2015 was been a busy year for the broking sector with a number of key themes coming to the fore, such as:
- The calculation of business interruption insurance continues to be a common denominator in E&O claims which continue to increase, potentially as a result of the soft market;
- The Financial Conduct Authority (FCA) is becoming increasingly interested in the larger broking houses and regulatory review is becoming more common;
- Imminent legislative changes by way of the Insurance Act 2015 and the Enterprise Bill will bring new challenges to all those operating in the insurance market and are likely to give rise to an increase in claims against brokers;
- 2015 was a year with a number of acquisitions and mergers, particularly across the larger broking houses.
1. E&O claims
Claims against brokers rarely make it to the courts for determination. However, two 2015 judgments have provided encouraging guidance for brokers.
Business Interruption insurance continues to be an area which sees a high number of claims. It is often alleged that brokers failed to advise their clients on how to calculate the sum insured or to choose the appropriate indemnity period. By their nature these claims are usually substantial.
Brokers will be encouraged by the judgment of Mr Justice Blair in the Eurokey case (Eurokey Recycling Ltd v Giles insurance Brokers Ltd  EWHC 2989 (Comm)) which confirmed that it is a matter for the commercial client, and not the broker, to calculate the level of business interruption cover and choose the indemnity period. However, the broker must provide adequate advice to enable the client to make these decisions.
In Involnert Management Inc v Aprilgrange Ltd and Others  EWHC 2834 (Comm) insurers avoided a policy on the basis that the insured failed to disclose the true value of a yacht, or, in the alternative, that the insured failed to comply with a condition to notify insurers within 90 days of any loss. The claim was brought against insurers, the placing broker and the producing broker. The judgment provided the following guidance for brokers:
- A broker cannot reasonably rely upon a standard provision printed on a cover note as a substitute for providing direct advice. The broker should seek to elicit particulars which ought to be disclosed to insurers and to ensure that the proposal form is correctly completed.
- There is not a requirement on a broker who has not been asked to assist an insured in dealing with a potential claim to volunteer advice on the claims procedures.
- Placing brokers do not owe any duties to insureds unless there is an assumption of responsibility to bypass the producing broker.
In terms of risk for brokers as and when claims arise, generally we have found it is currently more challenging for brokers to ‘call in favours’ from insurers to either cover claims or make ex gratia payments when technically they are not obliged to do so. We consider this is a reflection of the current soft state of the market. The risk on E&O claims against brokers has therefore increased. With the state of the market showing no sign of change in the short to medium term we do not expect this risk to abate any time soon.
2. FCA regulation
The FCA is becoming very interested in the larger broking houses and regulatory review is becoming more common and, inevitably, more expensive. This is often prompted by acquisitions and the FCA appears keen to ensure, given the number of roles a broker can play within an insurance transaction, that broking houses are operating in a transparent way.
2015 saw a period of rapid consolidation for both brokers and insurers and there have been a number of large acquisitions in the broking market. As a result, the likelihood of producing and placing brokers being under the same corporate umbrella has increased. An added complication is that the insurance might be placed through a Managing General Agent which is part of the same company.
Not only is this of considerable interest to the FCA, this type of issue also overlaps with potential E&O risks. Following acquisition, it is entirely possible that different E&O policies will respond to different parts of the business within one corporate entity. If those in the different roles seek to blame each other, this could create a number of internal issues, to include issues relating to dissemination of privileged information within an organisation.
3. Legislative changes
The Insurance Act 2015 comes into force in August 2016 and brings in many challenges for all involved in the insurance market. These were considered in our recent article.
In summary, the following changes will impact on the way brokers do business:
- The new duty of fair presentation requires risks to be presented to an insurer in a manner which is reasonably clear and accessible. Every material representation of fact must be substantially correct and every material representation in respect of any expectations/beliefs must be made in good faith. For small insureds, it will be simple enough for the broker to advise how to discharge this duty. However, take, for example, a large construction company with an international reach in terms of project and foreign subsidiaries; the broker’s advice on the presentation of this risk will be much more involved and hence the risk of the broker making an error is higher.
- Brokers will need to advise their clients about the new provisions relating to data dumping, which is not permitted under the Act. Brokers will need to consider and advise their clients how to best present the risk.
- Brokers who act for large complex organisations will need to consider whether it is appropriate to agree disclosure protocols with insurers to avoid coverage issues down the line.
- Many brokers also act under delegated authorities for insurers. In these instances, brokers will need to equip themselves with knowledge of the obligations that the Insurance Act imposes on insurers and ensure compliance.
- If an insurer tries to contract out of provisions of the Act, the broker will need to carefully advise his clients on the implications of this and whether they should seek terms elsewhere.
- Claims brokers will need to ensure they understand the limited remedies available to insurers in order to seek the best outcome for their client.
The Enterprise Bill proposes a new requirement on insurers to pay damages for late payment of claims. This is a new principle and will impact brokers who will need to advise their clients (as insureds or as reinsureds) on entitlement to make a claim. Further, if a claim for damages is met by an insurer with an allegation that the claims broker delayed in forwarding information to it, the insurer may have the right to pursue recovery from the claims broker for damages paid.
4. Mergers and acquisitions in the market
2015 was a year of multiple mergers and acquisitions of both insurers and brokers. In addition, management buyouts, such as Marsh’s acquisition of Jelf, prompted much commentary. The merger of Willis and Towers Watson also generated much discussion and the market waits to see the effect of this latest activity.
In addition there were a number of moves of senior management figures across the larger broking houses which generated media attention and observations.
5. Looking ahead
Many predict that the growth areas in the insurance market for 2016 will be cyber security and terrorism cover. In addition, other technological advances, such as driverless cars, will require a market for new and emerging risks. Those who wish to succeed will need to innovate and be one step ahead of the competition.
Others predict further consolidation; both for broking houses and insurers. Few are predicting a change to the current soft market so the pressure on rates will remain.
2015 was an eventful year for the broking sector and all predictions are that this will continue into 2016.