Broker Negligence, Hypothetical Cover And Section 54

The Victorian Supreme Court has clarified that insureds pursuing broker negligence claims must prove a hypothetical policy would have responded to the loss. The decision provides important guidance on causation, section 54 of the Insurance Contracts Act, alteration of use clauses, and broker renewal obligations.

In Danbol Pty Ltd v ACN 007 198 343 Pty Ltd [2026] VSC 305, the Supreme Court of Victoria has confirmed that a client alleging negligence by its broker for not placing an insurance policy on its behalf must establish that the policy that should have been placed would, on the balance of probabilities, have responded to the loss.

The decision provides important guidance on burden of proof, hypothetical indemnity claims, alteration of use clauses and section 54 of the Insurance Contracts Act 1984 (Cth) (ICA).

Background

Danbol Pty Ltd owned a large industrial warehouse in Tottenham, Victoria. The warehouse was insured under an Industrial Special Risks policy arranged through Griffiths Goodall Insurance Brokers Pty Ltd, later ACN 007 198 343 Pty Ltd (broker).

The insured business description in the policy reflected the former use of the premises, including timber pallets, reconstituted logs, woodchips, mulch and associated activities. The policy period was to run to 4.00pm on 24 August 2018.

In June 2018, a new tenant, Delacor Pty Ltd, took occupation of the warehouse. Danbol understood that Delacor would use the premises for the warehousing and storage of pallets and decommissioned gas bottles. That information was provided to the broker and passed to the underwriting agent.

On the morning of 24 August 2018, the underwriting agent declined to offer immediate renewal terms because of uncertainty about Delacor’s activities, including whether gas bottles were being decommissioned at the premises. Given the timing, the underwriting agent offered a 14-day extension so Danbol could maintain cover while the position was clarified. The broker did not communicate that offer to Danbol.

On 27 August 2018, the broker advised the underwriting agent that the gas bottles were processed and decommissioned before arriving at the premises. That advice reflected Danbol’s instructions, which in turn were based on what Delacor had told Danbol.

On 29 August 2018, the underwriting agent offered a 12-month renewal. The proposed policy was to commence retrospectively from 4.00pm on 24 August 2018 and was subject to terms including a satisfactory site survey. The broker did not communicate that offer to Danbol either.

By then, the risk at the warehouse had changed. Delacor had not merely been storing decommissioned gas bottles; it had brought substantial quantities of flammable chemicals onto the premises and stored them in an unsafe and unlawful manner.

On 30 August 2018, the warehouse was destroyed by a major fire. Danbol initially sued the insurer, contending that cover existed. That claim failed because no contract of insurance had been formed. Danbol then sued the broker for the indemnity it said would have been payable had the 14-day extension or the annual renewal been communicated and accepted.

Decision

The central issue was not breach. The broker admitted that it had acted negligently by failing to communicate the extension and renewal offers. The issue was whether that negligence caused any recoverable loss.

To succeed on its claim, Danbol had to establish that a hypothetical insurer would have indemnified the fire claim. Applying section 52 of the Wrongs Act 1958 (Vic) and the NSW Court of Appeal decision in Flanagan v Bernasconi, the Court held that Danbol bore the onus of proving that counterfactual.

It was not enough to show that a policy would have existed. Danbol had to establish that the policy would have responded. The ordinary allocation of onus in a coverage dispute did not assist. This was a claim against a broker, not an indemnity dispute with an insurer.

The 14-day extension would not have responded

Danbol failed to establish that indemnity would have been available under the 14-day extension.

The existing policy contained an alteration of use condition. The condition excluded liability for loss caused or contributed to by an alteration, after commencement of the policy, in the trade, manufacture, nature of occupation or other circumstances affecting the premises, where that alteration increased the risk of loss.

The Court’s analysis proceeded on the basis that the 14-day extension would have continued cover on the terms of the existing policy, although the relevant comparator was informed by the fact that the underwriting agent had been told of the changed tenancy and the storage of decommissioned gas bottles. The issue was therefore not whether a new alteration of use condition would have been inserted into the extension; it was whether the existing condition, applied to the extended cover, would have defeated the hypothetical indemnity claim.

Danbol argued that the condition could not apply unless it knew about the change of use. The Court rejected that submission. The condition was concerned with the risk accepted by the insure; it was not confined to changes known to the insured.

The Court found that the chemical storage began after 4.00pm on 24 August 2018. It also found that the storage of flammable chemicals materially increased the risk of loss, destruction or damage and, although the ignition source was not established, contributed to the loss by increasing the intensity and duration of the fire.

