Professional Indemnity FAQ

Professional Risks that come with Premium Funding

Professional Risks that come with Premium Funding

For many of us Insurance Brokers, we have probably taken for granted our own professional exposure when it comes to arranging Premium Funding for our clients.

For the uninitiated, premium funding is what we call when a short term loan is arranged from a finance company to pay insurers the premium, but repayments are made monthly (usually ten months but no more than a year) back to the financier. Simply the Insurance policy is the security. If they default on the repayments, the policy is cancelled and any refund is returned to the premium funder/financier to pay off the outstanding amount.

But what happens if the Broker has arranged a non-cancellable policy? Is the Broker obligated to inform the Premium Funder? Afterall, sometimes a small commission is earnt for connecting the client to the Premium Funder.

It appears the High Court has determined the issue in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited [2010] HCA 31.

Briefly the facts are that Consolidated Timber Holdings Limited ('Consolidated Timber') retained an insurance broker, Miller & Associates Insurance Broking Pty Limited ('Miller'), to negotiate a $3.975 million loan with a financier, BMW Australia Finance Limited ('BMW'), on its behalf. .The cancellability of the policy in this case was not subject to any express communications between Miller and BMW.

Consolidated Timber ultimately defaulted on the loan, leaving BMW unable to recover $2.715 million of the $3.975 million borrowed. It commenced proceedings against Miller in the Victorian Supreme Court alleging, relevantly, that Miller had engaged in misleading and deceptive conduct contrary to s52 of the Trade Practices Act 1974 in:

The primary judge found against BMW, but it successfully appealed to the Victorian Court of Appeal. Miller then applied to the High Court for special leave to appeal. The High Court unanimously found for Miller, overturning the Victorian Court of Appeal's decision and reinstating the decision of the primary judge.

According to the majority, the relevant circumstances in this matter were that:

  • BMW failed to make reasonable inquiries following receipt of the certificate, which put it on notice that the underlying policy may be an unusual one
  • There was nothing in the conduct of the parties to put Miller on notice that BMW was under a misapprehension that the policy was cancellable, or that cancellability was important to the determination application. In fact, BMW's requested directors' guarantees suggesting not.

The policy was not a lengthy document and apparent it was not a property policy, nor cancellable.

It was not disputed that Miller knew that the cancellability of insurance was important to a premium lender's determination of a loan application. Nevertheless, in light of the factors referred to above, the majority held that: 'There was no foundation for the conclusion that the known importance of cancellability gave rise to a reasonable expectation,With respect to the policy wording itself, the majority considered that 'Miller's failure to draw to BMW's attention a circumstance that the document itself disclosed was not misleading or deceptive.'

Similarly, Chief Justice French and Justice Kiefel noted that the knowledge of the person to whom the conduct is directed, and 'the existence of common assumptions and practices established between the parties or prevailing in the particular profession, trade or industry in which they carry on business' may be relevant in characterising conduct in commercial dealings. They concluded that '..as a general proposition, s52 does not require a party to commercial negotiations to volunteer information which will be of assistance to the decision-making of the other party. A fortiori it does not impose on a party an obligation to volunteer information in order to avoid the consequences of the careless disregard, for its own interests, of another party of equal bargaining power and competence.'

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