Newcastle-based financial services firm Prosperity Advisers was placed in the hands of administrators after it became involved in a battle with its former professional indemnity insurer over legal claims from dissatisfied investors. 

The dispute with Prosperity's former professional indemnity insurer relates to advice given to Prosperity clients in 2004-05. Some investors lost money after following this advise. More than 160 clients sued the company for negligently advising them to invest, which resulted in  $17 million in losses.  The firm referred the claims to its professional indemnity insurer, called Dexta. 

What the company has labelled a "technicality" meant the professional indemnity insurer would only cover a portion of the claims. 

Prosperity’s insurer rejected the broker’s view that only one deductible of $40,000 was payable on the entire matter, and instead, required separate deductibles to be paid for each investor’s claim.

Law firm Colin Biggers & Paisley claims the case demonstrates that organisations that rely solely on a broker and do not seek legal advice on the adequacy of their insurance policies are taking careless risks.

According to the law firm, the Court found that the insurance broker who provided incorrect advice to the director of a firm of financial planners, on the legal effect of a policy’s excess provisions in the course of arranging professional indemnity cover for the firm, had breached his duty of care. 

Kemsley Brennan, special counsel at Colin Biggers & Paisley said assessing whether an insurance policy effectively meets the needs of a business requires a lawyer’s input.  

"You cannot determine a business’s real exposures, if you’re not qualified to identify potential liabilities in employment and customer contracts. And you cannot advise on whether deductibles or limits are appropriate unless you have a strong understanding of insurance law principles,” said Brennan.

“The bottom line is that directors should always have a lawyer review the organisation’s insurance program and map it against the business’s needs. A good insurance lawyer will then identify coverage gaps and arm the organisation with the knowledge to ensure they ask the right questions of their broker, to get the insurance product that’s ultimately right for them. 

“The right policy can mean the difference between business insolvency and success, so it’s important for organisations to get a lawyer involved at an early stage as a vital complement to their broker’s services,” he said. 

The Court found the broker had breached his duty of care to Prosperity.

Brennan said that ultimately however, Prosperity’s negligence claim did not succeed, as it could not identify an alternative insurance product available at the time that imposed a single deductible.