GRAHAM STRATEGIC LIMITED V STRATUS FINANCIAL SERVICES LIMITED HC WN CIV 2008-485-2603

GRAHAM STRATEGIC LIMITED V STRATUS FINANCIAL SERVICES LIMITED HC WN CIV 2008-485- 2603 2 September 2009IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2008-485-2603BETWEEN GRAHAM STRATEGIC LIMITED Plaintiff AND STRATUS FINANCIAL SERVICES LIMITED Defendant Hearing: 17-19 August 2009 Counsel: I R Millard QC for Plaintiff P R Rzepecky for Defendant Judgment: 2 September 2009JUDGMENT OF SIMON FRANCE J Introduction[1] This case concerns a claim that an insurance broker (Stratus) failed to ensure that the professional indemnity policy held by its client (Graham Strategic Limited – "GSL") covered all the work done by GSL. As a consequence, when an event occurred which caused GSL a loss, GSL was not protected when it should have been. [2] Stratus' position in response is that the scope of the insurance cover was a consequence of express instructions by GSL for it to be limited in the way it was. Further, that limited coverage was maintained despite Stratus advising GSL to take wider coverage. Additionally, it is Stratus' position that even if the policy covered the client in issue, what happened would never have fallen within the policy.Facts(a) The insurance contract is established[3] In March 2000 Mrs Leigh Graham, who had worked in the media and advertising industry for eighteen years, set up Graham Strategic Limited. It is a marketing and communications company, specialising in advertising. It was initially a small business, but has proved successful and has expanded significantly. [4] Initially GSL carried no professional liability insurance, its insurance protection being limited to contents, buildings and the like. However, in 2003 GSL secured a marketing contract with the Ministry of Education. The terms of the contract required GSL to have professional indemnity insurance. [5] Mrs Graham approach Mr David Collins, who is the principal of Stratus Financial Services Limited. He had for many years provided insurance advice to Mrs Graham's husband, and had also assisted the couple with financial planning. The primary business of Stratus is investment advice, mortgage broking, and life and general insurance. Professional indemnity insurance is not a core area of expertise and so Stratus used another broking firm, Marsh Limited, to assist it with the placement of Mrs Graham's professional indemnity insurance. [6] Mrs Graham initially had dealings with an employee of Stratus who quoted her a figure of $2,500 as the likely premium for the coverage required. This was the figure Mrs Graham used in her budgeting for the contract quotation. When Mr Collins eventually obtained a quotation the premium was in fact $13,500. [7] Mrs Graham was unwilling to pay this much. She required Mr Collins to find options to reduce the amount. Eventually the position emerged that one insurance company, Lumley, would provide professional indemnity coverage limited to this one contract.[8] It had been difficult to obtain such coverage since insurance companies were reluctant to insure just part of the business risk. Nevertheless, Lumley did provide cover, which was expressly limited to the:Ministry of Education contract only.[9] The final cost, GST inclusive, was $4,275. [10] In August 2004 GSL secured a contract with the Ministry of Health. That Ministry likewise required GSL to have professional indemnity cover. An extension of the existing policy with Lumley was negotiated, at a cost of an extra per annum premium of $1,300 plus GST. Thereafter the policy carried this business description:Provision of public relations, advertising, marketing and communication services, in respect of the Ministry of Education and Ministry of Health only.[11] It is apparent, since the business had started three years earlier in 2000, that GSL did work for other clients that was never the subject of insurance cover.(b) The policy never changed[12] Over time GSL's business grew, and the client base grew and changed. Notwithstanding this the policy remained unchanged. The position of the two parties as regards why this happened is very different. At this point I intend only to set out the general positions, and leave the detail to when it matters. [13] Stratus says that throughout their relationship, Mrs Graham was unwilling to either discuss insurance or spend money on it. Professional indemnity policies are new contracts each year and the person seeking insurance has to complete a fresh application ("proposal") each year. Stratus says Mrs Graham was always late to complete the proposal. Stratus would have to visit her to assist her to fill it out. Further, she was always querying the premium, and wanted to spend as little as possible on insurance. She did not consider she required professional liability insurance, and wanted to have it only where a client required her to.[14] In 2006 Mr Neil Carter took over this aspect of Stratus' business from Mr Collins. Mr Carter says that at the time of this 2006 renewal, he discussed with Mrs Graham the need to have full coverage. He obtained a quotation for full coverage from Vero Insurance but the premium of $25,000 proved unacceptable to Mrs Graham. Mrs Graham had been looking to reduce premiums, not pay more, and so the instruction was to renew the existing insurance on the same terms. [15] The policy was therefore renewed on this basis, and again in 2007 and 2008. On those occasions Mr Carter did not renew his efforts to have GSL take a broader coverage. In 2008 the discussions on behalf of GSL were done by the accounts manager, Ms Jodi Henry. However, Mr Carter says it was clear that Mrs Graham was still calling the shots as Ms Henry left the meeting on several occasions to consult her. The 2008 renewal is the operative one in the sense that the events giving rise to the claim fall within that year of coverage. [16] What happened in 2006 when Mr Carter first dealt with renewing the policy is the key factual dispute in the case. Mrs Graham says that such discussions about taking fuller cover never took place. This is an important dispute because Mrs Graham's position is that by sometime in 2005 she had forgotten altogether that her coverage was limited. This failure of memory was replaced by a belief/assumption that her professional indemnity coverage applied to all her business activities. Obviously this evidence is much harder to establish if Mr Carter's version of what happened in 2006 is correct since then the issue of limited coverage would have been brought to Mrs Graham's attention. [17] The case for GSL is that from this time in 2005, when Mrs Graham forgot about the limits and so came to think that her coverage was comprehensive: a) Stratus did several things that positively reinforced that belief; b) Stratus failed to do several things it should have, any one of which would have disabused Mrs Graham of her incorrect belief.