Guest Post – Broker failed to place house insurance

LMI’s New Zealand Manager, Tony Howie was asked to act as an expert witness in a High Court hearing of a broker who failed to place house insurance for a couple despite assuring them on a number of occasions that he had done so.  Unfortunately, the house suffered significant damage in the September 2010 Canterbury earthquake.

Tony provides the following synopsis of the matter:

The clients, a doctor and his wife had insured their house, along with their contents, vehicles and the medical practice, with the Medical Assurance Society.  The doctor had suffered a series of head injuries that affected his cognitive skills, memory and ability to manage his medical practice.  More from a lack of care than a deliberate intent, he submitted some false General Medical Services claims.  He was subsequently prosecuted and in September 2008, was found guilty of fraud.  As a result of this, he was censured by the New Zealand Health Practitioners Disciplinary Tribunal and, in June 2009, the Medical Assurance Society cancelled the policies held with them.

Around this time, the clients approached the broker to obtain fresh insurances.  He submitted a High Value Homes questionnaire to NZI and obtained a quotation and offer of cover.  Cover was offered on full replacement conditions to a floor area of 498 square meters, but limited to $1.5 million until a valuation was provided.  Shortly thereafter he assured the clients that insurances had been placed with NZI.  He did this on several occasions over the next 15 months and even paid a claim for a broken pair of spectacles himself, although as payment went direct to the optometrist, the clients were not aware of this.  He had, in fact, not bound cover with NZI.

The September 2010 earthquake struck and caused significant damage to the clients’ house.  At this point, the broker completed a proposal backdated to prior to the earthquake.  This proposal was signed by the broker on behalf of the clients and answered ‘No’ to whether the clients had any convictions or policies cancelled, however it was clear from the brokers evidence that he knew both statements to be untrue.  A second proposal was completed on 19 October 2010 by the clients who included full disclosure of the client’s conviction and the cancellation by Medical Assurance.  This proposal was submitted to NZI who naturally declined to accept it and the clients were left with a significantly damaged, uninsured house.  The reason given for this was that cover had not been placed with NZI.  The letter from NZI specifically stated that the client’s conviction was not a factor that influenced this decision. 

The clients sought recovery from the broker.

The broker denied liability on the basis that:

  1. The client had failed to disclose their convictions and the cancellation by Medical Assurance;
  2. The house was uninsurable due to the insured’s conviction and the cancellation of the prior insurance.

From the evidence of the broker, the judge found that the broker was aware of the cancellation around July 2009 and that he became aware of the convictions in early August of the same year.  The question then was whether NZI, or any other insurer, would have issued cover had they been aware of the conviction and cancellation.

I was one of two expert witnesses called to assist the Court on this issue.  The fact that NZI continued as insurers in respect to the clients’ medical practice and wrote two new motor policies after becoming aware of these matters was persuasive that they would have written the House and Contents policies if these had been placed with them in a timely manner.

Not surprisingly, the Judge ruled in favour of the Insured’s.  The judge found that the broker should have:

  1. Confirmed cover with NZI in July 2009;
  2.  Arranged for the NZI proposal to be completed at that time;
  3.  Counselled the clients on the consequences of non-disclosure.

The judge ruled that the broker was liable to the clients for the amount necessary to put them into the same position that they would have been in if the insurance had been in place.  Although he did not set a quantum for this, it is likely to be in the $1.5 million to $3.0 million range.

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This is a timely reminder for every insurance broker on their duty to their client and the ramifications of breaching that duty.  In my own career, the only time that I have really got myself into trouble is going too far in trying to help someone. If the broker did not think he could have secured insurance for this client he should simply have said so from the very beginning. Better still, he could have tried and reported back his success or otherwise but made no promises until cover was actually arranged.

Two points stand out here. The broker never collected a premium and did not attempt to profit from this matter. Secondly, he set a dangerous position for himself by paying out the small claim.

Not only has the broker sustained a significant Professional Indemnity claim he has also lost his ability to trade as a broker in his own name.

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