The courts' approach to insurance brokers' scope of duty over recent years reflects a general trend towards an expansionist agenda. The decision in Jones v Environcom  addressed the wide-ranging scope of brokers' duties to clients. This was followed by Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  which seemed to signal a shift in favour of brokers. However, the recent decision in RR Securities Limited v Towergate Underwriting Group Limited  hints at a drift back. This body of case law, together with changes impacting on brokers' duties under the Insurance Act 2015, indicates that the burden on brokers in terms of their obligations to clients remains unabated.
Jones v Environcom: revisiting brokers' duties to the client
In Jones v Environcom the court reviewed insurance brokers' duties to clients, in particular the duty to explain the insured's obligations of disclosure.
Environcom, which operated an electrical goods waste recycling facility, used super-hot plasma cutters to remove difficult bolts from refrigerators whichcontained an extremely flammable substance. Environcom failed to disclose previous incidents of fire to insurers.
A number of fires subsequently occurred and insurers rejected Environcom's claim under its policy on grounds of non-disclosure of earlier fires and use of plasma cutters. Environcom settled its claim with insurers and subsequently pursued the insurance broker for a £6 million shortfall.
Environcom claimed that the broker had:
- failed to advise the client of its disclosure obligations; and
- made insufficient inquiries to discover the earlier fires and Environcom's use of plasma cutters.
The court held that an insurance broker is under a duty to:
- advise its client of its duty to disclose all material facts;
- explain the consequences of failing to do so;
- indicate the sort of matters which ought to be disclosed as being material or arguably material;
- take reasonable care to elicit matters which its insured client might not think necessary to mention but which ought to be disclosed; and
- ensure that its client understands what it has been advised about materials facts.
The judge commented that it will not be sufficient for a broker to rely solely upon standard form written explanations and warnings annexed to proposal/policy documents in order to satisfy its duty to explain the client's disclosure obligation. The broker must be satisfied that the position is in fact understood by the client. This will usually require a specific oral or written exchange on the topic at the time of the original placement and at renewal.
Eurokey: a rebalancing of the onus on brokers?
In Eurokey Recycling Limited v Giles Insurance Brokers Limited, the court appeared to soften its approach to the imposition of increasingly onerous obligations on insurance brokers.
Eurokey, a waste recycling company, brought proceedings against its insurance broker because its business interruption policy was placed on the basis of a turnover of only £11m, rather than the actual turnover of £17.6m. When the premises were subsequently destroyed in a fire, Eurokey was substantively underinsured and unable to recover the full extent of its losses.
Eurokey alleged that its broker had:
- failed to explain how to calculate the appropriate business interruption sum;
- incorrectly sought cover for turnover of £11 million in circumstances where the true turnover was over £17 million; and
- failed to pay attention to Eurokey's accounts, which showed that its turnover was over £17 million (notwithstanding that the accounts had only been provided to the broker after the policy had been placed).
The court took the view that:
- the broker had provided an explanation of how gross profit for business interruption was calculated for the purpose of insurance in the broker's pre-renewal report and reviewed the same at a meeting with Eurokey;
- the business interruption figures had been provided by Eurokey, who should have known the correct turnover figure; and
- the broker's belief that the correct figure had been provided was reasonable given that it had significantly increased from the year before.
The court concluded that a proper enquiry and explanation had been undertaken by the insurance broker. The court also considered it relevant that Eurokey was a sophisticated commercial client.
Although ultimately not relevant in light of the finding of no liability, the court noted obiter that, if the broker had been found negligent, it would have made a finding of 50% contributory negligence against Eurokey, which had provided incorrect figures.
The court also laid down some general principles relating to insurance brokers' scope of duty, in particular:
- A broker need not calculate the appropriate sum insured or choose the indemnity period, but must provide a sufficient explanation to enable its insured client to do so. This will include an explanation of the method of calculating the sum insured
- In order to effectively do this, the broker should take reasonable steps to ascertain the nature of the insured client’s business and its insurance needs
- An insurance broker is neither required nor expected to conduct a detailed investigation into a client's business
- Although as a matter of common sense a client may not need annual repetition of advice previously given and understood, this assumes that the responsible personnel remain the same. It also assumes that the giving of advice can be properly demonstrated by documentation (or otherwise) and the onus will be on the broker to demonstrate the same
- Reasonable steps should be taken to ensure that the insured client understands the term “gross profit” in a business interruption context.
