English Case sets to explain the duty of a broker when it comes to setting the sum insured

http://www.dreamstime.com/royalty-free-stock-photo-arrow-signs-not-my-fault-shifting-blame-image18471565In the case of Eurokey Recycling Ltdv Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm) the broker was being sued when the Insured found they did not have any where near adequate business insurance.

Far too often we see the broker being seen as a second line insurer when the Insured find themselves without the incorrect or inadequate insurance.

While the case is an English one and is not binding on Australian law it would nevertheless be regarded as persuasory. It also is a good reminder to us all as to our duties to the Insured. In this case the judge stated that based on the legal “authorities, the expert evidence and the parties’ submissions that, as relevant to this case, the following principles apply to business interruption insurance:

(1) Whilst a broker is not expected himself to calculate the business interruption sum insured or choose an indemnity period, both of which are matters for the commercial client, the broker must provide sufficient explanation to enable the client to do so. This will include an explanation of the method of calculating the sum insured, which will likely require an explanation of terms such as ‘estimated gross profits’, ‘maximum indemnity period’, and the considerations to take into account when choosing a maximum indemnity period.

(2) In order to do this, the broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs (Youell v Bland Welch & Co. Ltd (Superhulls Cover No. 2)[1990] 2 Lloyd’s Rep. 431 at 445, Phillips J; Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd [2010] Lloyds Rep. I.R. 149 at [168(1)], Hamblen J; Saville v Central Capital [2014] CTLC 97 at [29-30], Floyd LJ; M Simpson, Professional Negligence and Liability (2013), at para 10.144).

(3) In Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep IR 491, Judge Grenfell pointed out at [25] that “Insurable ‘Gross Profit’ is a term of art which means something very different from what an experienced businessman might expect”, adding that “a broker owes a duty to his client to ensure that he fully understands that term of art”. I would respectfully put it slightly differently, and say that the duty is to take reasonable steps to ensure that the client fully understands the term.

(4) An insurance broker providing the type of service that Giles was providing in this case is neither required nor expected to conduct a detailed investigation into a client’s business. However, and in so far as this was suggested, the broker’s duty is not diminished because his firm may offer an enhanced service at additional cost (in this case the “Giles Plus” service). Regardless of the availability of additional services, the above duties apply to any broker who takes on business of this kind. Nothing in Sharp v Sphere Drake Insurance Plc (The Moonacre) [1992] 2 Lloyd’s Rep. 501 at 523 suggests a contrary conclusion. (In closing, the defendant accepted that the broker’s duties were not diminished by the fact that Giles offered the Giles Plus service, its relevance being simply that the firm did not undertake specialist duties such as calculating the business interruption sum insured or choosing an indemnity period.)

(5) The nature and scope of a broker’s obligation to assess a commercial client’s business interruption insurance needs will depend upon the particular circumstances of the case, including the client’s sophistication, and the number of times the broker has met the client in the past (William Jackson & Sons Ltd v Oughtred & Harrison (Insurance) Ltd [2002] Lloyd’s Rep IR 230 at [29], Morison J). Contrary to the claimant’s submission, the fact that ICOBS 6.1.5 to 6.5.7 does not make reference to a client’s sophistication is not inconsistent with this, since the matters referred to in these rules are stated to be non-exclusive. (ICOBS is the Insurance Conduct of Business sourcebook published by the regulator, the FCA.)

(6) In that regard, although business interruption insurance is for commercial clients, the level of client sophistication will clearly vary enormously. It cannot be assumed that an SME (like the claimant in this case) will have any understanding of the nature of the insurance. (In this context, the evidence in this case is that the insurance industry unlike some other parts of the financial services industry does not have standard procedures for the identification and recording of sophisticated clients.)

(7) Further, although as a matter of common sense a client may not need annual repetition of advice previously given and understood, this assumes that the responsible personnel remains the same. It also assumes that the giving of the advice can be properly demonstrated by documentation (or otherwise), and the onus is likely to be on the broker to show this.

(8) If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate (Jackson & Powell, ibid, §16-069, and Synergy Health (UK) Ltd v CGU Insurance Plc [2011] Lloyd’s Rep. I.R. 500 at [206], Flaux J).

(9) Having satisfied these obligations, where a broker is given express instructions as to the cover to be obtained, he must exercise reasonable care to adhere to those instructions (Colinvaux’s Law of Insurance, 9th ed, 15-034).

In this case Giles were found to have fulfilled their duties and as a result they avoided a Professional Indemnity claim of £17 million.

www.BIcalculator.com and in the United Kingdom BIcalculator.co.uk  was invented to assist broker in the education process with the client. I am proud to say that the broker in this case Giles are one of LMI BIcalculator’s client’s in the United Kingdom and moving forward I am sure they will be using the service as proof of the quality of their advice.

BIcalculator is not the only such product with PolicyComparison and RiskCoach also developed to assist in the education process as both a sales tool and protector of the broker’s professional indemnity program.

2 responses to “English Case sets to explain the duty of a broker when it comes to setting the sum insured”

  1. Andrew says:

    Hi Allan, great article. Underinsurance is a big issue in Australia, do you think direct insurers do enough to inform customers that their sum insured may be too low? There was a fair amount of backlash after last years Blue Mountains bushfires, especially where the damaged homes had been re-categorised as requiring new fire protection code, which can add up to $150,000k to the rebuild if classes in a ‘flame zone’.

    How do you think direct insurers can sufficiently inform their customers of the need to check their sums insured without giving ‘advice’?

    thank you,

  2. Allan says:

    The insurance industry is sometimes on a hiding to nothing. Councils can and do allow people to build in flood zones or bush fire zones and then impose significant extra costs of reinstatement which really set home and business owners to fail.
    As an industry we do have to work closer will all forms of government to try and identify the issues and advise the public.
    That recent paper on funding following natural disasters is a good start.

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