Reported decisions on insurance brokers’ negligence claims over the last couple of years have often gone against the broker and painted a bleak picture for the profession. This decision in Giles’ favour offers a ray of hope, showing that the court is perhaps happy to accept that brokers are not acting as an insurer of last resort, and that the clients (and their instructions) have a role to play.
Giles acted for Eurokey, a waste recycling company, placing its commercial insurances including business interruption cover. Following a fire at Eurokey’s premises, the combined commercial insurers threatened to avoid the policy (by reason of gross underinsurance – turnover was declared at £11 million whereas it should have been £17 million). A deal was struck whereby Eurokey accepted a sum from its insurer which was significantly less than the value of its losses for business interruption (BI).
Eurokey alleged that Giles had, among other things:
- Given no explanation of how to calculate the appropriate BI sum insured.
- Incorrectly sought cover for turnover of £11m, when in fact the turnover was more like £17 million.
- Not paid attention to Eurokey’s accounts, provided after the policy had been placed, which showed the turnover at over £17 million.
The judge (Mr Justice Blair in the Commercial Court) found for Giles. He accepted evidence that their broker had gone through the calculation of a gross profit sum insured by reference to an explanation in a renewal report; that the BI figures had come from Eurokey – they of all people should know what the correct turnover figure was; and Giles’ belief that the right figure had been given was reasonable given the significant increase from the year before. This had all the hallmarks of a proper enquiry and explanation.
Although not relevant given the finding of no liability, the judge also said that a contributory negligence deduction of 50 per cent would have applied if he had found Giles negligent because Eurokey had to take responsibility for providing incorrect figures – noting that they passed exactly the same figures to alternative insurers when trying to obtain cheaper insurance.
It wasn’t however all plain sailing for Giles. There were a number of mistakes in its records and presentations but the court was able (on this occasion) to see past them and get to the core issue of why the cover in place was for the sums it was.
A “test” for advice to be given on BI?
The judge also laid down some principles that brokers should apply to BI advice:
- The broker has to provide a sufficient explanation to the client to enable it to calculate the appropriate sum insured and indemnity period. This will probably require an explanation of the terms used in the BI formulae in the policy wording.
- To do this, the broker needs to take reasonable steps to ascertain the nature of the client’s business and its insurance needs.
- Reasonable steps should be taken to ensure that the client understands the term “gross profit” in a BI context.
- Much depends on the circumstances of the case – the broker’s obligations to assess its client’s needs will depend on the client’s sophistication.
- Advice does not necessarily have to be repeated annually if given previously and understood, as long as the same person is dealing with the client’s insurances.
- If a client who appears to be well informed provides a broker with information, the broker is not expected to verify it unless there is reason to believe it isn’t accurate.
- If express instructions are given after all these requirements have been met, then the broker must be careful to adhere to those instructions.
Points to take away
- Giles’ documentation was criticised but they were able to overcome this, largely by their witness evidence.
If template documents are being used, there is no excuse for them being incorrect and it creates a bad overall impression if they are. They should be checked at a senior level and reviewed periodically.
If documents are being updated year on year, careful checking is required. Sending copies of market presentations (and even meeting notes) to clients with a request to check figures carefully is wise.
- The judge reiterated that there is a duty on a broker to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but that does not (on these facts) extend to a detailed investigation into the client’s business.
The decision here came down to “knowing your client”, one of the core ICOBS requirements and the interpretation of these.
- The scope of the broker’s obligation depends on the particular circumstances of the case, including the client’s sophistication. Clearly, that level of sophistication can vary. Here the judge expressly found that the client gave the impression of being well versed and that justified the lack of challenge to the figures presented to the broker.
Regardless of this case, don’t assume knowledge on the client’s behalf. Just because the client appears to be a business person, that doesn’t necessarily mean s/he is au fait with insurance matters – particularly something like gross profit which has a different meaning in a BI insurance context.
- The onus will be on the broker to show that advice given is demonstrated by proper documentation.
Clear file notes/records could be the difference between a finding of liability and not – particularly where there are errors/inadequacies in other documents. Brokers should ensure that they keep clear and accurate records of communications with clients to put themselves in the best possible position if their advice is challenged.
Brokers are likely to breathe a sigh of relief at this judgment, which appears to be based on a more common sense approach to broker/client relationships than previous decisions which seemed to be moving towards strict liability for brokers.
It remains as important as ever however that brokers’ standards are maintained in relation to not just the advice given to clients but also record keeping so that can be evidenced later.