[18] The position of GSL is that these acts and omissions by Stratus reflect a reality that it too had forgotten about the limited nature of the coverage. [19] With that overview of the competing factual positions, I turn to the business event that underlies this case.(c) The failed advertising campaign[20] In 2006 GSL had entered into a three year contract with the Retirement Commission to provide advertising services. Within that primary contract, any major campaigns would be subject to specific sign-off. GSL's role in these major campaigns is primarily as an organiser or project manager, although it also provides creative input. One aspect of such campaigns that was not under GSL's control was the booking of television advertising time. This was done by another agency used by the Commission. The dates for such advertising are required to be settled in advance, and cancellation penalties apply. [21] In 2008 a new campaign was planned. The first television date was to be 18 May 2008. The new campaign was to be based around the "My Way" song made famous by Frank Sinatra. Obviously copyright approval is required to use songs for advertising campaigns. When the "My Way" idea was first floated, GSL checked with the appropriate music licence specialist as to availability. The song was advertised as being generally available for use, subject to specific consent being provided. [22] Once the Commission signed off on the campaign on 3 April 2008, an application was immediately formalised for the copyright. It was expected that the timing would be fine. Shooting of the advertisement took place over the weekend of 26/27 April 2008. By that time the copyright had not come through. This was known to contractors working on the campaign, but not to GSL. Those with knowledge of the absence of copyright approval were being advised that the consent would come through in time for the campaign launch.[23] As it happens copyright was never obtained. The copyright holders are resident in France. There are eight trustees who are related to each other, and the approval of all eight is required. At the time of the GSL application it appears that there were unresolved disagreements within the trustees so only five would grant approval. The end result of this conflict was that the advertising campaign could not be used. GSL only became aware on 6 May that the copyright licence was not to hand. [24] On 8 May it alerted the Retirement Commission to the issue, but indicated it was still optimistic that the problem could be resolved. The Retirement Commission was understandably not enthralled by the news, and made it clear that GSL was the party responsible. GSL increased its efforts to obtain the licence, but to no avail. [25] On 9 May, the agency handling the television advertising aspect successfully managed to move the booked airtime without penalty. It is apparent that this was a praiseworthy piece of negotiation that avoided what could have been substantial penalties. The relevant "to air" dates were moved first to June and then to August. Ultimately 24 August became the final date. As part of the negotiations it had been necessary to pay in advance for the advertisements. It became thereafter settled that the 24 August date was fixed, and if the date was not used, the money would be forfeited. [26] Discussions continued with the Retirement Commission. Eventually planning started on a new campaign whilst efforts continued to get the licence. 30 June 2008 was set as the date by which the licence had to be obtained. If not, the "My Way" campaign would be abandoned and a new concept proceeded with. The latter is what happened and a new campaign was filmed. It met the 24 August deadline, and so aired on time albeit three months later than the original planning. [27] The arrangement reached with the Commission was that the Commission would pay for the new campaign which had a similar budget to the "My Way" campaign. It would not pay for anything to do with the "My Way" campaign, and any money it had already paid would be credited to the cost of the new campaign.This is what occurred and the final cost to the Commission for this campaign was in fact slightly less than the budget for the "My Way" campaign. [28] Subsequently the Commission has billed GSL for $8,450 for other wasted costs it incurred in relation to the "My Way" campaign. [29] The outcome of all this is that GSL was paid for the advertising campaign that was accepted by the Commission and which aired. It has however been left to carry the cost for the unusable "My Way" campaign. This loss includes both its own time and the payments it made to other parties who worked on the project. It is this loss that GSL seeks to recover by these proceedings. [30] The proceedings allege that if the Retirement Commission contract had been included within its professional indemnity cover, as it should have been, the insurer would have been required to indemnify GSL for this loss. The sum claimed is $413,918.55, the breakdown for which is:GSL fees 45,866.25 External costs 377,421.05 Reimbursement to Commission 10,631.25 433,918.55 Less policy excess 20,000.00 413,918.55These proceedings[31] It is common ground that the insurer was correct to reject the claim on the basis that work that GSL was doing in relation to anyone other than the Ministries of Health and Education was not covered. The case against Stratus is pleaded as a breach of contract, it being alleged that it breached an implied term of the contract by failing to ensure GSL was covered. [32] The plaintiff words the implied term in this way:Stratus would be reasonably familiar with GSL's business and would exercise reasonable care and skill in advising on and placing such insurance and in managing any claims that arose under any resulting policy.[33] Stratus accepts a modified form of the implied term, and denies a breach. It says the implied term is that Stratus:would exercise a reasonable standard of care and skill in advising the plaintiff and following its instructions in relation to the placing of its insurance instructions.