The Duty of Care: Acting with Reasonable Skill and Care

This article, provided by guest authors Robin Wood and Roger Franklin, continues our series looking at an insurance broker’s duty of care and improving the quality of your Professional Indemnity risk management. This week focuses on the standard of care and competence that insurance brokers need to demonstrate when carrying out their work.

Several readers have asked us what standard the Court is looking for when considering a negligence claim against an insurance broker and the simple answer is that the law requires you to display a reasonable standard of competence.

Competence has three elements: Knowledge, Understanding of that Knowledge, and Application of that Knowledge and Understanding in doing your job (KUA)

In Scotland they use a term “ordinary insurance broker” and for the purposes of explanation, we like this. A reasonable standard is one which would be expected of an ordinary or average insurance broker acting with reasonable skill and care, and that is decided by the Court after hearing the evidence of the case and about the body of opinion of peer practitioners (other brokers) from an independent expert.

So, when we look at discharging the duty of care to your client, you must know what is expected of you, understand how to do it and then do it to a standard expected of an ordinary insurance broker.

In terms of gathering information, you need to collate sufficient information such as will enable your client to make a fair presentation of the risk to underwriters and to allow you to be competent in recommending a suitable policy that covers the client’s demands and needs.

Some may say that you can be competent by experience alone but that is nonsense. You have to have some sort of learning and testing system. This can be by way of examination or some other form of independent testing.

Equally, it is impossible to measure competence just by testing of knowledge and understanding. One has to complete the circle by assessing the ability of an individual to apply the knowledge and understanding and typically this can be done by on the job assessment including observed transactions and file checking.

We have worked on hundreds of negligence claims against insurance brokers and there are three categories of broker involved in negligence claims:

• Those who are ignorant of how to discharge their duty.
• Those who can show that they have the knowledge and understanding of how to discharge their duty but have made an error.
• Those who have discharged their duty and the claim against them fails.

In this series of articles we are seeking to give you the tools to know your duty and to understand how to discharge it to the extent that you could only fall into 2) and 3) above.

You would be surprised at how many individuals involved in cases we work on fall into category 1) and the worst type are those with little knowledge or practical experience. It can either be a case of someone too junior and inexperienced or more commonly, someone of high station or even from another profession who has never studied insurance or has not kept up to date.

One of the most amusing cases was a practitioner from another Chartered profession who advised a client on buying a packaged general insurance policy and when accused of negligence actually made this statement in Court: “I don’t know why you are picking on me, I am a Chartered xxx and know nothing about General Insurance”. (Bless!)

Don’t be pusillanimous. If you want to be classed as a reasonably competent insurance broker, then always work to get things right and not to let your client down. It takes hard work, there is much learning to do and you must expect to be tested on your knowledge and understanding and assessed on how you do your job. No regulator would be expected to censure an individual for making a mistake (once) but evidence of ignorance and lack of evidence of Compliance with SMCR and CPD requirements are becoming an evidential feature of negligence cases.

What this means is that with all the new FCA Rules on assessment of competence, the Court can be presented with evidence that an individual or a firm are not compliant with the rules and whether or not the Court is influenced by a failure, the regulators are likely to pay attention to the breaches.

The Subject of Gathering Information and Censure

It is debatable whether insurers have a duty to be fair and we all know that there are some who will do anything legal to get out of paying a claim in full. They will also do things which are possibly not legal but that is, in our experience, a rarity.

Here is a case of unfairness:

A family run business had a fire which caused about a £million of material damage. There was no Business Interruption cover. The Managing Director of the business had been convicted of fly tipping and fined £10,000 by the Court.

At renewal, the client disclosed the conviction to its broker who forgot to mention it to the insurer.

The insurer had a specific exclusion in its rating manual for any criminal convictions and declined the claim outright and avoided the policy (fairly in our view).

It is clear that the insurance broker was negligent and liable for the £1 million loss so referred it to their PI insurers.

This is where it gets interesting because whilst the lawyers accepted that the broker was liable they claimed that the loss was uninsurable and as such the insured could never have obtained insurance and therefore had suffered no loss. (This is referred to as the “causation” argument).

This is a common defence and it is up to the Claimant to show that on the balance of probability the risk was insurable.

When we were instructed it was absolutely clear the risk was insurable. There were several markets and the Defendant broker knew this as well.

