A recent case in the NSW Supreme Court has highlighted the hidden risks, and care required, by brokers using letters of appointment Sphere Healthcare Pty Ltd v Allianz Australia Insurance Ltd [2026] NSWSC 579
The case involved a breach of the duty of disclosure for failing to disclose the storage of bulk ethanol that exceeded the capacity of the dangerous goods area and was placed next to the factory. The factory was destroyed in a fire and the insurer successfully denied indemnity.
The insured manufactured health care products and infant formula however, as a result of the COVID-19 pandemic, the insured decided to make hand sanitiser and sought cover under an ISR policy.
However, during the period that the insured was trying to source ethanol (to use in the production of hand sanitiser), the insured changed brokers.
My focus for the purposes of this article is the circumstances of the appointment of the broker.
The circumstances
In parallel with the sourcing of a large quantity of ethanol, the Group (who had recently acquired the insured), was working with three insurance brokers to source insurance for the group.
The Group wanted to keep the ISR policy which the holding broker had arranged. The new broker asked the insurer to transfer the ISR policy, while the holding broker asked the insurer to cancel it. After some confusion caused by the fact that the new broker’s letter of appointment was back-dated, the insurer issued a new policy schedule and wording but for the same premium. [4]
The appointment of the holding broker
4 months prior to the fire and following a tender process, the insured provided the holding broker with a letter of appointment [76].
The Court highlighted the insured’s discussions to change brokers; notwithstanding the letter of appointment, the Group was continuing to seek cheaper insurance through the new broker. The insured emailed the new broker, pressing for the best price, “Please try any good strategies to get us a good package deal”.
The insured proposed to “fully follow” some policies arranged by the holding broker, including for the relevant site, and then use the new broker to arrange other policies, “This way, the total cost is still much lower than the current [holding broker] pricing.” But the policies arranged by the new broker “cannot be backdated”. Nor did they want to pay “broker fees twice”. It was decided to appoint the new broker on receiving confirmation that the policies arranged by the holding broker “will remain unchanged after [the new broker] takes over, and we won’t be double charged.” [127]
Back-dating the letter of appointment for the new broker
In order … to take over some of the policies”, the new broker recommended that its appointment be backdated to 29 February 2020. The insured was asked to photocopy a letter onto the Group’s letterhead and to sign and return the document that day. In respect of the policy for the relevant site, the new broker noted “to take over, premium amended”. The broker offered to “assist with the paperwork on the few policies we are taking over.” [129]
The holding brokers fee
The insured discussed whether they should offer to pay part of the holding brokers fee, having been advised by the new broker that they could refuse to pay because the holding broker had “broke[n] their word”. The insured suggested, “Tell them they’ve left us no choice but to try someone else because their price has increased several times and neither of us can justify it to our boss. Tell them xxx is not in the mood to talk to them any more. He can’t face the boss … [As for broker’s fees] just say we won’t pay for now”. [131]
Following a call with the holding broker (to remove them from the account) an internal message chat took place between the insured “The way we teamed up in talking with [the holding broker] today was great, leaving them nothing to say”. Apparently xxx was less convinced, “For now they look okay saying they’ll give up AUD 30,000 commission”. [133]
The insurer
The insurer was concerned about the letter of appointment received from the new broker. An internal email noted, “There are some concerns over this [letter of appointment] as it looks as though we received another [letter of appointment] for a holding broker signed by a different party (same insured) and on the same day.” xxx was asked to seek more details from the new broker without disclosing the name of the holding broker. [144]
News of this reached the insured who exchanged internal messages together with a copy of the letter of appointment, “The date is 28th Feb, same as the one we gave [the holding broker] before, which means we appointed two brokers on the same day. Could this be a problem later?” xxx replied, “Hold on, let me change it to the 29th”. At 3.25 pm, the holding broker emailed the insured as follows: “… We’ve been notified by Insurers that they’ve received the [letter of appointment] from another broker. Please reply to this email to provide confirmation that we are no longer your appointed broker in order to process the cancellation.” [145]
At 4.18 pm, the new broker reassured the insured that he should inform the holding broker that they had indeed decided to go with another broker. Further, “There is no effect on the policies that we have taken over as the respective Insurers have already been advised that you have appointed us as your broker.” Having obtained this advice, at 4.24 pm, the insured replied to the holding broker, “We confirm we decided to go with another broker.” Two minutes later, at 4.26 pm, the holding broker replied: “Confirm cancellation with effect from 24/03/2020.” [152/153]
[the court then proceeded to work through the various issues]
Lessons learnt
- Clarity needs to be provided whether the client has issued a letter of authority (to tender by obtaining quotes etc) or letter of appointment (appointed to act on behalf of the insured for contracts of insurance). The NIBA Insurance Brokers Code requires a Terms of Engagement is provided in writing to prospective clients (once engaged) including the matters in 4.2 of the Code.
