice sought by the client;
iii. the client’s objectives, financial situation and needs;
iv. that the client receives a benefit that is more than trivial;
 This is an obligation already imposed on AFS licence holders under s766B
of the Act
 Providers are also obliged to provide appropriate advice (s961G); to warn
the client if their advice is based on incomplete or inaccurate information
(s961H) and prioritise the interests of the client where there is a conflict
with their own interests, or those of one of their related parties (s961J)

13. 'Safe Harbour' – 7 point checklist (s961B(2) of the Corporations Act
 If the agent can demonstrate compliance with those factors, the Act will
provide that the agent has satisfied his or her duty.
 7 point checklist -
 a) identify the objectives, financial situation and needs of the client that were identified through
instructions
 b) identify the subject matter of the advice sought by the client (whether explicitly or implicitly)
 c) identify the objectives, financial situation and needs of the client that would reasonably be
considered relevant to the advice sought on that subject matter
 d) if it is reasonably apparent that information relating to the client’s relevant circumstances is
incomplete or inaccurate, make reasonable enquiries to obtain complete and accurate information
 e) assess whether you have the expertise to provide the advice sought and, if not, decline to give
the advice
 f) if it would be reasonable to consider recommending a financial product, conduct a reasonable
investigation into the financial products that might achieve the objectives and meet the needs of the
client that would reasonably be considered relevant to advice on the subject matter and assess the
information gathered in the investigation
 g) base all judgments on the client’s relevant circumstances, and
 h) take any other step that, at the time the advice is provided, would reasonably be regarded as
being in the best interests of the client, given the client’s relevant circumstances.


14. The 'modified duty' for general insurance
 The duty is modified for general insurance (s961B(4) – need to
demonstrate compliance with (a)-(c):
a) identify the objectives, financial situation and needs of the client
that were identified through instructions;
b) identify the subject matter of the advice sought by the client
(whether explicitly or implicitly);
c) identify the objectives, financial situation and needs of the client
that would reasonably be considered relevant to the advice
sought on that subject matter

15. Another review - Corporations Amendment
(Streamlining of Future of Financial Advice) Bill
 Passed through second reading in House of Representatives on 19 March
2014
 One of the criticisms that has been levied against the best interest test is
the uncertainty generated by the inclusion of the catch-all test contained in
the 7th item of the checklist –
 "take any other step that, at the time the advice is provided, would reasonably be
regarded as being in the best interests of the client, given the client’s relevant
circumstances"
 Under the proposed reforms, there will be no requirement for providers to
prove they have ‘taken any other step’ in order to discharge the best
interests duty and for agents providing advice in relation to general
insurance products, they will still need to show compliance with the first
three factors set out in the s961B(2) checklist

16. A final word on the standard
 When assessing the behaviour of an adviser and ensuring their actions are
in the best interest of clients, apply the following four standards:
1) the advisor must have acted with a reasonable level of expertise in
the subject matter of the advice sought by the client
2) they must have exercised care
3) they must have objectively assessed the client’s relevant
circumstances
4) they must have regarded taking the step as in the best interest of the
client, given the client’s relevant circumstances
(drawn from s961B and 961E of the Corporations Act)

17. Consequences of a breach of the best interest duty
 No criminal prosecution
 Retail client can access compensation under s961M(5)
 Exposes advisor and the licensee to a penalty (s 961Q of the Corporations
Act)
 The maximum penalty for contravention is $200,000 for an individual or
$1m for a body corporate (s1317G(1F) of the Corporations Act)
 The AFS licensee is responsible for the conduct of representatives
irrespective of whether the representative’s conduct was within the scope of
their authority given by the licensee. In other words, the client has the
same remedies against a licensee that the client has against the
representative (s917B & s917C of the Corporations Act)

18. Conclusion
 Distribution channels have become more complex since Justice Lush
expressed his views in 1981
 We have Authorised Representatives, underwriting agencies, brokers
clusters transforming into ASX listed entities, online transacting of retail
classes and all manner of combinations
 The legislative regime has also become more complex but two things are
clear – professional standards are expected of agents now and they owe a
clear duty of care to their clients.

19. For inquiries please contact:
Richard Jowett, Partner – Melbourne
T: +61 (0)3 8601 4521
E: richard.jowett@hfw.com
Andrew Dunn, Partner – Sydney
T: +61 (0)2 9320 4603
E: andrew.dunn@hfw.com
Mikaela Stafrace, Consultant – Melbourne
T: +61 (0)3 8601 4513
E: mikaela.stafrace@hfw.com