[34] The primary difference is that Stratus' version emphasises the role and centrality of a client's instructions. [35] GSL submits that Stratus breached the implied term of the contract in that: a) it ought to have advised GSL that its policy was limited to two clients – the Ministries of Health and Education; b) it was negligent in how it responded to situations in that the manner of its response not only failed to alert GSL to the limited coverage, it positively reinforced GSL's mistaken belief that it was covered. These responses also form the basis of a Fair Trading Act claim. [36] GSL submits that had the proper advice been given, GSL would have taken out insurance that applied to all its clients. Armed with such cover, it is claimed that it would be able to turn to the insurer to cover its losses on the "My Way" campaign. [37] Stratus says it did advise GSL of its limited coverage, and that GSL instructed it to maintain the same limited coverage that had been in place from the outset. Alternatively it submits that if it did not advise GSL, any failure to advise was not causative of loss because GSL would not have taken coverage despite such advice. Finally it submits that the policy would not in any event apply to indemnify GSL's losses on the "My Way" campaign. This is because that sort of loss does not fall within the coverage provided by a professional indemnity insurance policy, or alternatively if generally within the policy, three exclusions were applicable. Stratus also submits that it can claim contribution in relation to any loss, and that GSL's own default was a primary cause of its losses.Issue one – breach of implied term[38] It is not easy to resolve the factual conflict between the parties. On the one hand GSL originally instructed the coverage to be limited. Thereafter there is no claim by GSL that it positively altered this position or ever told Stratus to increase the cover. Rather it says it erroneously thought this had somehow happened. On the other hand there is no document sourced in Stratus which brings the limited cover to the attention of GSL subsequent to the 2004 extension of the policy to Ministry of Health. Stratus forwarded on documents such as policies and policy schedules that contained this information, but never itself brought them to GSL's attention. [39] In my view Stratus did breach the term of the contract which requires it to use reasonable skill and care in advising GSL. I base this primarily on two matters: a) the response it gave to certain requests by Mrs Graham; b) the manner in which it dealt with annual "renewals" of the policy.(a) The deficient responses[40] Part of GSL's business was to tender for new work. This would require it to complete application on tender forms. The process led Mrs Graham to seek assistance from Stratus. [41] First, on 3 October 2005, some fourteen months after the adjustment to add to the Ministry of Health, Mrs Graham emailed Stratus:Can you please advise how I would respond to the question in an RFP about insurance. The question is: Please provide details of types of relevant insurance held and amount of cover, i.e. Public Liability Professional Indemnity.[42] Stratus (Mr Carter) replied:You can confirm you have both: Public Liability cover – limit $1,000,000 Professional Indemnity – limit $2,000,000[43] It is to be noted this answer was only true as regard the Ministries of Health and Education. Mr Carter did not know to whom the tender was being made. It was in fact either for IRD or the Reserve Bank (Mrs Graham cannot now recall which it was). [44] Next, on 16 May 2006, Mrs Graham emailed:I'm just doing another tender at the moment. Can you please confirm what I can say about our Professional Indemnity and Liability insurances please?The answer was:You can confirm current cover – limit of indemnity $1,000,000. Insurer Lumley General . Current to 1.4.07. Let me know if you need to confirm anything further or if you need a certificate/confirmation sent to anyone.[45] Finally, on 23 October 2007, Mrs Graham emailed:We are currently doing a new business pitch. What kind of wording could I use to answer the following question please: Specify whether we have or will obtain adequate insurance to cover any liabilities that may arise from providing the required services, including details of insurer, type(s) and level(s) of cover.The answer received was:Not sure exactly what the business pitch is but presuming it is in your normal fields then You can confirm that you both hold professional indemnity and public liability covers relative to your profession. Professional Indemnity – Lumley – limit $1,000,000. Public Liability – AMP – limit $5,000,000 including statutory and employers liability to $500,000 limit. Increases can be arranged if specifically required.[46] In my view the answers provided by Mr Carter fell below the standard of skill and care one could reasonably expect of a broker. The answers were incorrect unless the business pitch related to one of the two Ministries (none of them did). [47] Mr Carter's evidence is that they were just an inquiry and he answered what was asked. However, that is not so in that the answer is wrong. On none of the occasions did Mrs Graham have this coverage. The expert called by Stratus agreed that he regarded the answers as less than fulsome. Whilst seeing the nature of the answers as reflecting the dangers of doing these things by email, the effect of his evidence was, quite properly, that the answer should have referred to the contractual limits. In my view, in failing to provide proper responses, Stratus breached its duty. The effect was that on three occasions when the client should have been clearly and firmly reminded of the contractual limitation to the two Ministries, this was not done. [48] A point made during the trial by Stratus is that it was entitled when replying to such inquiries to rely on Mrs Graham having read the documents sent to her each year and which set out the contractual limit. However, the documents Stratus refer to equally set out the financial information Stratus provided in its answers. There was no basis to think Mrs Graham was unaware of the financial limits but was aware of the client limitations. If she needed reminding about some limits she plainly should have been reminded about this fundamental one. [49] Reflecting on the answers given by Stratus, it is a convenient moment to note one of the central themes advanced by the plaintiff. It is GSL's proposition that Mr Carter was equally unaware of the client limitation. I mention that at this point because some support for it is found in the last line of the third answer. Having set out the monetary limits, Mr Carter says to Mrs Graham:Increases can be arranged if specifically required.