Brokers’ duty when placing business interruption insurance
The claimant alleged that its broker had been negligent when placing business interruption (“BI”) cover for it. The claimant had reached a settlement with its insurers after they had indicated that they might exercise their avoidance rights because the claimant was under-insured. Although most of the case turns on the facts of the case (and, in particular, the source of figures supplied to the insurers), Blair J did set out some basic principles of brokers’ duties when placing BI cover:
- Two particular problems arise with the placement of BI cover: The calculation of “gross profit”, allowing for the fact that the insured will not be incurring the costs of purchases or variable costs in the event of a catastrophic event; and the period of indemnity which will be required (the maximum indemnity period can be 12 or 24 months and the insured event may take place near the expiry of the policy).
- The broker need not calculate the sum insured or choose an indemnity period, but he must provide sufficient explanation to enable the client to do so.
- The broker is not required to conduct a detailed investigation into a client’s business. However, he should take reasonable steps to ascertain the nature of the client’s business and its insurance needs.
- It is a general principle that a broker’s duty is not diminished just because his firm may offer an enhanced service at an additional cost.
- The scope of a broker’s duty to assess a commercial client’s business needs will depend on all the circumstances of the case, including the client’s sophistication (even though the insurance industry, unlike some other parts of the financial services industry, does not have standard procedures for identifying sophisticated clients). It cannot be assumed that an SME will have any understanding of BI insurance.
- Nor can it be assumed that a broker will not have to repeat advice annually, since personnel at a client may change.
- Importantly for this case, if a client appears to be well informed about his business and provides the broker with information, the broker is under no duty to verify that information unless he has a reason to believe it is not accurate. Here, the judge concluded that the information passed to insurers had come from the client (and the broker had had no reason to doubt it) and that adequate advice had been given by the broker.
One further issue raised in this case was whether Arbory v West Craven (see Weekly Update 15/07) had been correctly decided when it concluded that the object of BI cover is to enable the company to recover and to resume its pre-incident level of profitability at the earliest date and hence an insured can recover foreseeable consequential losses. However, Blair J refused to opine on whether a consequential loss of profits claim could have been made by the claimant in this case.
The judge went on to find that, had the broker been negligent, contributory negligence would have been assessed at 50%, on the basis that incorrect figures had been given by the claimant to the broker (even though the claimant could not be criticised for failing to read in detail the documentation sent to it by the broker).
COMMENT: Some writers have found the case of Arbory controversial since it appears to override the rule in Sprung v Royal Insurance  (which held that an insured is not entitled to the recovery of damages for the non-payment or late payment of insurance monies) However, the judge in Arbory held that the very purpose of BI insurance is to cover loss of profits and so, for that reason, it is an exception to the rule in Sprung. This case takes the argument no further though. As we have previously reported, the issue of damages for non or late payment of insurance monies was to have been addressed in the Insurance Bill currently going through Parliament but the relevant clause was removed from the bill before it was presented to Parliament (although it may possibly be re-introduced in an amended form this autumn).
It is also interesting that the judge held that the claimant’s commercial director who was responsible for placing its insurance would not have been expected to read the documentation sent to it by the broker in detail. Prior caselaw on this point is fact-specific, but in general it seems that it is difficult to claim contributory negligence where an insured has no particular insurance expertise and this case continues that trend (a finding of contributory negligence only having been likely because the broker had relied on the figures supplied by the insured itself).