- If the client’s instructions are cryptic, ambiguous or otherwise not clear, the broker’s duty is to get those instructions clarified promptly. [Sutton on Insurance Law, Enright, Merkin & Hawke 5th Edition Lawbook co 2025, paragraph 4.990 page 330]
- If the instructions are not clear, but the broker cannot readily communicate with the insured, the broker must exercise his discretion bona fide in the insured’s interests and conform to any customs or usage. [ibid page 330]. Authors note: this would include complying with standards in the NIBA Code and/or NIBA guidelines.
- The broker will be liable for any failure to follow the client’s instructions with due care. [ibid page 331]
- A broker would not ordinarily be entitled to cancel a policy. Brokers have been held to owe duties to their former clients in relation to cancellation even after their appointment has been terminated. [ibid page 360]
- Brokers conduct – an AFS Licensed broker (and their authorised representatives) must provide the financial services ‘efficiently, honestly and fairly‘. The Courts have emphasised this phrase as; conduct which is morally wrong, or not straightforward in a commercial sense, sound ethical values and judgement, a requirement of competence in providing advice and complying with relevant statutory obligations, a reasonable standard of performance by a person that the public is entitled to expect. [ibid page 242]
- Brokers conduct – the Code provides that the broker, their staff and authorised representatives will act honestly and with integrity in all dealings.
- The insurers requirements. The Court in Sphere said ; the insurer does not appear to have regarded the [holding broker] has having authority to cancel the policy either. Rather, over the course of the day, the insurer satisfied itself that the new broker was validly appointed. The insurer sought an explanation from the managing director of the Group to explain the conduct of its authorised representative. Whilst it was not necessary for the insurer to confirm cancellation in order for it to have effect, if the instruction to cancel was valid, the fact that the insurer did not take any steps consistent with cancellation indicates that it did not regard the policy as having been cancelled at the time. [at 209]
What about Commissions?
In the Sphere case, the Court remarked:
What is also known is that the [holding] broker was displeased, no doubt because they had lost some $30,000 in commissions: see [133]. As the managing director of [the Group] later put it, the [holding] broker was of the view that if the client was “going to seek terms elsewhere after the work they had done then it was best they go elsewhere.” Perhaps for this reason, the [holding] broker appears to have been keen to cancel the policy, rather than have the insured’s benefit from the broker’s unpaid work in arranging it.
NIBA Rules and Regulations
Rules are made by the NIBA Board pursuant to clause 17 of the Constitution, the Rules apply to NIBA members.
Rule 3: Code of Conduct Brokerage, provides:
1. General
This Rule applies where a Member (the new broker) is appointed to act for a client in relation to any contract of insurance (any existing policy) arranged for that client by another insurance broker (the original broker).
2. Brokerage
The new broker will:
(a) not claim or enforce any entitlement to brokerage in relation to any existing policy other than for the renewal or extension of such policy;
(b) not suggest to the client that any existing policy be cancelled unless to do so is in the interest of the client (other than by reason of the new broker thereby becoming entitled to brokerage on any contract of insurance arranged by the new broker to replace any such policy); and
(c) account to the insurer, or the original broker, for any brokerage received by the new broker in relation to any existing policy, as soon as is reasonably practicable after receipt of that brokerage.
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