Insurance broker ordered to pay client’s copyright infringement settlement with Microsoft after failing to advise of potential risk13 March 2020 | Insurance Issues
Online retailer PC Case Gear has been awarded damages from its former insurance broker, Instrat Insurance Brokers Pty Ltd.
The Federal Court held that a reasonably competent insurance broker would have discerned a risk of copyright infringement from the nature of PC Case Gear’s business, and raised that risk with the client. As Instrat Insurance Brokers failed to do so, they were found to be negligent and ordered to pay $250,000 (which matched a settlement that PC Case Gear paid to Microsoft for copyright infringement).
- Whether the broker failed to act with reasonable skill and care by making insufficient inquiries of the client’s business;
- Whether the broker failed to act with reasonable care and skill by failing to identify, and advise the client of, the risk of copyright infringement;
- Whether the client would have obtained relevant insurance cover but for the broker’s breach.
PC Case Gear Pty Ltd (the client) supplied computer hardware and software, and its business included selling computers with Microsoft Windows operating system pre-installed. Prior to 2016 the client purchased Microsoft licences for Windows from a third party distributor, and installed these on computers prior to sale. 4,000 of those licences permitted installation of Windows only on refurbished computers, yet the Client only sold new products.
In January 2016 the 4,000 licenses were subject of a letter of demand from Microsoft, alleging breach of copyright by the client. The client subsequently settled this claim by, amongst other things, paying an amount of $250,000 to Microsoft.
The client’s cyber liability insurance covered the client for the costs of the litigation with Microsoft but did not cover the settlement as the insurance did not include cover for breach of copyright.
From 2009 until 2016 (during which the Microsoft claim was made), the client retained Instrat Insurance Brokers Pty Ltd (the broker), as its insurance broker. Each year at least one representative of the broker met with the client to discuss its insurance coverage for business. The broker then prepared and provided annual insurance plans to the client and procured the cover described in those plans. However, the broker’s insurance plans omitted cover for settlements relating to copyright infringement.
The client commenced proceedings against the broker for breach of contract and in negligence and sought to recover damages in the amount of the settlement paid to Microsoft. The client relevantly alleged that the broker failed to act with reasonable skill and care, by failing to advise of the availability of cover for copyright infringement.
The broker denied liability alleging that it did not breach its duties to the client. The broker alternatively alleged that the settlement was not otherwise foreseeable by either party. The broker also contended that any damages awarded to the client should be reduced due to the client’s contributory negligence.
Justice Anderson determined that a reasonably competent insurance broker in the position of the broker, would have discerned a risk of copyright infringement from the nature of the client’s business, and would have raised that risk and options to address that risk, with the client.
Justice Anderson was also of the view that had the broker raised the risks associated with copyright infringement, and recommended insurance to cover the client against such risk, the client would have taken out the relevant insurance cover (which was noted to be readily available for businesses in the client’s position).
On this basis, it was determined that the broker was negligent in failing to properly advise the client of its potential exposure to copyright infringement, so as to enable the client to make an informed decision regarding that exposure. It was not the client’s responsibility to highlight for the broker the risks that the client may face.
The court rejected the broker’s submissions that the client’s own negligence wholly or partly caused its loss, as there was insufficient evidence to establish that the client’s original use of the Windows licences (subject of the Microsoft claim) was negligent. It was further determined that payment of the settlement sum by the client to Microsoft was reasonable in the circumstances.
Justice Anderson therefore ordered the broker to pay the client $250,000 in damages (matching the sum the client paid to Microsoft) plus costs.
Implications for you
This decision is authority that an insurance broker has a duty to exercise reasonable care and skill in advising upon insurance cover. As part of that duty, a broker ought make reasonable enquires to understand the types of risk that may attract liability, and ascertain appropriate policies that will cover that risk. A broker ought raise potential risks, and options to address those risks, with a client, so that the client can make an informed decision regarding its potential exposure and insurance needs.