A Broker’s Duty of Care – Meeting Clients’ Demands and Needs

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.

Week 5 already….wow…time flies when you are enjoying yourself!

Let us recap the series so far.

The purpose of this series on customer care is not to force feed the reader with answers but to stimulate the process of thinking about things as the duty relates to you, your firm, and your own clients.

A key point is that PI Risk Management (PIRM) is one of the best starting points for discharging your duty of care to clients. If a client has no reason to blame you for something that goes wrong, it is a major step.

A claim not paid in full, legal insurance requirements not covered, contractual insurance requirements not covered, too much paid for insurance: if the client can make an informed and reasonable choice to avoid any of these occurring, then this is a key starting point to being a professional adviser that wants to prevent anything going wrong that is not the choice of the client.

So let us look at how clients can be the author of their own loss:

• A client who knows about the application of average but chooses to under-insure
• A client who chooses a 12-month indemnity period but knows it should be longer
• A client who knows the property is owned by the pension fund but chooses not to mention the interest to the insurer
• A client who chooses not to pay their accountant to calculate the Gross Profit sum insured accurately

And so on.

It can be concluded from over 300 expert reports, that most claims could have arisen from a client cutting corners (mainly cost), but that is not a good defence if you have no evidence to support the proposition. It is up to the broker to make certain notes in dealings with every client.

• What is the insurance knowledge of the client (use the GFSC Codec perhaps)?
• Did the client specifically put cost at the top of the demands list?
• When and how did you explain significant and onerous conditions and their effect?

And so on.

Remember, if you know or have suspicions that a client is not insuring properly to meet their Demands and Needs, you should tell them in writing. You should also inform them how to do things correctly so that cover is suitable, and perhaps, even consider whether you should refuse to act for the client if their actions are wilful and or reckless.

For example, many claimants claim that they believe property insurance is on a first loss basis: it is logical to them that they choose how much to insure for and just pay the appropriate premium. It is up to you to take reasonable steps so that they understand that they must insure for the full replacement cost. If, having done that, the client refuses to insure properly, consider that you may have a responsibility to notify insurers.

Possible Answers to Case Study 4

Last week, we posed the following case study:

The first point we want you to consider is that it was a family insurance broking business (about £4 million brokerage) operating as a partnership.

The broker advised a fire alarm business (a limited company with 2 directors) who installed fire alarms in a commercial premises and was in breach of the service contract, when there was a £10 million fire.

The Trustee in Bankruptcy sued the Insurance Broker for failing to recommend (or even discuss) one form of insurance with the client.

We asked, what insurance policy a Trustee in Bankruptcy might have expected the insurance broker to have explained to the client? The answer is: Directors and Officers Liability insurance.

In the event of liquidation of a limited company, there is often little or no assets for the Trustee (the shareholders) to go after, following, for example, recklessness or negligence by the directors of the company. If there is such insurance cover, then there will be assets to go after.

We don’t know if such an argument will hold up in the Court, but it does seem to us that there is a chance of litigation on the point. As such, the insurance broker perhaps has a duty to cover the issue, by recommending that the client effects D&O cover.

However, it is not the only answer. The case study was designed to get you thinking about how a Trustee in Bankruptcy might have a line of action through to the insurance broker, for not having addressed the clients Demands and Needs properly. Did you come up with any other answers?

Note that the duty only extends to putting the client in an informed position to make a choice, but as with many other covers, it seems to us that no broker should be shy about promoting more insurance to any commercial client.

The other point in this case was that the insurance Brokerage was a family partnership with no limit of liability. It is worth remembering that a claimant solicitor will be focusing on the possibility of cash or assets to pay any claim. In the case of a broker with limited liability, it is likely to be the limit of indemnity of an insurance policy but in the case of a partnership, it could be all the partners’ assets. Be warned and take some professional advice if you are in that position.

Things to Consider

There is no case study this week but we want you to revisit the first 4 articles and start to consider your own thoughts, opinions, and arguments about what we have said. Chat about them with colleagues and see if you can come to a body of opinion amongst yourselves.

• Do you agree with our opinion?
• Do you disagree?
• Do you have an opinion to add?

Remember, an amateur does something until they can get it right. A professional does something until they cannot get it wrong.

You cannot reach a professional standard without having your own opinion. What we are trying to do with this series is give you the tools to work things out for yourselves, so that when a new set of circumstances arises you can work through it and identify the PI pressure points.

In other words, “can you identify the points where your client might be at risk and suitable insurance solutions or actions to release the pressure?”.

As an example, only a handful of brokers know the true definition of an indemnity period. Were you one of them, or like many insurance brokers, did you believe that the indemnity period was the time needed to get back into business?

In week 6, we are going to look at how a duty to inform a client can be discharged by a well-constructed and firm-specific glossary.

Have Your Say

Let us be clear, that we have expressed informed opinions in this series of articles, but judging from responses so far, you, the brokers, have your own ideas about things said, so let us hear about them. (ruylopezuk@btopenworld.com and roger.franklin@edwincoe.com).

Expert and legal opinion is not empirical and even where there are judgements given, these are only a snapshot of what actually went on in Court. In the case of actions that did not reach Court (95%), you hear nothing at all of what went on and the arguments offered and exchanged.

One of the most useful events is the private meeting between two Experts. Bearing in mind that both Experts (and sometimes more than 2) are no more than very experienced insurance brokers, there is no reason why you, the reader, should not have valuable input to give on the points raised. So, let us hear from you. Be sure that you will rarely hear what exchanges took place in a meeting of Experts, so why don’t you join the debate? We can learn much from a challenge.

It is important to realise that the Courts are seeking an opinion on what the body of peer practitioners would regard as reasonable practice. This is often more important evidence than regulations or codes of conduct.