A Broker's Duty Of Care: Case Studies

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.

If you consider that we have acted on over 300 cases between us over 30 years, there is of course a vein of experience we can tap into which is based upon everyday scenarios.

So, think very carefully about what you have learned over the last 4 months and consider whether you are more competent to spot the issues which might threaten your client.

That is a key part of your job and how to discharge your duty of care. Can you now spot the pinch points of risk to your client which ultimately can turn into PI claims against you and your firm?

Is it Material?

Last week’s case was about a hotel owner on the South Coast whose property burnt down for the second time in 5 years and the underwriters had rejected a substantial second claim on the basis of non-disclosure. The first fire was caused by a kitchen fire and the owner had rebuilt the restaurant without a restaurant and kitchen. He had not disclosed this information and the underwriter claimed this was material and repudiated the claim and the policy.

When the details were presented to us the flaw in the insurer’s argument was obvious. Can you spot it?

Following the repudiation by the insurer, the client, working on the basis that the fact not disclosed was arguably material, sued the Broker for not having given them sufficient guidance to disclose the fact. The brokers defended themselves robustly, but did you spot the flaw in the underwriters repudiation?

Interestingly, it is far more likely that a qualified broker will have spotted this because they would have had to have learned the subject in detail for their exams. This is not an advertisement for Chartered Status, but about the learning and assessment process.

The answer lies in the duty to make a fair presentation and the rule that a fact cannot be material to the underwriter if it lessens the risk.

In this case, a key factor was obviously the existence of a kitchen which had caught fire before and the underwriter’s assumption that on reinstatement after the first fire the kitchen had been rebuilt and recommissioned. The fact is that the owner had been so devasted by the first fire he had decided to lessen the risk by not incorporating a kitchen in the refurbished premises.

Clearly, everyone was somewhat embarrassed by the legal and expert opinion and the broker and the client went away happy but for some pretty expensive costs to that date.

If the insurer’s agent is aware of a fact, is the insurer deemed to be aware of it also?

This case also introduced another raft of thinking which is how diligent does an insurance agent or surveyor have to be in spotting facts which might be material. Most brokers we meet seem to have the view that the duty of the insurer’s agents to an insurer is quite clear.

For example in our case study, the loss adjuster was fully aware that the kitchen had been excluded after the previous fire as they approved the settlement and an insurance survey will have been undertaken when the building was completed. The truth is that both the adjuster and the surveyor probably knew full well that there was no need to tell the actual underwriter but is the fact they know, knowledge that can be implied to the insurer?

As a matter of law, the underwriter actually knows whatever is known to any individual who participates in the underwriting decision in respect of the specific risk in question, including the insurer’s agent (such as a coverholder). As with the insured, this includes blind-eye knowledge.  

The underwriter  “ought to know” something (i.e. constructive knowledge) only if (i) an employee or agent of the insurer (such as a surveyor, or medical examiner) knows it, and ought reasonably to have passed it on to the individual(s) responsible for the underwriting decision; or (ii) if the information is held by the insurer, and is readily available to the individual(s) responsible for the underwriting decision.

The learning point here is do not assume anything other than that the underwriter is expected to know facts and processes which will be typical to the trade of your client and not much more.

In a very famous case, the client used a heat process on one of the recycling lines. This was not disclosed in writing by the insured or the broker. The insurer claimed that the use of this process was material and repudiated the claim. The insured claimed the process was standard in their industry and in any event several of the insurer’s agents had visited the premises and witnessed the process first hand.

It was indeed an astonishing and undisputed fact that a number of different parties had visited the insured premises (broker, insurance surveyor, health and safety and so on) and not one of them admitted to having noticed the heating process being used?

One has to consider that the client actually would have had to hide the process from everyone for these claims to be credible. That all seemed possible until the client pointed out that they had tried to claim for damage to one of the tools used in the process some months prior to the fire in question.

A very complex and expensive insurance case could have been avoided if everyone had not assumed that everyone else knew what was going on without a word being said to anyone.

So, the learning point is, never take anything for granted when it comes to considering whether a fact is known by the underwriter.

Start to take ownership of your duty of care and if you feel a question should be asked then ask it, even if it does not appear on the insurer’s information gathering forms or your own firm’s forms.

Do not leave information on your file for someone else to deal with. It could be a time-bomb waiting to explode. Send it to the underwriter and if the insurer ever tells you not to send through so much information, make sure you have that request on file!  The Insurance Act 2015 provides that the insured is required to give disclosure in a manner which would be reasonably clear and accessible to a prudent insurer.  This was intended to avoid data dumps, but not the disclosure of potentially material facts which may or may not be of interest.

Also be desperately careful about email trails. We have said this before, but it is worth repeating that unless you have a system that easily enables you to access relevant email strings, the risk of missing a trail that discloses something material is ever present. It is one of the commonest faults we see. Alternatively, get used to forwarding critical disclosure information from the client to the insurer immediately you receive it.

Circumstances that might give rise to a claim

Consider also the less than astounding events that insurers consider material. This was never an issue until one of the major cases hit the news. We refer of course to events or circumstances which might have given rise to a claim. Typically, this will be a number of recurring events which have never come to anything in the past but might do.

Here are examples of cases where underwriters have tried this approach.

• A large commercial estate with a good number of small water damage claims
• A snooker hall with a number of unsuccessful break ins (mainly kids)
• A recycling plant with minor ignition (snuffed out in seconds) in a heating process
• Anywhere with a history of small fires.
• Personal injury cases where no claim was made
• Any situation where the client chooses to pay a loss rather than make a claim

Some insurers are now specifically asking for circumstances which might have given rise to a claim and it is vital that the broker asks the question and explains to the client why they should go on enquiry to establish whether such events have occurred whether the insurer asks the question or not and what might happen if they do not disclose (the effect).

Does this Mean More Work?

Yes of course it does, both in terms of the additional learning required and the greater level of care that is needed but if it means the client gets the claim paid in full, it is worth it.

Insurable Interest

Next week we are going to look at the subject of insurable interest. A classic example is of the directors’ pension fund owning the building the client operates from and the property being insured in the name of the firm not the pension fund. Historically insurers have worked on the basis that if the lack of insurable interest is unintended and the risk is not much different, they will simply press on as if it existed. There is case law to support them waiving their right to repudiate the claim..

But over the last 30 years, we have witnessed cases of insurers being quite harsh on the point. They have a right to repudiate so why should shareholders and capacity providers not expect them to act in their best interests?