07/05/2015
An insurance broker's duty of care extends further than merely the duty owed to their client. In the first part of this series on Insurance Broker Negligence, we will examine the duty a broker owes to the following:
The Duty of Care Owed by an Insurance Broker to their Client
Contract and Tort
An insurance broker owes a duty to their client in the law of contract, tort and equity. If there is a contract between the insured and their insurance broker, then section 13 of the Supply of Goods and Services Act 1982 provides an implied term that the service provided by the broker must be carried out with reasonable care and skill. These implied duties can be limited but only ‘where is reasonable to do so’, (section 2(2) of the Unfair Contract Terms Act 1977).
The case of Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd's Rep 431 held that in cases where the insured is the broker's client, a duty in both tort and contract is held concurrently. Therefore, the insured party can bring an action under either area of law.
Equity
In order to avoid the limitation restrictions that apply to claims made in contract and tort, under certain circumstances claimants can make a claim under the law of equity, by arguing that an insurance broker has breached the fiduciary duty he or she owed to them.
In order to establish that an insurance broker owes their client a fiduciary duty, a situation of trust and confidence must have developed between them. The principal touchstone appears to be the existence of an obligation of loyalty, although whether or not there is a fiduciary relationship between the parties will turn on the facts of the case.
However, in the case of Bristol and West Building Society v Mothew [1998] Ch 1Lord Millett stated that duties to act with reasonable care were not fiduciary duties.
The Duty of Care Owed by an Insurance Broker to an Insured Party who is not their Client
If an insurance broker is acting as a sub-broker, they can owe duties in both contract and tort to the insured party if they imply, by their actions, that they are taking on a personal responsibility on behalf of the insured. This is illustrated in the case of Pangood Ltd v Barclay Brown & Co Ltd [1999] Lloyd’s Rep IR 405, where it was held that by obtaining a quotation and effecting insurance in accordance with the terms of that quotation, a sub- broker did not assume a direct responsibility to the broker's principal.
The Duty of Care Owed by an Insurance Broker to the Insurer
The relationship between an insurance broker and an insurer is generally governed by the Terms of Business Agreement. This agreement will detail any warranties and indemnities between the agent and insurer (including following the standards set out by the FCA). A duty is owed in contract, tort and equity as well as in statute.
Under section 19 of the Maritime Insurance Act 1906, an insurance broker must disclosure to the insurer.
‘(a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and
(b) Every material circumstance which the assured is bound to disclose, unless it comes to his knowledge too late to communicate it to the agent.'
In the case of Nicholas G Jones v (1) Environcom Limited (2) Environcom England Limited and MS PLC t/a Miles Smith Insurance Brokers [2010] EWHC 759 (Comm), Mr Justice David Steel set out solid guidelines as to the scope of an insurance broker's duties. These guidelines included the extent of enquiries that a broker needs to make when interviewing a client in order to satisfy their disclosure requirements to an insurer. Steel J stated "... where an inappropriate and incomplete explanation is afforded to the client as to his obligations, it follows that there is a higher standard of care on the part of the broker in eliciting arguably material information for disclosure."
An insurance broker must be satisfied that the duty of disclosure is fully understood by the client. It is insufficient for an insurance broker to rely on written standard form explanations provided to the insured.
The Duty of Care Owed by an Insurance Broker to Third Parties
An insurance broker may owe a duty to third parties; however, this will depend on whether the third party was in close enough proximity that the loss could be deemed as reasonably foreseeable.
Intended beneficiaries of the insurance policy may also be owed a duty by the broker, even if they are not parties to the policy contract itself. The case of BP plc v AON Ltd [2006] EWHC 424 (Comm), [2006] 1 All ER (Comm) 789, Mr Justice Colman found that AON London owed the claimant a duty of care as a sub-broker, even though no contractual relationship existed between them (the contract was between BP and AON Texas). A chain of contracts between the sub-broker and insured will not automatically exclude the existence of a tortious duty owed by the sub-broker.
In Summary
The duty of an insurance broker to take reasonable care extends far beyond simply ensuring his or her client understands that they must disclose all relevant information. It is, therefore, prudent for brokers to take active steps to ensure they are not inadvertently taking on an assumption of responsibility via their actions.
However, from the insurer or insured perspective, in situations where millions of pounds may be lost due to the negligence of an insurance broker, it is a comfort to know that the courts are prepared to extend the scope of a broker’s duties in appropriate circumstances.
If you would like to find out more information regarding insurance brokers negligence then please phone our London office on 0207 993 6960 to make an appointment.
In Part 2 of this series, we will be discussing the standard of care owed by insurance brokers to various parties.
Fisher Scoggins Waters is a leading construction, engineering and manufacturing litigation firm, specialising in disputes and disasters. For further information on this article or any of our litigation services, please contact us on +44 (0) 207 993 6960.