[50] The GSL theory that Mr Carter was unaware of the client limitation could provide some explanation for what is otherwise a somewhat inexplicable offer to increase the monetary limits, without mentioning the more important fact that exceptfor two clients, there was no coverage at all let alone worry about the size of the amounts. [51] At this point one can also observe another feature of the evidence. Each year, GSL was required to complete a new insurance proposal. It was assisted in this by Stratus. One of the questions required the insured to list its five major contracts. The contracts listed by GSL changed over time:2005 : Health and Education were the only two listed. 2006 : Education, Health, Health Sponsorship, Quit Group, Cancer Society. 2007 : Health Sponsorship, Quit, Health, Retirement, AXA. 2008 : Health Sponsorship, Health, Retirement Commission, Quit Group, AXA.[52] These contracts are listed above in order of the monetary value of the contract. It is to be noted that for the last two years Education was not there at all. Related to the previous point, it is quite puzzling given this profile, for Stratus to be mentioning that the monetary limits could be increased. After all they applied only to Health, and to the disappearing Education client. The far more obvious query must have been about the scope of the coverage. [53] Against this background I consider the three email answers were negligent. They were incorrect and they failed to draw attention to a major problem in the scope of the coverage. Whether or not the scope of the coverage had been raised in 2006 (a disputed point), one would still expect a reasonably competent insurance agent to return to the topic. Interestingly the insurance expert called by Stratus noted that in the circumstances of this case he would have proffered a quotation for full cover every year, regardless of whether GSL had previously indicated its preference for limited coverage. The standard shown by Stratus in its dealings falls significantly below that careful approach, and failed to meet the necessary standard.(b) The "renewal" process[54] As noted, each year a professional insurance policy must be reissued in the sense that it is a fresh policy rather than the automatic renewal of the existing. The insured is required to complete a new application each year. [55] The process for GSL was conducted this way. The broking firm used by Stratus, Marsh Ltd, would send the application form to Stratus every January. Stratus would forward that on to GSL. It has to be observed that Stratus lacked timeliness in this regard. The dates the material was sent by Marsh, and then forwarded on, were – in 2006, 20 January and 16 February; in 2007, 17 January and 8 March; in 2008, 16 January and 28 February. [56] On each occasion, Stratus forwarded the proposal forms for completion. In 2006 nothing specific was said at the time the forms were forwarded on. In 2007 Mr Carter said he would like to get the forms sorted properly this year. This was a reference to an on-going issue as to whether the proposal should declare GSL's turnover, or its actual income. In 2008 the emphasis of the covering letter was on highlighting the need to identify any claims, or significant changes. [57] The forms having been sent to GSL, there was thereafter a meeting arranged at GSL's offices. Mr Carter would attend and assist. Prior to Mr Carter taking responsibility, Mr Collins had done likewise. The forms were completed at that meeting. It is apparent that there was often a difficulty in having Mrs Graham commit to having the meeting, and then engaging in the process. At times there would be discussion about the premium, usually initiated by Mrs Graham's desire for the lowest possible. At one point options were obtained for different monetary levels, and the effect that would have on premiums. GSL chose a lower but not the cheapest option. Once the forms were complete, Stratus would send them off to Marsh and the new policy would be issued. [58] On receipt of the completed proposal forms, Marsh would send to Stratus what were called "renewal terms". These were in turn forwarded on to GSL under acovering fax, the total number of pages to the fax being six. Mrs Graham was required to sign the renewal terms and return them to Stratus. [59] The renewal terms were a four page document. Taking the 2007 version, page 1 was a cover page. Pages 2 and 3 set out the key terms. Page 4 constituted the formal quotation which was to be signed. Page 3, the second of the key terms pages, contained only one topic which was an offer on instalment payment: [60] Page 2 had four paragraphs, the headings for which were:1. Introduction 2. Renewal terms 3. Policy coverage 4. Professional Liability Renewal Terms summary.[61] The last of these paragraphs included the business description, the policy date, the indemnity limit on one claim, the aggregation limit on more than one claim, the excess and the premium. It was the business description that contained the limitation "in respect of the Ministry of Health and Ministry of Education only". [62] There were some variations in this document in other years but it was essentially in similar terms. Paragraph 4 or its equivalent set out reasonably prominently the limits applying to the policy. [63] I turn to the covering letter Stratus sent when forwarding these renewal terms. Looking first at 2006, Mr Carter discussed the premiums and his efforts to obtain reduced premiums. There was no mention of the client limits. He sought instructions by tomorrow. (On this occasion Stratus had only received the document from Marsh the day before so in this aspect there was no delay). [64] In 2007 the focus was likewise on the premium, and on the monetary limits of the coverage. Mr Carter observed that "the cover is about minimum premium level for your business". This was to reflect Marsh's comment to him that the premium is "pretty much on the border of the minimum premium offered by Lumley".