A Broker’s Duty of Care – Treating Customers Fairly

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.

Last week, we posed the following case study:

ABC Brokers work in the Glens of Scotland and insures local pubs. They place their business with XYZ wholesale brokers in London who specialise in policies for small, licensed premises.

Over a period of a few years, ABC present a number of modest claims where locals have held a Friday night drink and dance session and customers have fallen and claimed for injury.

Underwriters at Lloyds have become concerned about the trend and feel that the best way to deal with the issue is to exclude slip and trip claims on nights when the venue is being used for dancing.

This is added to the policy at renewal and XYZ send the new policy wording to ABC.

Of course, a slip and trip claim arises in the new policy year and XYZ advises the retail broker that the claim will not be paid as the loss has been excluded at renewal.

Clearly, the client (the pub) has not been advised of the change and someone will have to pay the claim.

We asked you to consider who was responsible for paying the claim, and if the rules on Client understanding extend to the relationship between separate brokers in the distribution chain, from underwriter to client?

Some thoughts for you.

There is a tendency to assume that all brokers are peer practitioners, but is this really the case when a specialist broker is dealing with a non-specialist?

In the case in question, we think that if the retail broker relied on the wholesale broker for specialist knowledge, then XYZ should probably have regarded ABC retail broker as only a sophisticated client and not a peer practitioner. As such, XYZ has a duty of care to ABC and should have made sure that they knew about the Slip and Trip exclusion being added.

If it had been addressed in a letter to the retail broker at renewal, then particularly as there had been a history of claims, this might have done the trick. What actually happened was that the wholesale broker simply added the exclusion to a long list of other matters at renewal (hidden on page 9), and the retail broker did not pick up on it and advise their clients. So they, as laymen, were not informed.

Of course, there is no strict answer until something like this is decided by the Courts, but the learning point is that not all brokers are naturally peer practitioners.

Treating Customers Fairly

This almost seems like history bringing up this old War Horse from nearly 20 years ago, but it has great relevance in the definition of a duty of care.

A good reason for its importance is that TCF is a mantra of the FCA, a Statutory Authority (and it can be sited as evidence in a case of negligence against an insurance broker). However, the reason for our interest, is that it is actually a very good set of standards to refer to when planning your PI Risk Management.

Let us Remind Ourselves:

The FCA has defined six consumer outcomes, which explain what it wants TCF to achieve for consumers.

Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

When you read these again you can see that they remain the foundation of modern regulation.

The TCF Outcomes are a good, relevant framework for analysing the duty of care and will often be quoted by an expert reporting to the court on any case.

Let us have a look at Outcome 5 in relation to our ongoing discussion about explaining matters to a client.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect.

Read this carefully a few times until it is clear in your mind that the duty of care is to inform clients what to expect from the insurance arrangements you have recommended.

Assume that, unless you have reason to suspect otherwise, they will expect the insurance to meet claims in full and cover their legal and contractual obligations.

If we can assess the insurance knowledge of a client, then the next step is to make a list of every way their expectations might not be met.

1. Claims not being met in full.

We need to make a list of reasons why insurers do not pay a claim in full. We can do this individually or “the firm” can make a list and publish it on a regular basis to staff.

• Under insurance generally
• Application of Average
• Failure to make a fair presentation of the risk, including failure to disclose moral hazard (past claims, financial history, convictions, and other judgements on character)
• Failure to make a reasonable search
• Lack of insurable interest
• Claim not covered by policy (date, scope, premises etc)
• Claim not insured at all.
• Fraud or illegality

If we are to discharge our duty of care, then the client must be in a position to expect that a claim will not be paid in full or at all, for any of the above reasons and more, when it occurs. This normally means that the client has not followed the broker’s advice or recommendation.

We will spend a few weeks on this subject of helping a client to make an informed decision, but the following case study is both real and fascinating with a number of learning points.

Case Study 4

The first point I want you to consider is that it was a family insurance broking business (about £4 million brokerage) operating as a partnership. Give some thought to this in relation to the claim against them and we will discuss further next week.

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…What was it and how could the broker have escaped being found negligent?

The moral of this story is that PI Risk Management can be good for new business!