A UK Court has distilled a series of principles from insurance case law to guide brokers on their obligations to their clients in relation to business interruption insurance.
The judgment may be persuasive to New Zealand courts.
Eurokey Recycling Ltd (Eurokey) was suing its former insurance brokers for breach of contract and negligence relating to a policy for business interruption (BI) cover. The issue arose after a fire wiped out Eurokey’s main premises.
Eurokey was grossly under-insured, claimed this was because it had been badly advised, and was pursuing the broker for the shortfall between the pay-out it got from its insurers and the amount it would have got had it been properly insured, together with consequential losses.
Although much of the evidence was disputed, the Court found that the broker had not breached its duties to Eurokey.
In the course of making its decision, the Court traversed the relevant case law and laid out the following principles in respect of the broker’s duty to the client in the provision of BI:
- the broker is not expected to calculate the BI sum insured or choose the indemnity period but must provide “sufficient explanation” to enable the client to make informed decisions in relation to these matters
- this will include explaining the method of calculating the sum insured and will likely require explanations of terms such as “estimated gross profits” and “maximum indemnity period”
- the broker will need to take “reasonable steps” to ascertain the nature of the client’s business and insurance needs and to ensure that the client fully understands the term “Insurable Gross Profit”
- the broker’s responsibilities to the client are not diminished if the brokerage firm offers an enhanced service at additional cost and the client has chosen the non-premium product instead
- the extent of the broker’s obligation to assess a commercial client’s BI insurance needs will depend upon the particular circumstances of the case, including the client’s sophistication and the extent of their past dealings
- although as a matter of common sense, a client may not need a repetition of previously given advice each time the policy is renewed, the broker needs to be alert to whether there have been any changes in personnel
- any advice should be appropriately documented to provide evidence that the broker’s obligations have been met
- if a client appears well-informed about the business, the broker is not expected to verify the information given unless there is reason to believe that it may not be accurate, and
- where a broker has been given express instructions as to the cover to be obtained, reasonable care must be exercised to adhere to those instructions.
The judgment can be accessed here.