A recent decision has provided further guidance on when placing brokers may be found to have assumed responsibilities despite there being no contract with an insured. The case also highlights the need to exercise extreme caution when addressing the perennial problem of block notifications.
In Ocean Finance & Mortgages Ltd v Oval Insurance Broking Ltd liability was apportioned 70% to the producing broker, Oval Insurance Brokers (Oval) and 30% to the placing broker, Senior Wright (SWIL) for the claimant’s losses arising out of a failure to advise the claimant to make a block notification of circumstances prior to renewal of its professional indemnity insurance (PII) policy. Cooke J found that the dangers of not making such a notification outweighed any risks involved with notification, subject to the insured obtaining legal advice.
The claimant company OFML, a finance broker, approached Oval to source PII for the business which included the sale of payment protection insurance (PPI). Oval, in turn, approached SWIL as experts in placing professional indemnity business in London. Neither broker was an expert in PPI.
A policy was taken up for the period of 31.10.08 – 31.10.09 with a primary layer from CNA having a limit of £1.7m and with an excess layer from Hiscox having a limit of £3.3m. The policy period was back in a time when the FSA was indicating its intention to target the sale of PPI and in fact by 1 March 2009 OFML had ceased the sale of single premium PPI. During the course of 2009 OFML received numerous adjudications from the FOS which were adverse to it. Various discussions took place in 2009 and particularly in the run up to the 2009 renewal between OFML, Oval and SWIL in relation to the claims position and the systematic failures in OFML’s historical practices.
This claim was brought against Oval for breach of both contractual and tortious duties in failing to advise OFML to make a block notification within the 08/09 policy period in respect of all 18,000 PPI policies that OFML had sold, which it was claimed should have been notified as “circumstances that may give rise to a claim”. A block notification of circumstances was made in the following 09/10 policy year and, in fact, CNA did make a payment in respect of that notification. However, Hiscox declined cover on the basis that notification should have been given in the previous policy year as notification had to be made “as soon as practicable”. Due to a further policy clause, Hiscox also denied cover in its entirety for the 09/10 year.
Oval brought SWIL in as a CPR Part 20 defendant. SWIL had provided limited notification of certain circumstances in the 08/09 policy year without instruction from Oval or the claimant. This limited notification led Cooke J to state that SWIL had assumed a duty in contract and tort to Oval and possibly a duty in tort to OFML to make appropriate notifications in the 08/09 period.
On 21 December 2015 Oval settled the claim for a significant discount, admitting that a block notification should have been made within the 08/09 period. Oval argued that SWIL had been in direct contact with the insurers and had therefore taken on primary responsibility for recommending a block notification such as this. Oval also said they had relied on SWIL for specialist advice. In return, SWIL argued that Oval had not passed on key information which would have alerted SWIL to the need for a block notification.
Cooke J found both brokers partly responsible for the loss. Oval had had much greater knowledge than SWIL of the systematic failures in OFML’s sales practices, however SWIL should also have advised Oval regarding Hiscox’s renewal terms. SWIL had provided insurers with a limited notification when in fact it should have provided insurers with a more widespread notification. Whilst there was always the argument that such a broad notification would have been rejected by insurers, Cooke J noted that “any assessment of the consequences of not notifying circumstances under policies which shut out claims made later, which arose from circumstances which were known or should have been known, ought to have led to the recommendation to make or at least consider making a block notification with advice from lawyers to hand”. Oval had far more knowledge as to the widespread failure of OFML’s sales processes and, as such, liability was apportioned 70% to Oval and 30% to SWIL.
Various points of note arise from the decision, none more so than the confirmation that brokers should advise their clients to seek legal advice on whether or not to make a block notification in circumstances such as these. There is always going to be the danger of a block notification being rejected by insurers, however the devastating consequences of not notifying were such that, in the words of Cooke J, “no competent broker would have failed to consider it and recommend to the insured that they should, subject to legal advice, take such action”.
The importance to the placing broker of being careful not to unnecessarily create a duty in tort directly to the insured is also worthy of note here. As per the decision in BP v Aon (2006), where a sub-broker has assumed responsibility to the insured in the performance of services and the client can establish that it relied on the sub-broker, the sub-broker may be found to owe the client a duty of care. In making a limited notification without instruction, SWIL potentially created a duty directly to OFML. Brokers should be careful not to follow suit.