JRC053 14 March 2012
Earlier this month the Royal Court handed down a decision which will be of interest to those involved in arranging insurance whether as brokers or clients. Bedell Cristin represented the Plaintiff.
The claim was by Café de Lecq Limited against the Channel Islands' largest insurance broker R.A. Rossborough (Insurance Brokers) Limited. The essential facts were that Rossborough arranged cover for the operation of a beach cafe by the claimant. Unfortunately, not long after cover had been taken out there was a fire caused by a deep fat fryer overheating which resulted in the cafe being totally destroyed. When the cause of the fire was established it became apparent that the fat fryer was an old model and it did not comply with the terms of a warranty in the policy which stipulated that any deep fat fryer at the cafe had to be fitted with a thermostat designed to prevent the temperature of cooking oils or fats rising above 230 degrees centigrade and an automatic cut-out which would cut off the heat source should the thermostat fail. The insurers AXA Insurance UK plc rejected the claim entirely for breach of the warranty following which the claimant sued its broker for loss of cover by not making it aware of the requirements of the warranty and the consequences of not complying with it. After a six day trial the Royal Court held the broker Rossborough to have been negligent and awarded damages of £528,500 to compensate the claimant for the level of cover which it should have enjoyed but for Rossborough's negligence. Interest and costs were left over to be determined.
It was not disputed that Rossborough made no effort to expressly draw its client's attention to the meaning and effect of the fryer warranty either orally or in a covering letter accompanying the policy documents. Rossborough defended the case on the basis that the person who they dealt with at the cafe was experienced in arranging insurance of this type and their correspondence with him made it clear that he had to read the accompanying policy documents where he could have seen the warranty which was in plain English and readily understandable as an important provision that had to be complied with.
The Royal Court rejected the plea that the client was experienced in insurance matters of this type. Whilst it found him to be a businessman of considerable experience and success in running catering establishments and it accepted that in that capacity he would have arranged business insurance, the Royal Court did not consider that that made him experienced in insurance in the sense Rossborough relied on. A great many people running small businesses arrange insurance cover but that does not qualify them as experienced in the sense of understanding the technicalities and jargon for which insurance is notorious. The Royal Court also found on the evidence that Rossborough actually knew very little about his background and experience of insurance at the time they arranged the cover.
Of perhaps greater significance for brokers generally, was the finding of the Royal Court that simply telling a client "Here is the policy documentation: be sure to read it and check that it meets your requirements" is not good enough irrespective of the client's experience in insurance matters. A number of English authorities were found to be persuasive on the duty of a broker to make his client aware of onerous policy terms, the most recent being Nicholas G Jones -v- Environcom Limited & Anor  EWHC 759 (Comm). Whilst not wishing to be prescriptive about how the broker should word his correspondence to make a client aware of such policy terms, if that is the broker's preferred way of doing so, the Royal Court said that in this case the message to be conveyed was simple and was that AXA only offered cover on terms that the fat fryer was compliant and remained so throughout the term of the insurance and that a failure to comply would be likely to make the whole policy ineffective. It held that Rossborough came nowhere near to conveying that simple message.
The Royal Court also had some cautionary words regarding Rossborough's business practice in this case. It emerged during the witness testimony that AXA had installed software on Rossborough's computer system which enabled the broker to generate a quote without referring back to the insurer - a "quote engine" as it was described. The broker merely had to populate the software with certain details obtained from the client about the level of cover required in order to generate a quote and to print off the insurance documents. Unfortunately the system contained default settings which, for example, in this case included the statement that the cafe premises were of standard construction which factual assertion became a bone of contention at trial. If questions were not asked of the client, the information automatically generated by the system was capable of being completely wrong and it required diligence and understanding on the part of the client to spot the mistakes and inform the broker of the corrections required otherwise the cover was put at risk. By way of further example, that the level of business interruption cover for the cafe was fixed at just 12 months' duration was found to be almost certainly the result of a default setting. The Royal Court made an increased award of damages in respect of business interruption cover on the basis that the period should have been two years. Whilst accepting that the process for selling "package" policies is driven by considerations of speed and economy which may have advantages for all concerned, it may also entail significant risks for the client as was found to be the case here.
The case has not changed the nature of the broker's duty of care. Rather it is a timely reminder of it. The Royal Court commented on the process used in this case to generate cover as having the potential to cause trouble because "[it] is designed to minimise the time and effort that the broker has to spend on the matter and to transfer responsibility for getting things right to the client, thereby draining the broker's role of much of its raison d'être. Also because it is liable to foster a situation in which the broker becomes more closely allied with the insurer whose policy documentation he is generating than is healthy, to the detriment of the client whose interest he is supposed to be looking after. If this last observation seems too harsh a judgment, the circumstances of the present case suggest otherwise."
The judgment of the Royal Court in this case is an important one. To the average layman the term "warranty" may convey the idea of some sort of benefit but in insurance terms a "warranty" does not confer a benefit on the insured. Quite the reverse in fact. This case highlights only too clearly the importance for brokers generally to make clients aware of such policy terms and the effect of them.