The Commercial Court has provided useful guidance on the duties owed by brokers when arranging business interruption cover and held that there are circumstances where it is sufficient for a broker to act merely as a “postbox” when he receives information post placement of the risk.
The insured was a waste recycling company and had obtained stock, machinery and business interruption cover through its broker for a number of years. Cover for the 2010/11 year was placed with a new insurer on the basis of a BI sum insured of £2.5 million and a turnover figure for the next 12 months of £11 million. The insured intended to finance the premium, which was higher than in previous years, through a company called Premium Credit Ltd. After the cover had been placed, the insured sent the broker its draft accounts for the year ended 31 August 2009 which the broker forwarded to Premium Credit. Having received the draft accounts Premium Credit agreed the loan. The accounts, which the broker did not read, showed a turnover figure of £17.6 million.
Following a fire at the insured’s premises, the insured was found to have been significantly underinsured and settled its claim under the BI cover for a reduced amount. Proceedings were issued against the broker for the balance of the insurance claim, alleging that the insured had been negligently advised and that the broker had failed to arrange adequate levels of cover.
Duties owed on placement of BI cover
Commenting that the fixing of the amount of cover for BI insurance is not necessarily simple, the court set out the following principles on brokers’ duties when arranging BI cover.
• Although a broker is not expected himself to calculate the business interruption sum insured or choose the indemnity period (which are matters for the commercial client), the broker must provide sufficient explanation to enable the client to do so. This includes giving an explanation of the method of calculating the sum insured.
• In order to do this the broker needs to take reasonable steps to ascertain the nature of the client’s business and its insurance needs.
• The broker has a duty to take reasonable steps to ensure that the client fully understands the term ‘Insurable Gross Profit’.
• An insurance broker providing the type of service that was provided in this case is not required or expected to conduct a detailed investigation into the client’s business. Nevertheless, the broker’s duty is not diminished because the firm also offers an enhanced service at an additional cost which the client has decided not to pay for.
• The nature and scope of a broker’s obligation to assess a commercial client’s BI insurance needs will depend on the particular circumstances of the case, including the client’s sophistication and the number of times the broker has met the client in the past.
• The level of client sophistication varies enormously and it cannot be assumed that an SME will have any understanding of the nature of the insurance.
• As a matter of common sense a client may not need an annual repetition of advice previously given and understood but this assumes (a) that the responsible personnel remain the same and (b) that the giving of the advice can be demonstrated (by documentation or otherwise) and the onus is likely to be on the broker to show this.
• If a client who appears well informed about his business provides the broker with information, the broker is not expected to verify that information unless he has reason to believe it is not accurate.
• Having satisfied these obligations, where a broker is given express instructions as to the cover to be obtained, he must exercise reasonable care to adhere to those instructions.
On the facts the court found that there had been no breach of duty by the broker and that the claim in respect of the BI cover failed. The broker had given the insured adequate advice and the cover was placed on the basis of the insured’s instructions as to the indemnity period required and figures for turnover and sum insured. The broker had had no reason to challenge the figures he was given.
Post placement duty to identify potential coverage issues
Relying on the Court of Appeal’s decision in HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd (2007), the insured also argued that the broker had an active duty to read the draft accounts sent to him after inception of the risk and to identify any potential coverage issues. InHIH v JLT the Court of Appeal found that where, after placing the risk, the broker becomes aware of information that has a material and potentially deleterious effect on the insurance cover which he has placed, he is under an obligation to act in his client’s best interest by drawing it to the client’s attention and obtaining his instructions in relation to it. The broker has a duty to act as more than a mere postbox.
In the present case the judge distinguished HIH v JLT on the facts. In this case the broker was literally to act as a postbox, passing the accounts on to the credit company in respect of the premium. In the absence of anything to alert the broker to the fact that the information in the accounts could have a material and potentially deleterious effect on the insurance cover, the broker had no duty to read them.
Insurance brokers and their insurers will welcome the court’s finding that a duty to alert a client to potential coverage issues post placement of the risk will not arise where the broker is not aware of the information in question and there is nothing to alert him to it.
The decision also provides useful guidance on a broker’s obligations to his client when arranging BI cover and the limits on the duties owed where the client is a commercial entity. Brokers should, however, be mindful of the court’s warning that the level of sophistication of commercial clients can vary widely and that SMEs in particular may not have any understanding of the nature of the cover being arranged.
Further, brokers should treat the Court’s observation that it may not be necessary to annually repeat advice previously given as being limited to the nature and calculation of BI cover and not applying more widely to other duties owed by brokers.
Further reading: Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  EWHC 2989 (Comm)