Business interruption (BI) insurance can be complex. The role of brokers explaining and advising clients on BI cover came under scrutiny in this judgment of the commercial court earlier this month. The court gave useful guidance that insurance brokers should bear in mind when arranging business interruption cover.
Eurokey Recycling Limited (Eurokey) operate a substantial waste recycling business. On 2 May 2010, there was a serious fire at Eurokey’s main premises in Enderby, Leicestershire which caused extensive damage. Loss adjusters were engaged and it was during the loss adjusters’ investigations that it became apparent that Eurokey was significantly underinsured.
Eurokey brought a claim against its former insurance brokers, Giles Insurance Brokers Limited (Giles), alleging that Giles acted in breach of contract and/or negligently when placing a commercial combined policy. The policy provided cover for business interruption risk and stock and machinery (amongst other things).
Eurokey alleged that Giles gave negligent advice about the insurance and failed to secure adequate levels of cover. Eurokey further alleged that, because of Giles’ negligence, Eurokey was significantly underinsured. The fact that Eurokey was underinsured was not disputed by the parties.
Giles had arranged the insurance policy with a Lloyds syndicate, acting through Paladin Underwriting Agency Limited (Paladin). The policy had incepted in April 2010.
Paladin threatened to avoid the policy due to the inaccurate financial information provided at placing, but made an offer to Eurokey of £1.5 million in settlement of the insurance claim. Paladin made it clear that unless the offer was accepted, it would be withdrawn and Paladin would avoid cover. After seeking advice from leading counsel, Eurokey accepted the offer. Giles did not dispute Eurokey’s decision to settle with Paladin.
Eurokey claimed the shortfall between the settlement it had reached with Paladin, £1.5 million, and the sum which Eurokey alleged it would have recovered had Giles given proper advice. The difference claimed was some £16 million. The trial was of liability only.
In defence of the allegations of negligence, Giles submitted that it accepted that it had a duty to take reasonable steps to ascertain the nature of a client’s business and insurance needs, but that duty would depend upon the particular circumstances of each case. Giles asserted that Eurokey was a sophisticated client with experience of commercial insurance and was fully aware of how stock and machinery should be insured, and the method of calculating the sum insured for business interruption cover. The relationship between the broker employed by Giles and Eurokey spanned a number of years and there was evidence that meetings had taken place to discuss the level of cover - and that increases had been made to the sums insured over the years.
There was a considerable factual dispute between the parties, particularly in relation to the information which was provided on turnover. Giles had represented to insurers that Eurokey’s turnover was some £11 million per annum, whereas in fact it was closer to £17 million, and at a late stage Eurokey had sent draft accounts to Giles which included details of the increased turnover, although the court considered these had been sent only in relation to Giles arranging the credit for the financing of the premium.
Both parties in the litigation instructed broking experts. The experts were in agreement that a reasonably competent broker would have:
- explained how to calculate the sum insured; and
- made reasonably sure that the explanation had been understood.
It is worth pointing out that when considering the parties’ respective positions, the court held that ‘… a broker is not expected himself to calculate the business interruption sum insured or choose an indemnity period, but must provide some explanation of the relevant terms. The broker has a duty to take reasonable steps to help his client understand how to calculate the sum insured for stock, namely that the sum insured should reflect the replacement value of the stock, and should take reasonable steps to help the client understand the concept of floating cover and ascertain whether that is suitable for the client’s needs. As regards machinery cover, an insurance broker is under no duty to calculate the sum insured for machinery himself, but must be reasonably satisfied that his client knows how to calculate that figure, in particular that machinery should be insured on a re-instatement basis’.
The court noted that it was Giles’ case that it had discharged these duties.
Finally, Giles also contended that figures about turnover and business interruption had been provided by Eurokey afterGiles had discharged these duties and that it had no reason to go behind the figures provided.
The judge found in favour of Giles and dismissed Eurokey’s claim. The judge also acknowledged that there was a conflict between the witness evidence given on behalf of Giles and that given on behalf of Eurokey. He preferred the evidence of the broker and concluded that adequate advice was given by Giles to Eurokey about business interruption and that Giles had no reason to doubt the figures provided by Eurokey. The judge also held that there were no shortcomings in respect of the advice given by Giles about stock and machinery cover. Although Giles had been sent draft accounts which contradicted the financial information previously provided by Eurokey, and passed on to Paladin by Giles, the judge concluded that Giles were merely acting as a post box in passing this on to the premium finance company and did not have a duty to review this and raise concerns about inconsistencies.
Contributory negligence considerations
Although the judge found that Giles had satisfied its duties of care and were not liable, the judge considered Giles’ contributory negligence arguments. As part of its defence, Giles had asserted that Eurokey’s own contributory negligence approached 100% - pointing to Eurokey’s failure to consider key documents and its provision of inaccurate figures in respect of gross profit, turnover and stock and machinery.
The judge stated that had he found against Giles, on the basis that figures given by Eurokey to Giles were inadequate, he would have assessed Eurokey’s contributory negligence at 50%.
While the brokers successfully defended this claim, the judgment does not dilute what are relatively onerous duties owed by a broker to understand their clients’ insurance needs, to explain and advise clients in some detail about their obligations of disclosure and the effect of underinsurance and to ensure the client understands the principles of the insurance they are seeking.
The particular type of insurance in the spotlight in this case was business interruption cover and the judgment provides helpful guidance to brokers about discharging their duties of care when arranging this cover. For example, a broker needs to explain to a client how the term ‘gross profit’ in a business interruption context differs from the term in the usual accounting context, but if an apparently well informed client provides information, a broker does not have to check its accuracy unless there is a reason to believe it is inaccurate.
The written records retained by Giles were imperfect and opened the door for the significant factual dispute which was thrashed out in court. While it was resolved in favour of the brokers, had better records been maintained, the case may not have reached court at all. At the risk of sounding like a broken record, clear and accurate documentation - and written evidence of all communications with clients - is invaluable for the defence of a professional negligence claim.