11/05/2015
In Part One of this series on Insurance Broker Negligence, we discussed the duties owed by an insurance broker to their clients, the insurer and their parties. In Part Two, we will be examining the standard of care required by an insurance broker when exercising his or her duties.
To do this, we will examine the standards set out by the judiciary in case law, and also the requirements of the Financial Conduct Authority (FCA) who have been regulating insurance brokers since 2005.
The General Standard of Care Required by an Insurance Broker
The relationship between an insurance broker and his or her client is governed by a written agreement (which is ideally checked by a legal professional before it is signed). In Youell v Bland Welch & Co Ltd (No 2) (The "Superhulls Cover" case) [1990] 2 Lloyd's Rep 431, Philips J gave guidance as to the standard of care considered reasonable by the Court. His expectations were as follows:
- An insurance broker must ascertain his or her client’s needs by instruction or otherwise;
- They must use reasonable care and skill to obtain for the client the cover they ask for, either expressly or impliedly; and
- If they cannot obtain the cover the client requires, then they must explain why and seek alternative instructions
If an insurance broker fails to comply with instructions given by their client this is seen as a breach of absolute duty and the courts have made a distinction between these type of breaches and the failure to reach a certain standard of care.
The courts have also made clear that an insurance broker has a duty not only to advise on matters covered by the written agreement, but also issues that may appear after the talking with the client, which may not have been part of the original brief (Harvest Trucking & Co Ltd v PB Davies T/A PB Davies Insurance Services [1991] 2 Lloyd’s Rep 638).
A clear example of where a broker failed to provide a reasonable standard of care when exercising his duties is illustrated in the case of Strong and Pearl v S Allison & Co Ltd (1926) 25 L1 L Rep 504. In this case the insurance broker failed to provide cover for a yacht to be moved (although he had organised cover whilst the yacht was berthed in order to be repaired), even though the owners had informed him they planned to move the vessel.
Insurance Brokers and the Financial Conduct Authority Requirements
As well as acting with reasonable care and skill under common law, all insurance brokers and intermediaries must also abide by the Financial Services Authority (FSA) Handbook, which includes the Insurance Conduct of Business Sourcebook (ICOBS).
Central to the Handbook lie the high-level principles for businesses (PRIN). Particularly relevant for brokers are Principle 8, which provides that "A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client" and Principle 6, which requires firms to treat customers fairly.
The ICOBS sourcebook sets out the rules and guidance governing how insurance brokers (and in some instances insurers also) should conduct their business with commercial customers or prospective commercial customers seeking insurance. It covers a multitude of areas including:
- Providing clear communication to customers around inducements and exclusions of liability
- Following disclosure rules (including disclosure around remuneration where applicable)
- Identifying customer needs and advising competently
- Rights of cancellation
- Claims handling
In 2009 further guidance was drawn up by the British Insurance Brokers' Association (BIBA), the London and International Insurance Brokers’ Association, the Institute of Insurance Brokers and the Association of British Insurers (ABI). This guidance aims to improve the information provided to commercial clients during the sales process. The FSA will take into account whether an insurance broker firm has followed this guidance when exercising its regulatory powers.
The guidance for commercial customers is based on the following principles:
Principle 1 Integrity: a firm must conduct its business with integrity.
Principle 3 Management and control: a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
Principle 6 Customers’ interests: a firm must pay due regard to the interests of its customers and treat them fairly.
Principle 7 Communications with clients: a firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.
Principle 8 Conflicts of interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.’
The Consumer Insurance (Disclosure and Representations) Act 2012
The Consumer Insurance (Disclosure and Representations) (CIDR) Act 2012 came into force in April 2013 and put the burden onto the insurer (or insurance broker) to ask the right questions to obtain information in order to assess a customer’s risk. In the past, the duty was on the customer to make a full and frank disclosure.
Insurance brokers have commented that these regulations are too complex and difficult to apply. They also have fears that they will be exposed to greater liability of they fail to gather the underwriting information correctly and a claim is subsequently refused.
In Summary
Over the past ten years or so the insurance industry has been subject to more strict controls and regulations, designed to protect the consumer and ensure more payouts. Insurance brokers now face a high standard when it comes to exercising their duty of care, and they are concerned that more regulation will be put in place by The International Association of Insurance Supervisors (IAIS) becoming the main driver of regulatory initiatives for the insurance industry. Although it does not make regulations, the IAIS it does produce standards, guidance papers and reports which set out highly influential principles related to global 'best practice'. The FCA has supported the IAIS’s initiatives, which in turn, is likely to mean that the standards set by the IAIS will be highly considered when it comes to drafting insurance legislation in the future. However, on the flip-side, commercial organisations investing millions of pounds into construction venture may be able to rely on even greater protection in the future when it comes to their insurance policies.
If you have any questions regarding the standard of care required by an insurance broker then please call our London office on 0207 993 6917 to make an appointment.
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.