What do you expect from an insurance broker when you ask him to arrange insurance for you? Most likely you are concerned to ensure that he gets you a good price for the insurance and that the insurance is with a reputable company that will handle any claim efficiently. You probably don’t think of the broker as someone you may wish to sue if you hit a problem with an insurance claim.
However, situations do arise where brokers are defendants to professional negligence claims, and on many occasions in recent years the courts have found in favour of brokers’ clients where the insurance cover arranged by the broker falls short of the client’s requirements.
Insurance is an important feature in property ownership, investment and development, and in the context of professional indemnity. It often involves large sums of money. The insured wants to be confident that all relevant risks are covered and that any claim will be paid without the need to embark on complex and costly litigation. Sometimes the remedy for a dispute with the insurer may lie in a claim against the broker.
The position of broker
The position of the broker has historically been problematic: were they salesmen acting on behalf of insurance companies, or agents representing the prospective insured? And if the former, was the prospective insured clear about the relationship?
That question becomes important when a dispute arises, for example over the common problem in insurance – non-disclosure of a material fact. What happens if the insured provided information to a broker that he failed to pass on to the insurer? In most cases, over the course of the nineteenth and twentieth centuries, the answer was that the insurer was entitled to avoid the policy, leaving the insured with a possible claim against the broker, but unable to obtain payment from the insurers.
Since January 2005, brokers have been subject to regulation under the Financial Services and Markets Act 2000. Under the regime, now encapsulated in the Insurance Conduct of Business (ICOBS) regulations, firstly there is a right of action against them for failure to comply with ICOBS, and, secondly, the regulations determine what constitutes reasonable competence on the part of brokers. A breach of the regulations that has also caused financial loss to the insured is likely to be regarded in law as a breach of the broker’s duty of care.
An interesting point arising from ICOBS is that, arguably, the regulations place a greater burden on insurance brokers than that arising from the test which is applied as standard in negligence actions against other professionals.
The traditional test in professional negligence, going back to Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, is “the standard of the ordinary skilled man exercising and professing to have that special skill” and “a man is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a reasonable body of [medical] men skilled in that particular art”.
The negligent professional in Bolam was a doctor, but this test has been approved and applied in every type of professional negligence claim since 1957.
Beyond the duty of care
However, if it were accepted that ICOBS defines reasonable competence for brokers for the purposes of establishing negligence, their duty may go beyond that required under Bolam. They are required under ICOBS to “specify, in particular on the basis of information provided by the customer, the demands and needs of that customer”.
The use of the word “needs” suggests the broker should go beyond simply acting on the client’s instructions and arranging the insurance he requests; the duty placed on the broker is to advise whether that insurance is adequate and to consider what additional or alternative insurance might be necessary to meet all likely eventualities.
Historically, the broker’s duty did not go beyond arranging the particular type of insurance requested by his client. He was not negligent if he failed to provide advice about some other form of insurance that the client may wish to consider taking out to protect himself.
For example, some of members of the syndicate that owned the racehorse Shergar instructed brokers to take out mortality cover for the horse, and when he was stolen they pursued a claim against the brokers alleging that they should have advised them to insure against theft as well. The claim failed on the ground that, while the brokers had a duty to exercise reasonable skill and care in ascertaining their clients’ needs, they had complied with that duty by acting on their clients’ clear instructions.
The position even pre-ICOBS might have been different if the owners had approached the brokers seeking general advice on what insurance was appropriate, but the court held in this case that the brokers were given clear instructions on the nature of the cover the owners wanted to buy.
More recent cases, however, have suggested that a broker is required to consider and advise, whether asked to do so or not. In the Standard Life case arising from the large numbers of claims from individuals relating to payment protection insurance misselling, the court held that the brokers had a duty “to identify and advise the client about the type and scope of cover which the client needs and, in doing so, to match as precisely as possible the risk exposures which have been identified within the clients’ business and with the coverage available.”
Minimising litigation
A further element of the obligation to give advice that meets the demands and needs of the client is the question of protecting the insured from unnecessary litigation.
When a claim is made, the insurer will look at all aspects of the insurance in considering whether the policy responds to the claim that has been made. There is a higher risk that the insurer will refuse to pay the claim if the policy wording is ambiguous, for example, in listing insured risks similar to the event that has led to the claim but not an exact match for that event, or because different sections of the policy are mutually inconsistent. Insurance claims, like most types of dispute, tend to be resolved by negotiation rather than litigation.
The insured is faced with the difficult choice, where the insurer argues that it is not liable to pay the claim but has made an offer of a reduced amount, between accepting or embarking on potentially protracted, expensive and risky litigation.
If, by the exercise of “reasonable skill and care” the broker should have anticipated the risk of litigation as a result of the policy wording, the broker may be liable to make good to the insured the difference between a reduced compromise settlement with the insurer and the full value of the claim.
FCNB v Barnett Devanney [1999] Lloyd’s Rep IR 459, is a composite insurance case where the claimant bank was co-insured on a property insurance policy. Usually with composite insurance each insured is covered for its own interest, and the rights of the lender will not be affected by the actions of the co-insured owner/occupier. The standard mortgagee’s protection clause provides that the insurance in favour of the mortgagee will not be prejudiced by any act or omission of the mortgagor. This clause was not included in the policy in this case.
When the property was destroyed by fire, the insurers purported to avoid cover against both the mortgagor, against whom non-disclosure, breach of condition and misrepresentation were argued, and FCNB. FCNB settled the claim with the insurers and then sued the brokers.
It was unsurprising that the Court of Appeal found in favour of FCNB. The clause that had been omitted was a standard one, and could have been included at no extra cost to the insured. In the judgment the court places a heavy burden on the broker:
“The protection to be afforded to the client should, if reasonably possible, be such that the client does not become involved in legal disputes at all. As in the case of a solicitor the insurance broker should protect his client from unnecessary risks, including the risk of litigation.”
Protection against “unnecessary risks” and “the risk of litigation” is of course a very desirable objective and difficult to achieve. In this case, the policy wording that the broker failed to secure was of a standard form. Where the dispute arises from a non-standard policy term, the courts might take the view that it was not within the scope of the broker’s duty to anticipate the arguments the insurers’ lawyers might come up with in order to avoid payment of a claim.
Claiming against the broker
The message for buyers of insurance, in the property market as in other sectors, is that if an insurer refuses to pay a claim or is willing to pay only a reduced amount, it is always worth considering whether a claim can be made against the broker.
The two main possible grounds are:
1. where the broker failed to recommend a suitable policy, ie, the policy taken out did not cover the risk that has resulted in a claim, or
2. where the broker failed to check that the policy wording accurately and unambiguously reflected the terms of the agreement as understood by the insured, and the insurer has argued that it is entitled to avoid payment of the claim.
There are many different elements to property transactions that need to be covered by insurance, and the law as it now stands obliges an insurance broker to go further than simply arranging the insurance requested by his client.
Susan Brown is a director and head of professional negligence at law firm Prolegal
