Brokers negligence and the standard of care is front and center in the recent Nova Scotia Court of Appeal decision in Marsh Canada Ltd. V. Grafton. In Marsh, the insured corporation sustained extensive fire damage to one of its building and sought indemnity from its insurer, Lloyds of London. Over many years, there was a misapprehension about the profile of the property. It was not ‘sprinklered and of masonry construction’ although the insured over many years had represented that it was.
The insured corporation had a number of properties that were subject to various insurance arrangements and a number of different people were responsible over the years for managing the insurance issues for the corporation. The misstatement about the building being equipped with a sprinkler system and of masonry construction stemmed from a 2003 application for insurance and was not an intentional misstatement.
When fire destroyed the property in 2007, the insurer became aware of the true profile of the building and denied coverage. The insured sued both the insurer and the broker on the theory that the standard of care of the broker required it to do more due diligence to ensure that the information on the application was accurate.
At trial, the court held that the broker was liable. Ironically, because of the ‘complexity’ of the insured’s holdings and the different people in the organization responsible for insurance arrangements, the trial judge concluded that the broker should have been alive to the fact that the information coming from the insured may not be accurate. Indeed, the trial judge thought that the broker should have inquired as to whether inspections had been done on the property to ensure information was accurately recorded (specifically regarding whether it was sprinklered and of masonry construction) and if not the broker should have recommended inspections be done.
The Court of Appeal overturned the trial judges ruling, noting that the broker was responsible only to make appropriate inquiries to determine the kinds of coverage required of the insured and to advise of the appropriate options available that would satisfy the needs of the insured.
Although this decision will give brokers reason to breathe a sigh of relief, it underscores the importance of robust and well documented communications between broker and insured evidencing that the above issues have been properly addressed.