[65] In 2008, the letter referred to the existing monetary levels and expressed the view that it was a good premium – "only a 6% increase against a 50% increase in turnover". As regards this comment Mr Millard QC observes it again shows that Mr Carter is not aware of the client limits because the 50% growth in GSL's turnover was not linked to work with the relevant Ministries but to the business's overall growth. [66] The picture of the renewal process can be completed by observing that when the actual policies were sent there was no reference to any of the terms. The covering letter just enclosed the policy each time. [67] It has been necessary to spend some time on this topic to illustrate the dearth of any written reference to the client limits. As noted, there is debate about 2006 in that Mr Carter says he had a discussion about full coverage, but if it occurred it was oral only. Assuming for the moment that Mr Carter's recollection is correct, in my view the process followed by Stratus throughout this period was deficient and in breach of the implied term to use reasonable skill and care in advising GSL. [68] I note again the evidence of Mr Jones, the insurance expert called by Stratus. In cross-examination he accepted various matters which are significant. First, he said he would expect there to have been a discussion with the client about changes in the business. Second he would have reinforced each year his advice for full coverage. Third, his covering letter would have referred the client specifically to a limitation of the type in issue here. Its importance was such that it should always be highlighted separately. [69] It is, I believe, a remarkable feature of this case that through this period Stratus never in writing at any point highlighted to GSL this limitation. The best that can be said is disputed evidence that it was raised once orally. [70] Turning to that debate, it seems common ground that Mr Carter did in 2006 obtain an alternative quotation from Vero for full coverage – the quoted figure was $25,000. A point of interest is why such a quote was not obtained from Lumley since it was already providing the limited coverage. Mr Carter says it was becauseof the tight time-frames and he called on a favour from a contact at Vero. Mr Millard observes that getting the quote from Vero is consistent with an incorrect belief that the Lumley figure already related to full coverage. [71] The quote from Vero followed upon a telephone conversation with Mrs Graham. Mr Carter's file note of that conversation records:Alternate costings for lower limits – other issues if time! Still doesn't believe she needs cover only does for contracts![72] The last line is supportive of the proposition that Mr Carter did know of the limited coverage, but if so what follows is perplexing. Why, given that instruction, was the only alternative pricing for full coverage? One would have thought it would be an attempt to see if another firm would provide limited coverage at a cheaper price. Mr Carter seemed unable to explain why he obtained a full coverage quote. The uncertainty this generates is reinforced when one considers the terms of Mr Carter's subsequent letter to Mrs Graham where he explains the Vero quote:Following our discussions I have also sought alternate options in an effort to reduce the premiums. This has been difficult in the short time frame allowed, however I did get alternate indications. Unfortunately these have confirmed the existing option remains easily the best available. Sorry. Vero Liability have indicated a premium of $25,000 plus GST for cover for $1,000,000 with a $10,000 excess. Yes that is $25,000 – this is minimum – they were initially looking for more.[73] It is impossible to read this other than as suggesting Mr Carter thinks the Vero quote is for the same risk that Lumley is insuring. This conclusion, namely that Mr Carter was unaware of the limited coverage, is reinforced by three subsequent facts I need only briefly mention: a) first, in 2007 Mr Carter wrote to Mrs Graham saying – "We tested the market last year and could not get any better, or even near same". This is consistent with the terms of the 2006 letter, and reflects the same error;b) second, in 2008 a new person looked after GSL's side of things. The limitation was never mentioned to her by Mr Carter, which is surprising if he was aware of it; c) third, when GSL first alerted people to the "My Way" issue, Mr Carter accepts he mistakenly believed the Retirement Commission contract was part of the insurance coverage. He now believes that was a temporary oversight on his part, but I consider it reflects an on-going mistake. [74] It follows from this that I do not accept Mr Carter discussed the limited coverage with Mrs Graham in 2006. He is mistaken in his recollection of events, and Mrs Graham's recollection is preferred. It also follows that the default of Stratus in terms of its contractual obligations is clear, and really indisputable given its failure to raise the limit with GSL or to recommend a change in insurance position over a period of four years. Indeed it is quite inexplicable why it did not do so unless one accepts, as I have held, that Stratus also forgot about the existence of the limit. [75] I accordingly find that the defendant breached its contractual obligation to GSL. It was negligent in its advice, and I hold to this view by a considerable margin over any other assessment of the facts. Before turning to assess whether the breach was causative of a loss in the sense of whether the policy would have protected GSL, I first address a factual causation argument raised by Stratus. It is that if advice had been given to Mrs Graham, she would not have accepted it.Issue two – Would Mrs Graham have accepted advice if she had received it?