Ultimately, this case represented a 'win' for the broking market by ring-fencing some of the broker's wide-ranging obligations to clients.
RR Securities: brokers' duty to warn clients of onerous terms
The recent decision in RR Securities Limited v Towergate Underwriting Group Limited concerned a broker's failure to advise its client that insurers required a certain standard of safety precautions as a condition precedent under a property policy.
In this case, JBR Leisure Limited (JBR), an operator of amusement arcades, retained insurance brokers Towergate Underwriting Group Limited to arrange property insurance (covering both building and contents) for a number of properties owned by JBR. The policy was placed through Equinox Underwriting Limited (Equinox).
One of the insured properties, known as the Rock Factory, was used by JBR to store arcade game machines which were not being used. A fire was deliberately started at the Rock Factory, resulting in all the machines being destroyed or rendered unusable.
JBR attempted to make a claim for loss of the machines under the policy but Equinox refused cover on the following grounds:
- JBR had, in breach of a condition precedent to liability, failed to comply with Equinox's standard form minimum security requirements (the MSS);
- JBR was in breach of a Reasonable Precautions clause in the policy aimed at preventing losses occurring.
JBR accepted that it had failed on the first issue and did not pursue its claim for cover against Equinox. JBR issued proceedings against Towergate alleging that it was negligent in placing the policy. It argued that Towergate was under an obligation to draw the MSS to its attention prior to inception of the policy. Towergate admitted liability shortly before trial, but disputed causation and quantum.
On causation, the judge found that, even if the MSS had been implemented, it would not have been extensive enough to prevent a determined intruder from gaining access to the property and starting the fire.
One of the other issues put to the judge was whether JBR had a valid claim against Towergate even in the absence of proof that the fire would have occurred. Towergate attempted to argue thas such a finding would amount to extending the scope of an insurance broker's duty beyond advising on obtaining insurance cover. Towergate argued that this would involve imposing a duty on the insurance broker (which it had not accepted) to advise the client on security precautions it should have taken.
Given the judge's findings that the fire would have occurred even if the MSS had been implemented, it did not fall to him to deal with the latter issue. However, he noted obiter that he would have rejected Towergate's argument on this issue. He considered that Towergate's duty was in fact to advise on security precautions (ie the MSS) required by insurers and that, had the broker fulfilled that duty the MSS would have been implemented. The judge commented that:
"..there is a much closer and direct connection between the 'insurance cover' duty and any putative expansion of that duty to cover the taking of security precautions. I reject the notion of any hard and fast rule here: arguments based on what loss is and is not within the scope of a broker's duty is highly context-dependent."
In essence, whilst the insurance broker argued against a potential expansion of scope of duty beyond advising on insurance cover, the court took the view that the very essence of the retainer in this case included an obligation to advise on issues of security. Whilst fact-specific, this case provides a warning to brokers that the scope of the retainer may be wider than anticipated.
Insurance Act: the new duty of fair presentation
The Insurance Act 2015 came into effect on 12 August 2016, with the purpose of updating the law to reflect the way the insurance market has evolved in the last hundred years.
The Act introduced some fundamental changes to presentation and assessment of insurance risks. One of the key changes impacting on insurance brokers involves the replacement of the pre-contractual duty of disclosure with the new "duty of fair presentation". The aim of this change is to encourage co-operation in the pre-contract stage between insurers and insureds and to prevent unhelpful 'data dumps' by insureds.
The new law requires a fair presentation of the risk to be made to the insurer, namely an obligation on insureds to:
- disclose to insurers every material circumstance it knows or ought to know or, failing that, to provide sufficient information to put a prudent insurer on notice that it needs to make further inquiries; and
- disclose information in a manner which is reasonably clear and accessible to a prudent insurer.
It will accordingly be incumbent on insurance brokers to provide adequate explanations/warnings to clients on the meaning and practical implications of the new duty. Brokers should be prepared to answer questions from their insured clients on information which needs to be disclosed under this reformulated duty, which may include information held by other parties (such as subsidiaries, contractors, consultants or other professionals). Brokers also will need to be mindful that they have an adequate understanding of the insured's business and the risk factors involved.
For clients, insurance brokers represent the last line of attack when insurers refuse cover. However, in such cases, involvement as the 'go between' often comes at a heavy price for insurance brokers given that the courts continue to hold them to wide-ranging and onerous duties of care.