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:

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Nor can it be assumed that a broker will not have to repeat advice annually, since personnel at  a client may change.
  7. 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 [1999] (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).