[76] This would normally seem a rather optimistic submission for a negligent party to make. However, on the facts of this case I do consider it requires serious consideration. The relevant facts in support can be succinctly stated: a) from its establishment in 2000 until the Ministry of Education insisted in 2004, GSL never had any professional liability insurance;b) in 2004 Mrs Graham was unwilling to pay a $13,500 premium and specifically instructed Stratus to obtain coverage only for the one client who insisted on her taking such insurance; c) in 2006 she repeated similar sentiments to Mr Carter. His file note is a contemporaneous record and there is no reason to doubt it. In it Mrs Graham is recorded as saying she still does not believe she needs cover; d) Mrs Graham never instructed Stratus to broaden the coverage. Obviously this was because she wrongly believed she had it. However, it remains the case that the only specific instruction is for limited coverage; e) throughout the period in dispute Mrs Graham consistently queried the level of the premium. In this regard one is talking about a premium around the $4,000 level. It is difficult to accept that she would therefore agree to a premium in the order of $25,000. The one occasion when a more expensive option was selected by GSL does not really undermine this general pattern. At best there was $800 difference involved, a figure far removed from the five-fold increase in premium likely for full coverage. [77] I am troubled on this topic by the absence of direct evidence either way. In her evidence Mrs Graham does not assert she would have taken full coverage if given that advice, or that she would have been willing to pay the level of premium. It is of course implicit in her evidence as it is in the claim, but it is not said. Nor, however, was it directly put to Mrs Graham in cross-examination that she would not have paid it if full coverage had been suggested. [78] The issue here is whether the plaintiff has satisfied me that had the defendant advised it to take full coverage, or at least coverage that would embrace the relevant claim by the Retirement Commission, GSL would have done so. I admit to someuncertainty but consider that Mrs Graham's evidence is implicitly an assertion of that proposition, and she was never challenged on it. [79] In particular in her brief Mrs Graham records she had discussions with Mr Collins about the level of cover "and the possibility of extending cover if something went wrong". Mrs Graham also is clear she assumed that she did have full coverage; that carries an inference that that is what she wanted. She was not challenged on that belief and there is no evidence that Mrs Graham, armed with a mistaken belief that GSL had full coverage, ever sought to have that reduced to limited coverage. Although there was considerable material available to mount a challenge on this topic of causation, none was put directly to Mrs Graham and accordingly I find the plaintiff has established the necessary link.Issue three – would GSL's loss have been covered?[80] The competing positions concerning the issue of whether the policy would in any event have helped GSL resolve into two arguments; first, a broader issue of whether the policy applies to this sort of loss; second, three specific disputes about clauses in the insurance contract.(a) Is this type of loss covered at all?[81] It is convenient to begin by setting out GSL's analysis of why it would have been able to recover under the policy. [82] The scope of the policy is found in clause 2.1 which provides that:Lumley shall indemnify the insured for any civil liability.[83] This apparently wide coverage is immediately circumscribed by the definition of civil liability, which is:legal liability arising from any claim for compensation arising out of the professional business.[84] It is common ground that the contract with the Retirement Commission fell within the requirement that the claim arise out of the "professional business" of GSL. [85] Finally, regard must be had to the definition of "claim" which is:a) legal proceedings instituted and served upon the insured; or b) any threat or intimation that legal proceedings will be issued against the insured.[86] The plaintiff's argument commences with the definition of claim. It is submitted that the communications between GSL and the Retirement Commission satisfy the alternative definition of claim, namely an intimation that legal proceedings will be issued against the insured. Although that is disputed by the defendant, it can be assumed to be correct for present purposes. [87] The existence of a claim having been established, GSL submits it incurred loss in avoiding a claim eventuating. It absorbed the "My Way" costs and proceeded to do a new campaign. The fact that it was paid for the new campaign should not affect its right to recover the "My Way" costs. [88] Before addressing this, I note that Mr Millard identified a possible alternative claim, namely breach of copyright. The policy extends cover to unintentional infringement of copyright, and it is submitted by GSL that the very filming of the commercial before the licence was obtained was a breach of copyright. This therefore is also a claim. There are, however, difficulties with this proposition. First, there is no basis to say there has been a claim in relation to copyright. The infringing commercial was never going to be aired without a licence. Further, even if the filming is itself a breach, no-one has instituted proceedings or intimated proceedings concerning that breach. Second, the plaintiff would I suggest face insurmountable hurdles concerning the requirement of "unintentional" breach since those doing the filming and those seeking to obtain the licence knew at the time of filming they did not as yet have a licence. Far from unintentional, it was a knowing and deliberate breach at that point, and GSL could not hide behind its own failure to check the position with its agents.[89] I turn therefore to the only claim in issue, namely the claim by the Retirement Commission. Assuming that the requirement of a claim is satisfied, one still has to be seeking indemnity in relation to:legal liability arising from any claim for compensation.[90] The existence of an intimated claim triggers the policy, but not the right to indemnity. There must ultimately be legal liability in relation to a compensation claim for which indemnity is sought. GSL has no legal liability to the Retirement Commission concerning the failed "My Way" campaign. The Retirement Commission suffered no loss. It might have – for example, if penalties were imposed for cancelled television bookings. But they were avoided. There is no claim for compensation by the Retirement Commission and nor could there be. 1[91] The Retirement Commission did not suffer a loss because GSL put together a new campaign which prevented the cancellation of the air time. But in doing that all GSL was doing was completing its contractual obligation, and indeed the Commission paid it for that work. GSL incurred no unpaid expenditure at all in relation to the new campaign. [92] It is to be noted that the Commission had paid money to GSL as progress payments on the "My Way" campaign. The arrangement reached was that such payments would be credited to the new campaign. However, any liability that GSL had to the Commission to refund those payments would not fall within the policy's definition of "civil liability". The liability of GSL would be to repay money it was not entitled to keep because it had failed to complete the contract. Any claim by the Commission for repayment of such money would not be a "claim for compensation".1 In saying this I put to one side the belated claim by the Commission for $8,000 in miscellaneous wasted costs it incurred. I am unsure of the detail of those, and the figure is well below the policy's excess.