Brokers will often procure policies of insurance which benefit not only their client, but also third parties. Other professionals in similar circumstances, such as solicitors or valuers, have been found to owe duties to such third parties (the most obvious example being a duty owed by solicitors to the putative beneficiaries of a defective will). But what is the position relating to brokers? Do they too owe duties to third parties who are not their client, but who were intended to benefit from the policy?
Mr Crowson was a director of a company. The company procured D&O cover via the agency of a broker. The broker was subsequently replaced by a new broker (H) and it was alleged that H had failed to renew the D&O cover leaving (it is assumed) Mr Crowson uninsured in relation to a claim made against him. A common feature of D&O cover is that it confers a benefit on both the company, and its directors and officers, in relation to any claims which may be made against them.
The contractual position
In the usual way, H's client was the company. As such, H asserted that it owed duties only to the company – both contractual duties (it is unclear from the judgment whether a TOBA was in place) and also a duty of care (ie a duty to act competently and not negligently).
Was there a claim for breach of contract?
The court considered earlier authorities to the effect that, contractually, duties would only be owed to a broker's client rather than to any third party. However, those authorities all predated the Contracts (Rights of Third Parties) Act 1999 (the Act). The Act provides that "A person who is not a party to a contract… may in his own right enforce a term of the contract if… the term purports to confer a benefit on him".
Mr Crowson asserted that, in seeking D&O cover, the company would be seeking to confer a benefit on him. The court found that such a proposition was arguable and accordingly a claim for breach of contract was allowed to proceed.
Was there a claim in negligence?
In addition to the contractual case, Mr Crowson also asserted that a duty of care was owed to him. The court considered that such a duty to third parties might arise in two circumstances; firstly when the broker was instructed to arrange insurance both for the client and for other entities (for example where the insured is stated as being a company together with all its subsidiaries), and secondly where the policy is intended to benefit a third party (similar to the contractual position under the Act). In the circumstances, given the nature of the D&O cover, the court found that a purpose of the policy was to confer a benefit on Mr Crowson, and hence it was arguable that a duty of care arose.
Unusually, the judgment in this case does not set a binding precedent on the basis that it was an interim decision of a Master (a procedural judge in the High Court) hearing an interim application to strike out a claim. However, should the decision be followed, it has important ramifications for brokers who arrange cover which is designed to confer benefits on third parties. Examples will include, in addition to the D&O scenario at issue here, the following:
- Accident and health policies where cover is designed to benefit the insured's family;
- Property damage policies where the property may be beneficially owned by others in addition to the entity with legal title;
- PI policies where the policy benefits both the partners and directors of the insured as well as the insured firm or company itself.
So what can brokers do to defend themselves against such claims? The best way to achieve this may be via TOBAs which expressly limit the brokers' liability to third parties. In order to have any effectiveness, it would be necessary for the TOBAs to be seen and approved by the third parties (such as the directors of a company) and for the limitation to be reasonable. Such clauses have worked to defend professionals in other disciplines.
Paul Castellani, Professional Risks Partner, comments: "Although an interim decision, it is an important one for brokers in that the court did not follow caselaw predating the Contracts (Rights of Third Parties) Act 1999. Brokers may now find it more difficult to defend claims brought by third parties on the basis that no duty is owed to them, and would be advised to consider their TOBAs and the manner in which they attempt to restrict or exclude their liability to third parties."