In the Autumn 2006 edition of The HKey, we looked at the first-instance decision in HIH Casualty and General Insurance Ltd v JLT Risk Solutions Ltd . Mr Justice Langley ruled that brokers were more than a mere postbox: they had a duty, he said, to analyse the material they received (in this particular instance, from the insured) and then to take appropriate action. It was not enough for them simply to pass on such information to the insurer without comment.
Subsequently, HIH appealed Mr Justice Langley’s findings on causation – the judge concluded that, while the broker was in breach of its duty, HIH had not demonstrated that the breach actually caused their loss – while the broker cross-appealed against the ruling on the extent of its duty and HIH’s contributory negligence. Mr Justice Langley said that he would have found HIH to be 70% contributorily negligent if the broker had lost on the issue of causation.
Court of Appeal ruling
Giving judgment on 12 July this year, the Court of Appeal upheld the decision of Mr Justice Langley on all counts. HIH’s loss was its own fault, the court concluded. Indeed, if contributory negligence had been an issue, the court would have assessed it at 100%. It was also determined that whilst brokers do have a post-placement duty of care and cannot act merely as a postbox, their obligations in this respect are not as wide-ranging as initially feared. However, given the inability for the lord justices to determine the extent and circumstances where a broker’s duty exists, brokers should still remain vigilant at all times.
Based on the decision, it should be noted that if any of the information obtained could potentially affect the extent of insurance cover, a broker should alert its client to this fact. If it is a case where the broker has played a key role in establishing the cover – especially where the client faces a greater exposure than normal – then the broker’s post-placement monitoring obligations will be correspondingly higher. Lord Justice Auld explained: “Where a broker has been at the centre of devising and structuring a risky scheme … for insurers and reinsurers … it is plainly a strong candidate for post-placement monitoring obligations of the sort alleged [in this case].”
The broker once again raised concerns that the whole market would seize up if a broker’s duty was so stringent, but the Court of Appeal rejected such concerns, with Lord Justice Auld and Lord Justice May concluding that the appeal was specific to the facts of the particular case. While there was a “fine margin of decision” when it came to the question of whether or not the broker had breached its post-placement duty, the court concluded that Mr Justice Langley’s decision was nevertheless “tenable”, despite the lack of evidence available on certain key aspects of the case.
The Gaughan decision
The HIH case was not the only decision that determined the extent of a broker’s duty. Earlier in the year, the Court of Appeal had already reaffirm the position that the individual circumstances and prevailing market practice would both be taken into account before determining whether a broker’s duty should be extended in a particular case in the decision of Gaughan v Tony McDonagh & Co Ltd. In this instance, the defendant successfully argued that it was under no duty (and that no market practice required it) to verify with the claimant information which had previously been supplied to the insurers, who now wanted to reconstitute their own file on the property covered by the insurance. There was one warning note in the case, though: the court emphasised that brokers would be well advised to seek such verification when something other than the mere reconstitution of a file was involved.
The Longmore view
However, it is important to note that, in the HIH case, Lord Justice Longmore took a much broader view than his fellow lords justices. He said that “an insurance broker who, after placing the risk, becomes aware of information which has a material and potentially deleterious effect on the insurance cover which he has placed is under an obligation to act in his client’s best interest … by drawing it to the attention of his client and obtaining his instructions in relation to it”. He then added: “as between a lay client unversed in insurance matters and his insurance broker, I would think that the existence of such a duty should be comparatively uncontroversial.” These remarks are unlikely to go down well with brokers, who will now fear there is a greater chance of their being sued in future.
Need for care
Sadly, the appeal cases do not make the limits of a broker’s post-placement duty of care especially clear. It seems probable, though, that the duty (whatever its limits may be when it comes to the facts of a particular case) will apply more often than not. Consequently, while the broker in the HIH case may have defended itself successfully on the issue of causation, brokers in general need to be aware that their obligations are likely to be heavier than originally anticipated. They must therefore be particularly careful when dealing with issues of material concern to their clients.