[93] This analysis of the particular insurance contract is consistent with the general scope and purpose of professional indemnity insurance policies. They are not designed to provide payment for work done. They provide protection for loss caused to a third party, such loss almost always being due to neglect. In this case there is no loss suffered by a third party, just a claim by the insured to recover its wasted time and costs for inadequate work which the client did not have to pay for. Professional indemnity policies are not about covering those losses. [94] MacGillivray on Insurance Law (11th ed, Sweet and Maxwell, London 2008) says of professional indemnity policies (at 28-072):It is essential to appreciate that the purpose of the usual professional indemnity policy is to afford cover in respect of the liability of the insured for negligence on the part of himself or his employees. Accordingly it does not cover the assured against loss suffered in his business due to his negligence where that negligence does not give rise to liability towards a third party.[95] That applies to the present situation. Accordingly I am of the view that the plaintiff's breach of contract claim must fail because the losses it seeks to recover would not fall within the policy even if the Retirement Commission contract was included in the contract. For completeness, however, I briefly address the issues raised concerning the actual terms of the contract.(b) Was there a claim?[96] When the copyright problem arose, the Retirement Commission indicated to GSL that it would hold GSL responsible for the situation. In my view this was enough to come within the alternative definition of claim, namely an intimation that legal proceedings would be issued. I am sure an insurer would see such advice as triggering the duty on an insured to report. [97] The indication by the Commission was obviously conditional in that it was saying, in effect, if we suffer loss because of this, we will be looking to you for payment. However, it was quite context specific. It was said at a time when it was known that a difficulty had arisen with the copyright, thereby jeopardising thecampaign. And it arose in an industry where all the players are aware of the significant liability that can be incurred in relation to cancelled television time. Against that background I consider the facts come within the policy's definition of claim.(c) Voluntarily assumed contractual risks[98] Clause 5.4 of the contract provides that Lumley will not indemnify the insured in respect of liability arising from a claim that arises:out of or [is] connected with any contractual liability, warranty or guarantee assumed or provided by the insured except if the insured would have been liable in the absence of the contractual liability, warranty or guarantee.[99] It is Stratus' submission that this provision applies. If GSL had liability to the Retirement Commission, that liability would arise solely because of a contractual obligation. If, for example, the Retirement Commission had incurred television penalties, it is submitted that GSL would be liable for those only because of a breach of some contractual term. There is no suggestion GSL was itself negligent concerning the failure to obtain copyright; indeed it is possible no-one was. There is no other cause of action that might make GSL liable for the Commission's losses other than its contractual obligations with the Retirement Commission. [100] Stratus disputes that such an interpretation would rob the policy of any effect. The normal situation arising under these policies is when the professional insured is negligent in the course of business, and thereby causes loss to a third party. In such circumstances, even if the case is pleaded in contract, there will be concurrent tortuous liability and so 5.4 would not apply. [101] However, as Mr Millard notes, the wording of 5.4, and the policy generally, does not expressly limit liability to situations of negligence. The television advertising penalties, had they eventuated, would be a liability to a third party arising directly from a default in the performance of the insured's professional business. If that is not protected, then the coverage is severely curtailed. Mr Millard submits theclause should be read as applying solely to contractual obligations occurring outside the norm of professional relationships. [102] Whilst I see the attraction in that, the difficulty that arises is that work outside the norm will most likely not be covered anyway, since it will be a liability not arising in the course of the professional business. [103] This clause is potentially quite important. The arrangements with the Commission were structured so that GSL met the costs of the production, and passed them on. It might have been, however, that the arrangements were that the Commission paid these people directly, in which case it would have no doubt looked to GSL for reimbursement. GSL's liability in that regard would arise solely because of its contractual arrangements with the Commission. [104] I am reluctant to rule on this issue since the evidence about the purpose of this presumably common clause is scant, or indeed non-existent. Had it been necessary to decide it, my view is that the respondent's interpretation represents the plain reading of the clause and is correct. It is consistent with and indeed complements the analysis I have earlier reached on the scope of the policy.(d) Professional fees[105] Clause 5.12 of the policy excludes liability, arising out of any claim:for a refund, by way of damages or otherwise, of professional fees or in respect of any claim that the insured is not entitled to professional fees.