But, PI insurers and lawyers being what they can be, delayed this for a couple of years until a mediation took place. By this time the family firm were struggling to survive.

At the mediation the Lawyer for the Defence gave away little and claimed a 90% chance of their success.

About 5 hours later and towards the end of the day the company secretary of the claimant suddenly grasped what was going on and handed a file to the Mediator which showed that at the time of the original quote he also obtained a competitive quote from another well known broker and having fully disclosed the conviction been given a quote about 10% more than the one they actually chose.

To say we were open mouthed was an understatement. No one, ourselves and the directors of the Claimant included, had considered that the key person (the person who handled the insurance) did not understand what the causation argument was.

It was such an enormous lesson that the public do not understand insurance even when they enter into a legal claim. No-one, brokers, experts, lawyers, mediator, insurers really did their job to a reasonably competent standard on that point.

And the story does not end there. The Defence lawyer and the PI insurer conferred and announced to the meeting that they still thought they had a 40% chance of success and wanted to go away and think about what offer they might make. After another 8 months they settled in full.

Disclosure of censure is so important because not only will insurers refuse to pay a claim if it is not disclosed but the causation argument is a very regular feature of claims for negligence against brokers. Read on…

A list of censures

We cannot give you an exhaustive list and you must make your own but using your own skill and judgement your firm should be thinking about what you are going to ask your clients.

1) To whom does it apply?

• Directors
• Partners
• Shareholders
• Senior Management
• Family and close friends working for the business
• Advisors
• Clients
• Landlords and other linked businesses and individuals

2) Types of Censure

Here again is a non-exhaustive list:

• HMRC (including investigations)
• VAT (including investigations)
• Police (criminal convictions, charges, interviews etc)
• Civil (cases against)
• Professional Censure
• Health and safety and any other censure from authority

3) Financial Matters

Another non-exhaustive list:

• Bankruptcy
• Insolvency
• Arrangements with creditors
• County court judgements
• Financial Default Generally

4) Insurance

Guess what, the last non-exhaustive list:

• Past claims
• Past circumstances that might have given rise to a claim
• Loadings, terms imposed or rejections on any policy

You have our assurance that every one of these examples has arisen in our cases at least once over the last 30 years and to give you an idea of how crazy it gets, the court supported an insurer which claimed materiality in the fact that the landlord was being investigated for drug dealing and the commercial tenant knew this because they had been questioned by the police. Underwriters are and have always been terrified of the unseen moral hazard and no more so than in these days of complex nefarious activity. In another case, a director of a family business was jailed and on his release took a minor job in the company. This was not disclosed and the insurer claimed that the individual had an influence over the running of the business and the appointment was material.

You can go on listing things for your client to disclose but ultimately you need a catch-all set of words and a synopsis of the outcome of a breach so that the client can make an informed decision about what to disclose.

“URGENT. PLEASE READ THE LIST OF POTENTIALLY MATERIAL MORAL HAZARDS. IF YOU DO NOT DISCLOSE YOUR CLAIM MAY BE REDUCED OR NOT PAID AT ALL.

Mention anything which has occurred or that you know might occur which would cause a reasonable person to doubt the integrity of anyone on list 1.

Be Hard with yourself. We have prepared a non exhaustive list for you to circulate to relevant persons with a tick box system. If any box is ticked, get more detail and send it to us. Remember, we cannot advise you unless you tell us about a circumstance.”

So, let us end this week with the last chapter on moral hazard and your duty of care and what do you do if the Client ticks a box on your list.

As a general rule of thumb be very careful about not mentioning everything you know to insurers. We have often seen cases where brokers do not think something is material and then end up with a negligence claim against them when insurers disappoint!

Always remember that a client has to exhaust their case against the insurer before going against the broker but if something is arguably material then the process of blame can turn against you.

Also do remember the causation point and your duty is to arrange insurance for the client if you can so if you cannot place the business yourself, either decline to act in that regard. Most brokers prefer to place the insurance if they can so do develop relationships with specialists at placing difficult risks.

If you go this route always check everything that goes on. You are still likely to be liable to your client and just because a broker is good at placing risks does not necessarily mean they are competent at arranging a suitable policy for your client. These days the duty of care is spread through the chain of distribution but ultimately it is you who has the relationship with the client.

Next week we will extend the examination of the Duty of Care and gathering information and consider fair presentation and reasonable enquiry.