The courts have always been tough on the professional advising a consumer client but it now seems, following the recent decision in Environcom v Miles Smith, that a form of strict liability for brokers to their commercial clients is perhaps not too far away.
Environcom ran an electrical goods waste recycling business. Miles Smith was their insurance broker. Cover was placed with Woodbrook for property and business interruption risks. Environcom suffered a fire at their premises (resulting in a claim for apparently nearly £7 million). Woodbrook avoided the policy for material non-disclosure relating to the use of plasma cutters in the “de-manufacturing” of fridges (which were a fire risk) and other previous fires at the property (in addition to two previous claims).
The relevant issue for the broker’s liability was should it have enquired further in relation to risk history so that the client would then have disclosed its method of working and the previous fires.
The decision – what advice must a broker give his client regarding material facts?
The scope of a broker’s duty in placing or renewing cover for a client is as set out in the relevant ICOB rules (which although not prescriptive provide good guidance of the standard to be adopted). The judge in Miles Smith however went further. He said (with our emphasis added) that:
“The broker must satisfy himself that the position is in fact understood by his client and this will usually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal (particularly if a new person has become that client’s representative).”
It follows that in order to meet the standard required of him the reasonably competent insurance broker must explicitly ensure that his client understands what he has been advised about material facts (and the consequences of non-disclosure) and obtain verbal or written confirmation from the client of this.
This is an obligation that is arguably higher than the requirements of the CII handbook and the judge in Miles Smith made it clear he was “not persuaded that it is sufficient simply to rely upon written standard form explanations and warnings annexed to proposals or policy documents”.
Practical points for brokers
- To write to your client and say you must disclose all material facts is arguably not enough, even if you describe a material fact as one that might be “relevant to insurers in their decision to provide cover”. Standard letters or phrases in isolation are not going to protect you.
- Insurance registers giving examples of possible material facts are useful. They do not however represent the complete picture. You need to specifically ask about facts which may be relevant to the risk in question. Questions of break-ins and fires are so standard they ought to be asked on every occasion.
- Record both the advice given to the client and that the client has understood and accepted its obligations.
- Explanations in writing are not enough. You need to follow up orally to ensure the message is understood.
- Remember that the CII handbook requires you set out in full the wording of any relevant warranties affecting a policy. A précis is not enough, nor is simply