A Broker’s Duty of Care – Creating a Glossary of Insurance Terms and Practices

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.

So, at week 7, we eventually consider how you might word your glossary and what you might put in it.

The decision is yours, but you might want to put some defensive wording at the start, i.e., “this glossary is offered as assistance, but is not intended to replace direct advice from us on the terms of your specific policy.”

Start by considering how you want to identify the worst terms and conditions.

• Skull and crossbones: our favourite
• Red warning triangle: a little more subtle but seems to work
• Different Type Face
• Bright colour or bold
• Etc

In this context, it is worth bearing in mind that the glossary is an opportunity to convey concepts in terms the client might better understand.  Therefore, there is little point in repeating the legal language contained in the policy wording, if the purpose of the glossary is to explain that more formal language. 

Name your Glossary appropriately. Say, “Nasty Insurance Terms that might stop a claim being paid in full - PLEASE READ”.

Here are some bloopers from some of our past cases:

• A broker used a different font and colour (grey) but none could really see it as it didn’t stand out
• A broker put the glossary on the back of the terms of business. This didn’t work because the client copied the document to circulate and only copied one side.
• A broker used the terms of business agreement to include some significant and onerous terms: the TOBA is the place to define your duty not to discharge it.
• A broker sent a glossary to the same individual but at a different insured business. Nothing was sent to the business with the claim. You must send the glossary to every business.

Your Glossary is to help clients understand when a claim might not be paid in full, and why or how they might not be insured suitably.

For Example: “Your property insurance is mainly on a replacement or reinstatement basis, so it is important that your sum insured reflects this. You may need to obtain a professional valuation to get an accurate figure, which should also include certain factors (for example, inflation).  Your insurance broker cannot offer a valuation service, but we can refer you to someone who can and will advise you on how to correctly calculate the sum insured, so please ask us.

If you do not insure for the full amount, the policy may be subject to an average calculation. So, any claim will be reduced by the amount of underinsurance.

So, for example: if the reinstatement value of your premises is £2 million and your sum insured is only £1 million, a claim will be reduced by 50%.”

For Example: “When your business is interrupted by an insured peril (say fire), you are covered for a period which should be sufficient to allow you to get back into business and to the level of business and profits you would have enjoyed if a loss had not occurred (the indemnity period). This would cover, cleaning up, refurbishing, getting back into business, winning back clients, and growing to the level you would have been had the fire not occurred. Consider also that a loss might occur on the last day of your policy year.

So, allowing for all the barriers that might be put in your way, you should consider 24 months as a minimum and we will obtain quotes for longer periods on request.

If you can find alternative premises, the period might be shorter, but always remember that if there is underinsurance on business interruption, it is the owner’s dividends and profit share which is typically the first to suffer.”

For Example: “When your business is affected by an insurable event, your net profit and your fixed costs (those which continue even though you are not fully trading) can be insured while you are not trading at the level you would have been had the loss not occurred.

This is referred to as your insurable gross profit, and whilst your accountant might help you to calculate the sum insured, be warned, it is not the same as the Gross profit in your accounts. If you are underinsured, any loss will be reduced in the same ratio as the level of underinsurance.

Remember that you will have to project forward to match your indemnity period. “

For Example: “Moral Hazard. The starting point for any underwriter is that the risk you present is normal for a given trade and geographical area. Risks the insurer cannot see are called moral hazards and will include: Past claims, criminal convictions and censure generally, poor financial history of all directors and those in managerial positions, a poor safety at work record, and so on.

You have a responsibility to make reasonable enquiries of the principals and directors and senior management of the firm. Here are some examples that have caught out clients in the past:

• Past Claims to include personal claims if your business is a partnership
• Criminal investigations not just convictions
• Police Investigations
• Insolvency, voluntary or otherwise/bankruptcy/CCJ’s/Tax investigations/HASAW censure and investigations”

For Example: “Physical Hazard. Anything which might increase the risk of physical damage to property, even if the real concern is the consequent financial loss that results. The insurer is presumed to know things which are common knowledge. The insurer is also presumed to know the things which an insurer offering insurance of the class in question would reasonably be expected to know. However, there may be risks unique to you:

• Unusual processes
• Unusual shift patterns
• New and novel sector risks
• Geographical risks
• The increased risk represented by a neighbouring business”

For Example: “The Duty of Fair Presentation: You have a legal duty to disclose facts which fall into either of the above categories. This extends to such information that should have been revealed by a reasonable search of information available to you. This will include your professional advisers and staff or consultants with a supervisory role.

For Example: “Breaches of policy terms and conditions. If you breach a term or condition in your policy and that affects the amount of a loss, then it is likely that the insurer will have a right to reduce your claim or refuse it all together. Most significant conditions of this nature are normally common sense (e.g., that if you have an intruder alarm you activate it before vacating the premises) but some of them are more obscure. We have listed all the onerous conditions you are subject to in your schedule, and you would be wise to read them. They must be complied with strictly and if you cannot do this you must tell us.

For Example: “Insurable Interest. If there is anything not owned by you it will not be insured under your policy unless you tell us, and we will advise the insurers. They will then tell us if they are willing to take the risk.”

Remember, it is your firm’s glossary, so this article simply gives you examples to build on. Think about numbering each point so that you can give specific emphasis to the Client.

Remember the adage about “leading a horse to water.” To discharge your duty of care, you want to reasonably ensure that the client can make an informed decision, so do all you reasonably can to lead them to the information.

Please feel free to get in touch with us if you want any help with your glossary.

Next week we will move on to phase 2 of the Duty of Care which is Gathering Information and then we will move on to Phase 3 which is Attaining and Maintaining Competence to do your job.