[106] Stratus argues that everything claimed by GSL in relation to the "My Way" campaign falls within this clause and so is excluded. That was also the evidence of Mr Jones as to his understanding of the meaning of the provision. Conversely, Ms Young, the expert called by the plaintiff, tended to the view that the "external costs" (i.e. things other than GSL's own fees) would be met by an insurer who would then look to the contractors to see if liability could be attached to them.[107] A difficulty for this Court is that if the earlier interpretations are correct, this provision is largely unnecessary because the wasted work is not caught anyway. That could, of course, mean that the earlier interpretations are wrong but I prefer the view that this exclusion largely reinforces the existing scope of the contract rather than truly represents an exclusion. Accordingly, it is preferable that I not seek to rule on the meaning of the clause when not presented with facts where it truly arises.Issue four – contribution?[108] Stratus argues that if it has breached the implied duty to use reasonable skill and care, and if that breach has caused loss, there should be an apportionment of liability due to Mrs Graham's own default. In response, Mr Millard queries the availability of contribution where the case is pleaded in contract, and anyway submits the Court should be wary to place responsibility on a lay person where the neglect of the professional adviser is so clear. [109] Concerning the availability of contribution on a claim in contract, it seems clear in this case that liability would exist in both negligence and contract. Both parties in their closing submissions accept that is the position. Given that, I refer to the following passage from Burrows, Finn and Todd (Lexis Nexis, 2007, at 21.2.5):Even on the view that the [Contributory Negligence] Act requires that the defendant be liable in tort, there can be little doubt that where there is a co-extensive liability in contract and in negligence, and the plaintiff brings his or her claim in negligence, the Act does then apply. The existence of a liability in contract is immaterial. The position is the same where liability in negligence exists, but the plaintiff chooses to frame his or her action in contract.[110] Mr Millard did not strongly advocate for the contrary, instead pointing his submissions to the observation that the law is not settled, and that the High Court of Australia has taken a different view. Accepting that to be so, I am content to adopt the learned authors' view as the correct statement of the law. Burrows observes that there has been an extensive legislative response in Australian states to the decision of the High Court of Australia, in each case reversing the effect of the decision.[111] Mr Millard next submits that the particulars of the defendant's pleading on contribution have not been met. These particulars are: a) insisting on limited cover from the outset rather than general broad cover; b) signing off on the Lumley renewal of the professional indemnity policy when it knew or ought to have known that cover was limited to its work for the Ministry of Health and the Ministry of Education; c) failing to exercise a reasonable standard of care and skill in the conduct of its business so as to look after its own interests. [112] Of these I consider the first particular is invalid. The defendant's breach is in failing to advise the plaintiff to reconsider its position as the nature of GSL's client base changed and as the business, to its general knowledge, grew. The reasons why the plaintiff initially chose limited coverage could not properly reduce the defendant's fault. [113] There is merit in points (2) and (3) combined in relation to the position of GSL. It is surprising that Mrs Graham forgot completely about her initial instructions. It is also clear that she was generally unwilling to engage in discussions on insurance and simply did not read anything sent to her. Had she done so the on-going limits would have been obvious. A reluctance to read contractual documents is far from unique, although here one is really only talking about having to skim over a two page summary sent to her every year. However, whilst it is not unique and therefore reasonably easy to be understood and accepted, that cannot absolve a person from all responsibility. [114] Mr Millard drew support from Gilbert v Shanahan [1998] 3 NZLR 528 where in a different context the Court of Appeal reversed the lower court and apportioned 90% of the blame on the professional.[115] Here I think the default on the part of the defendant was clear and significant. It is not a compelling argument to suggest that the client should have avoided the consequences of the defendant's negligence by herself being more careful. It is not a situation where the client provided misleading information or failed to disclose. Stratus was armed with all it needed to be able to discharge its contractual obligation to have and use reasonable skill in advising GSL. My earlier conclusion is that Stratus failed to do so because it failed to keep itself acquainted with the nature of the client's insurance cover. In such circumstances I would not have considered it just and equitable to apportion responsibility.Fair Trading Act[116] The plaintiff pleaded a cause of action under this Act. The focus was the incorrect answers provided on three occasions to Mrs Graham concerning the scope of her coverage (see paragraph [40]–[45] above). It is said the failure to provide the full picture misled Mrs Graham into believing she had coverage. [117] The pleading is that because Mrs Graham was misled into believing GSL had full coverage, GSL did not take the steps it would otherwise have taken and thereby suffered a loss, namely the "My Way" campaign costs. For the reasons already given, this claim must fail as the alleged breach of the Act did not cause a loss. The action it is said GSL would have taken if not misled would not have prevented the loss in relation to the "My Way" campaign.Conclusion[118] The plaintiff's claim fails. I have found the defendant to be in breach of the implied term of the contract which required it to use reasonable skill and care in advising GSL. However, even if GSL had the broader insurance coverage it says Stratus should have advised it to have, in my view that insurance coverage would not apply to the losses suffered by GSL in relation to the failed "My Way" campaign.[119] The parties may file costs memoranda if agreement cannot be reached. ____________________________ Simon France JSolicitors: I R Millard QC, Wellington, i_millard@xtra.co.nz P R Rzepecky, Barrister, Auckland, email: przepecky@bar.co.nz