A Broker’s Duty of Care – Highlighting Significant or Onerous Terms

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.

Over the last 5 weeks, we have looked at the duty of customer care and how making reasonably sure that the client can make an informed decision about the insurance you are recommending, is a mainstay of an insurance broker discharging their duty of care to a client.

Think of it this way: if a claim is rejected or reduced, or the client is found to be not insured for some risk, then they should not be surprised because they were informed that this might be the case.

It is no good just sending the client the policy or other formal documents if significant or onerous terms and conditions are difficult to find or are in a language that a layman might not understand.

Contrary to common belief, commercial clients are not expected to read and understand 50 to 100 pages of formal documents - which is the typical length of a modern insurance policy. It is your job to reasonably ensure the cover is suitable and that the client knows when it is not suitable.

Clients are also not expected to know and understand their responsibilities without some explanation.

In the Café de Lecq case, the argument of the Defence was that the duty of giving information for a distant sale was less than where the broker visited the client and the insured premises. The Court did not accept this argument.

In another reported case, one of our favourite experts, Tom Mcgrath argued that some commercial clients were more informed than others and that not all clients needed everything explained at every renewal. This was an argument that won the day with that judge (and softened the requirements of Environcom). In the Eurokey case, it led the Judge to question the lack of a Codec for the knowledge of clients in the general insurance market, which existed in the financial services market. This in turn, led to the GFSC approving such a Codec for their Code of Conduct, namely: insurance layman, insurance experienced layman, insurance sophisticated, and insurance peer practitioner.

The Franklin Wood insurance glossary is something that we have promoted for a decade or more, and is a method of informing all clients in a manner that breaks away from the rather stiff explanations one finds in policy documents or industry dictionaries.

One can use a template but in principle, each broking firm should design their own glossary for their own clients. Here are 6 steps to follow:

1. Decide what you are going to put in your glossary. Typically, this will be significant or onerous conditions which could:

• Lead to a claim being rejected or reduced
• Create a duty or responsibility for the client which could lead to a. above if not complied with
• Require the client to insurer something (contractual or legal)
• Lead to the client being uninsured or underinsured

2. Decide on your audience and the language you wish to use to inform them. Legal documents need to be in English and quite “stiff” in the language used, but making sure your clients understand the effect the wordings have on them, does allow some flexibility. You may also have clients or groups of clients where English is not their first language and you must decide whether your communications should involve another language, as well as English. You might also need to consider whether your approach might be different in various parts of the country or with certain professions and trades. In particular, you might consider whether the examples you give are relevant to your clients.

3. Build a bank of examples and then tailor them so that your clients are most likely to associate with them. Please feel free to use any examples we give of the cases we work on. If they are not Reported Cases, they will be doctored in any event! For example: if most of your clients are in the farming community then don’t give them a case happening in a shop. One of the famous underinsurance cases is a delivery man who fell into an unsafe lift shaft in a retail premises. The same would apply to a stack of bales falling on a delivery man visiting a farm. In other words, design the circumstances to fit the client. Also, think about the geographic location of your clients. If they are mainly in Manchester, then use local references. Dialect or colloquialisms is a matter for you, but it may be relevant.

Think also about trade customs in the client’s area. Does the language of the London Underwriter mean the same in say Leeds or Glasgow. A good example is the use of the word “disco”. To most underwriters it meant some sort of event for youngsters with the associated risk. In the case we acted on, “disco” in the dance halls of the north, was just about any dance night, with music from the 1950’s on. A dance hall burnt down on a night when 50- to 70-year-old ravers were revisiting their youth. It was described as a “60’s discos night”. A little meanly, in our view, the insurers decided to reject the substantial claim. Fortunately, the Court agreed with us, and the insurer backed down and paid. But the broker, with a duty of care, should have known that a disco night in Yorkshire was not what the underwriter had intended to exclude and addressed the ambiguity. Interestingly, the broker lived locally and had actually been to a “60’s” Disco night himself! He knew what the underwriter had intended by the exclusion but did not discharge his duty of care to the client; to emphasise and explain the terms used. We can tell you it was more than amusing to sit in a room with 3 other experts debating the meaning of “Disco” as the underwriter had intended. The fact that one of the experts had never been north of the Watford Gap, let alone knew the vagaries of Northern Soul and the passion for dancing there, did not help.

4. Decide a visual code for highlighting significant and onerous terms. Once your clients get used to certain symbols or styles, they will begin to take more note of warnings if you use them. We have a particular passion for a skull and crossbones in the margin (used sparingly) but firms and insurers we advise, have tended to choose red warning triangles. Whichever you use, they should make the warning or explanation stand out. Using a different font should also help you draw attention to something.

5. Keep significant and onerous conditions and explanations in one place. Many insurers have taken our advice on this, and you will now usually find significant and onerous conditions in one place in a policy document, often toward the beginning rather than the end. If one keeps the significant and onerous conditions in one place (a glossary) it is easier to direct the client to it, and to demonstrate to the court that you took reasonable steps to ensure the client could easily find it.

6. Emphasise to the client where to find the glossary and the importance of reading it. This has been a thorny debate for years. Angela Darling at the GISC was the first expert to address the issue by stating that significant and onerous conditions should be on the front page of a renewal or inception letter and emphasised in bold and/or in a different type face. The trouble is that there are so many significant and onerous conditions that the first page fills up pretty quickly and brokers were having to limit themselves to one or two warnings about, say, warranties or the duty of disclosure. So, the idea of the glossary was devised and in the manner that the GISC suggested, the client was directed to the glossary in no uncertain terms. Unfortunately, the defence of the client became that this letter was sent with 100 pages of information, and they just put it to one side. It wasn’t until the judge in the Café De Lecq case had a Eureka moment, that the scene was set for a solution that the client would find difficult to refute.

As the judge waved the document in the air, it became clear that something earth shattering had been discovered and yet, it was so simple.

The document the judge was waving was the correspondence from the broker asking for the premium to be paid. He made the point that if the premium had been paid then the client had obviously seen and read that page, and that it was, perhaps, that page which should contain a clear and simple direction to the glossary of significant terms.

Who knows? It sounds like the best solution yet. The horse is dragged to the water, and one hopes that if they do not bother to drink now, the Courts will support the insurance broker.

So, that is the 6 steps to starting your glossary. Next week, we will discuss ideas and provide some good examples of how not to do it.

We would wager that you never expected it would take 7 weeks to open up the subject of giving clients information, but if you have planned your study, you should have 5 to 7 hours of structured CPD by the end of next week.

We then start on the second limb of discharging the duty of care and that is: gathering information.