A recent British Columbia Supreme Court decision reaffirms the validity of amending the fundamental terms of a marine insurance contract by an endorsement. The Court upheld the validity of a clause in a hull and machinery policy that increased the insured’s deductible to $250,000 by an endorsement, because of its poor claims history.
The insured operated a fleet of vessels insured under a hull and machinery policy by two insurers. Beginning in 2000, the insured’s insurance broker negotiated these policies annually for the insured. One of the insured’s vessels sank. The insured claimed for constructive total loss. The hull and machinery policy included a $250,000 annual aggregate deductible clause, which had been added to the policy by an endorsement. An annual aggregate deductible clause requires the insured to absorb all losses during the term of the policy, up to a stipulated accumulated amount. The clause is often used to keep premiums low where an insured’s claims history is poor.
The insurer alleged that that the annual aggregate deductible clause did not apply to constructive total loss claims. Alternatively, it claimed damages from its broker for negligence, breach of contract and breach of fiduciary duty in permitting the endorsement.
The Court concluded that the insured must have been aware of the annual aggregate deductible, and of its application to constructive total loss claims, well before its vessel sank. The Court found that the clause had not been added to the policy “midway through its term” and without the insured’s knowledge or consideration, as the insured alleged. Instead, the insured knew that its insurers required the clause as a condition of providing coverage, and authorized its broker to agree to it.
The Court upheld the validity of endorsements to the insurance policy made by the parties in preceding years. The Court held that a contract may be amended, if there is a benefit to both parties which they accept. Non-material terms may be added to a policy by endorsements after it is created, even if they were not expressly agreed to when the policy was issued. In this case, the Court noted that the cover note for an earlier policy indicated the parties were using endorsements to alter the policy. The Court further noted that the insured had filed claims in previous years which the insurers had paid. By accepting those payments, the insured had accepted the benefit of the policy as amended.
In considering the insured’s allegation that its broker had breached an implied term of its brokerage contract and been negligent in performing its services, the Court noted that a broker does have an obligation of skill and care towards an insured when informing it of what risks are covered by a policy and which are not. Brokers must also provide their insured with advice about the best available coverage suitable to meet their needs. For a broker not to inform its insured of a material risk or alteration in coverage is negligent.
In this case, however, the Court held that although the insured had no opportunity to discuss the effect of the annual aggregate deductible clause with its broker, the insurers were not prepared to agree to any other terms, and there was no evidence that any other insurer would have done so, having regard to the insured’s poor claims history. The Court held that although the broker should have communicated more with the insured, there was no evidence that the insured had suffered any loss as a result of its not doing so.
This decision highlights the importance of insureds being alive to changes in their coverage that can result from claims. It also explains the duties owed by insurance brokers to their insureds.