Quebec’s Superior Court recently ordered a broker and his insurance firm to pay damages for negligence by the broker when renewing insurance for a building.1

The context

The insured owns a building in which it runs a show bar on the ground floor and rents out apartments on the upper floors. It had insured its building through the same insurance broker firm (Firm) since 2006.

On June 1, 2010, the insurance policy expired. The amount of insurance on the building was $424,000. Two business days before the expiration of the insurance policy, the Broker in charge of the insured’s file (Broker) met with the insured to discuss the renewal. During the meeting, the Broker mentioned that the amount of insurance might not be enough in the event of a loss. The Broker and the insured agreed that the building should be appraised and that the Broker would hire a chartered appraiser to do so. The cost of the appraisal was to be shared by the Firm and the insured. In the interim, the insurance policy for the building was renewed for the same amount of insurance ($424,000).

It took almost a month before the chartered appraiser’s services are retained to appraise the building. The Broker received the appraisal report a month and a half after the policy was renewed on June 1, 2010. The appraiser recommended that the building’s reconstruction value be increased to $565,000. The Broker read the report briefly on July 20, 2010. He left on vacation two days later without contacting the insured or asking the insurer to increase the amount of insurance on the building.

On July 23, 2010, the building was destroyed by fire without the amount of coverage being increased. The cost of demolishing and reconstructing the building amounted to $1,003,708.

The insured sued the Broker and the Firm for $224,701, representing the difference between the amount suggested by the appraiser and the amount of insurance as well as damages for loss of income. It also claimed from the Broker, the Firm and the appraiser the amount of $233,865, representing the difference between the replacement value the appraiser should have suggested and the value he in fact suggested, plus the demolition costs.

The insured alleged the Broker’s lack of prudence and diligence, in particular:

  • His lateness in taking steps to renew the insurance policy;
  • Failing to follow up on the file to obtain an appraisal quickly;
  • Failing to analyse the appraiser’s report when he received it and to take the necessary steps to have the insurance amount adjusted;
  • Failing to advise on and recommend available insurance coverage relating to the demolition costs, compliance with new building standards and additional insurance for loss of income.

Judgment

In a detailed judgment, the court recalled the obligations and duties of insurance brokers according to Article 2138 C.C.Q. and under the Act Respecting the Distribution of Financial Products and Services2 (Distribution Act), including the duty to act with prudence and diligence and the broker’s duty to advise his client. It also cited the leading cases of Fletcher3 and Baril4 on the insurance brokers’ duties in acting as advisers to their clients.

It quoted section 39 of the Distribution Act, which reads as follows:

“39. Damage insurance agents and brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs.”

The court comments as follows about this issue:

[Translation] “[53] Section 39 of the Act creates a special obligation for brokers. When a policy comes up for renewal, the broker cannot merely allow the policy to be automatically renewed, despite the possibly regular and automatic increase in the amount of coverage suggested by the insurer. The broker has an obligation under the law to offer his client a product that covers a potential loss for an appropriate amount of insurance, and the insurance product offered must be adapted to the client’s needs. When he sends the policy proposed by the insurer, his role as an adviser must continue.

[54] A broker cannot merely allow things to evolve according to the circumstances and the value of the property since the last policy was issued. […]

[55] The broker must thus ensure that the client’s needs are met when a policy is renewed. When, as in this case, the broker meets a client for a renewal for the first time, he must leave no stone unturned and ensure that the product offered fits the client.

[56] The broker’s duty is also adapted to the client’s level of awareness. The more the client understands the world of insurance, such as a broker who advises another broker, the lower his duty of care and advice. The less the client understands, as in this case, the greater the broker’s obligation to be vigilant and give advice.”
[emphasis added]

The court noted the following acts of negligence by the Broker:

  • A lack of prudence and diligence in managing the insured’s file (lateness in taking steps to renew the insurance policy, the delay in hiring the appraiser, the failure to follow up with the appraiser and poor management when he received the appraiser’s report);
  • The failure to inform the insured of the presence of a clause having the practical effect of incorporating the demolition costs into the replacement value of the building in the insurance policy and the need to increase the amount of insurance as a result;
  • The failure to tell the appraiser he should mention that demolition costs were excluded in his appraisal report or indicate an amount for such purpose;
  • The failure to adequately inform the insured of the potential additional costs resulting from the reconstruction of the building in compliance with new building standards and municipal by-laws.

According to the court, the appraiser was also negligent in his appraisal of the replacement value of the building, which the appraiser admitted at trial, including:

  • Appraising the building as if it were a residential building when it was in fact a residential and commercial building;
  • Failing to point out that the demolition costs were not included in the replacement value; and
  • Failing to indicate the additional reconstruction costs of bringing the building, which had been built in the 1930s, up to current standards.

However, only the Broker was held liable. The court ruled that Broker had committed the decisive error that caused the insured’s loss, not the appraiser, whose faults in connection with his appraisal report, according to the court, [translation] “were not directly related to the initial fault.”

Thus, the Superior Court held that, were it not for the faults committed by the Broker, the insured would have asked for full insurance coverage for its building and the insurer would have agreed to increase the amount of insurance accordingly.

The court therefore ordered the Broker and his Firm to pay the insured an amount of $348,032.

The judgment in first instance was appealed on December 12, 2014.