If the extension offer had been accepted before 4.00pm on 24 August 2018, the existing policy would have continued in force, and the change of use would have occurred after the contract was entered into. The relevant act was capable of causing or contributing to the loss. Section 54(2) of the ICA would therefore have preserved the insurer’s ability to refuse the claim or reduce liability to nil.

A renewal would have responded

Although a renewed policy would have commenced retrospectively from 4.00pm on 24 August 2018, the contract of insurance would not have been entered into until the afternoon of 29 August 2018. On the Court’s findings, the relevant chemical storage had probably already occurred by then.

That distinction mattered. Section 54 of the ICA operates by reference to acts or omissions occurring after the contract of insurance is entered into, not merely after the policy commencement date. The alteration of use condition was engaged by the retrospective policy commencement date, but section 54(2) did not assist the insurer because the relevant act had not occurred after the annual renewal contract was entered into.

The broker also relied on misrepresentation and non-disclosure. It submitted that Danbol had represented that the premises would be used for decommissioned gas bottles when, in truth, the premises were being used for bulk flammable chemical storage.

The Court rejected that argument. Danbol’s statements were based on what Delacor had told it. Danbol honestly believed that the warehouse would be used for decommissioned gas bottles, and that belief was one a reasonable person in its position could hold. No actionable misrepresentation was established for the purposes of sections 26 and 28 of the ICA.

The Court also rejected Danbol’s broader criticisms of the broker’s renewal process. Apart from the admitted failure to communicate the two offers, the broker had not fallen below the applicable standard of care by failing to commence renewal earlier, obtain a survey or probe further into the tenant’s activities. Those matters may have reflected prudent risk management, but they were not shown to be required by the legal standard of reasonable care.

The Court therefore concluded that a renewed policy would probably have responded to the loss. The broker’s failure to communicate the offer of renewal to Danbol caused it to suffer an uninsured loss. Judgment was entered for Danbol in a sum of approximately $9.68 million, subject to the unpaid premium for the hypothetical policy.

Implications

The decision is a useful reminder that broker negligence claims involving lost cover may become full indemnity hearings about policies that were never issued. Several practical points emerge for insurers and brokers.

Causation remains a powerful defence

The decision confirms that broker negligence claims remain vulnerable to coverage-based causation arguments. Even where breach is admitted, the plaintiff must establish that the cover that should have been in place would have responded. The existence of a lost opportunity to obtain cover is not enough.

The plaintiff bears the counterfactual burden

Insureds cannot rely upon the ordinary allocation of onus in coverage disputes to insurers. Where the claim is against a broker, the insured must prove the counterfactual policy response. That may require the insured to meet, and overcome, the same coverage answers an insurer would have raised had cover existed.

Extension and renewal counterfactuals need to be kept separate

The case shows why precision matters. The 14-day offer would have extended the existing policy. A renewal would have resulted in a separate contract entered into on 29 August 2018, albeit with retrospective commencement from 24 August 2018. Treating both simply as “hypothetical policies” risks obscuring the analysis.

Section 54 turns on contract formation

The distinction between policy inception and contract formation proved decisive. The annual policy would have operated from 24 August 2018, but the contract would have been made on 29 August 2018. For section 54 purposes, that difference mattered. Insurers assessing hypothetical indemnity scenarios should carefully identify when the contract would have been entered into, particularly where cover is backdated.

Alteration of use clauses still have real work to do

The Court treated the alteration of use condition as a fundamental underwriting protection and rejected any suggestion that knowledge of the alteration was required. Where a tenant materially changes the use of premises, particularly by introducing hazardous materials or a materially different fire load, the condition may have real work to do if the change increases the risk and contributes to the loss.

Coverage defences may be mutually inconsistent

The decision highlights the tension that often arises between disclosure-based defences and alteration-of-risk defences. The alteration case is strongest if the dangerous use begins after the policy is on foot. The misrepresentation case is strongest if the dangerous use existed, or ought reasonably to have been known, before the contract was made. Facts supporting one defence may undermine the other.

Best practice is not always the legal standard

The Court rejected the broader allegations that the broker should have started earlier, procured surveys or made more intrusive inquiries. The decision is useful for professional indemnity insurers because it distinguishes between prudent risk management and breach of a duty of care. The actionable failure was the failure to communicate available cover.

Renewal communications need to be immediate and documented

For brokers, the practical lesson is direct. If an underwriter offers an extension, renewal or conditional cover close to expiry, it must be communicated promptly and clearly to the insured client. For insurers, the case reinforces the value of clear underwriting records identifying what was offered, when it was offered, what information was relied upon and when the contract was formed.

Ultimately, the decision turned on timing. A matter of days determined whether section 54 applied, whether the notional insurer could have refused indemnity and whether the broker’s admitted negligence caused any loss at all.