A Broker’s Duty of Care – Ensuring Clients Can Make Informed Decisions

This article has been provided by Robin Wood, chartered insurance practitioner and expert on insurance broking market practice and standards, and Roger Franklin, Head of Insurance Litigation at Edwin Coe Solicitors.

In last week’s article, we introduced the concept of a broker’s duty of care in relation to their client and posed the following case study:

This is the case of a broker who recommended a package policy to a commercial client. It was a modest sized business with a turnover of £1.5 million. A delivery man visited the business premises and a store of goods fell on him. He was incapacitated and lost the use of both his legs. He sued the client for over £5 million, plus costs of nearly £1 million.

The default sum insured for public liability under the package policy was £2 million.

We asked whether the brokers in this case had discharged their duty of care.

The first issue you should have considered is the status of the package policy. We stated that there was a default limit of indemnity of £2 million. So, if the broker simply recommended the policy, then you should consider that in the absence of any other guidance or warnings, the broker also recommended that the client choose an inadequate sum insured. Therefore, they did not discharge their duty of care. The claim was not paid in full, and the policy was not suitable.

Did you consider how the broker might avoid this potential PI Liability?

• The broker should have warned the client that the liability indemnity level might not be adequate and that the client should consider a higher level. Ideally, the broker should have provided quotes for £5 million and £10 million and made it clear that even these might not be enough.
• Note that the broker is not expected to recommend an indemnity limit, simply to explain what the policy covers, the potential deficiency, and the effect of not having sufficient cover.
• Contact any major insurer (or BIBA) and ask them for up-to-date trends on third party liability claims.

The key learning point is that package policies contain default sums insured and if you do not point these out to the client and ask them if they are adequate, then you are likely to be deemed to have recommended the default sums insured and covers in the policy.

Do not make the mistake of simply asking the client to check if the policy is adequate for their needs. Most clients know very little about insurance and it is up to you to take reasonable steps to ensure that the client can understand the insurance and the decisions you are recommending they take.

Let us look at that in a little more detail:

You must take reasonable steps to ensure the client can make an informed decision.

This means that the broker must do some explaining. To do that, the broker needs to understand the level of knowledge of insurance that the client holds and, in particular, the individual who is dealing with insurance matters.

In the case of Eurokey Recycling Ltd v Giles Insurance Brokers Ltd (2014), the judge (who was an acknowledged specialist on financial services matters), referred to the fact that in that part of the industry there was a Codec which defined the knowledge of customers, and expressed surprise that this had never happened in the general insurance industry.

The Guernsey Financial Services Commission took heed of this suggestion and in their New Code of Conduct, included a simple codec that will help us all categorise our commercial clients.

• Insurance laymen
• Experienced insurance laymen
• Sophisticated insurance buyers
• Peer practitioners

If you class all your clients as insurance laymen then perhaps that is best, but equally clients will tire of explanations of things they already know.

Not all commercial clients are insurance laymen; many will be experienced laymen. Equally, some will be very informed full time insurance managers (sophisticated buyers) and some will even be peer practitioners who know just as much as you do, if not more.

A well-constructed glossary of explanations and terms is a useful tool which you can remind a commercial client to refer to. Never be afraid to refer a client to this, regarding any matter that might lead to a claim being rejected or reduced, with emphasis if appropriate.

Remember, this is about planning to give the client a better chance of getting a claim paid in full.

The learning point is that to discharge your duty of care by reasonably ensuring a client can make an informed decision, you have to first consider what their level of knowledge is and make a note of it!

So, the duty of care requires the insurance broker to give information. A critical part of discharging that duty, is to give information to the extent that the actual client can make an informed decision. By inference, this means that the broker must explain matters to the client through a modified explanation that dovetails with the client’s knowledge of insurance matters.

Ahead of next week’s article, let’s pose another a case study.

Case study 2

Client A was a fast-growing trendy bakers in London. The broker had acted for them for three years. A fire occurred and their business was destroyed towards the end of their policy year. They were insured for £500,000 gross profit on a turnover of about £5 million, under a combined policy with an indemnity period of 12 months. The client used the gross profit figure in their accounts.

They were able to find alternative premises while their own was rebuilt, but the 12-month indemnity period was substantially inadequate. The client had chosen the 12-month indemnity period as the broker had advised them that the indemnity period would be the maximum time needed to get back into business.

The adjusters claimed that the correct sum insured for gross profit should have been £3 million and average was applied on a £2 million gross profit claim which was exaggerated by their rapid expansion.

The broker was sued for the losses incurred by virtue of the inadequate insurance.

Consider what the broker might have done to avoid the claim that they had failed to discharge their duty of care?