The recent case of Eurokey Recycling Limited –v- Giles Insurance Brokers Ltd (2014) highlights a number of issues about a broker’s duties which in this case arose from Eurokey being grossly underinsured for losses to its stock, machinery and under its business interruption cover. The case highlighted the following principles that apply to business interruption insurance:
- The broker is not expected to calculate either the sum to be insured or choose the correct indemnity period. However, the broker must provide a sufficient explanation of how the cover works for the client to do so. This is important because of differences between how insurers define and calculate “estimated gross profit” in a way that is very different from what the commercial client might understand gross profit to mean from its accounts and normal business practices.
- The broker will need to take reasonable steps to understand the nature of the client’s business and its insurance needs. This could impact on assisting the client to properly gauge how long is needed for the “maximum indemnity period” for the business interruption cover. Clients tend to underestimate how long it will take, not only to get the business running again after e.g a fire, but how long it will take to get turnover and profit back to former levels.
- The nature and scope of the broker’s obligation to assess a commercial client’s business interruption insurance needs will depend upon the sophistication of the client. This can vary widely amongst small and medium enterprises.
- The client might not need annual repetition of advice previously given and understood assuming that there is a proper record of that earlier advice and the personnel at the client responsible for dealing with the insurance remain the same.
- If a client who appears well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe it is inaccurate.
Eurokey were ultimately unsuccessful in their claim as the judge preferred the broker’s evidence on the whole, but the issues to be alive to for both brokers and clients are ensuring that the sum covered is adequate for the client’s needs and that the policy terms and cover duration properly take into account the likely impact on the business if it suffers a business interruption. By working together there will be less scope for the insurance company to use technicalities to reduce what it pays out or avoid liability altogether.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.