Gone are the days when insurance brokers could simply pass information between insurer and their insured assuming little responsibility for the accuracy of that information. Over the last decade the duties placed on insurance brokers have developed and expanded so that, more than ever, it pays for those seeking insurance for their businesses to be familiar with the duties placed on insurance brokers particularly in circumstances where a claim is rejected by the insurer.
A broker’s duty
The positive duties placed on insurance brokers can be gleamed from the FSA Insurance Conduct of Business Rules. The recent case of Nicholas G Jones v (1) Environcom Limited (2) Environcom England Limited and MS PLC T/A Miles Smith Insurance Brokers  EWHC 759 (Comm) summarised the scope of a broker’s duty in both placing and renewing insurance cover in particular as regards disclosure of circumstances that may lead to a policy being avoided. In summary a broker must:
- Advise the client of the duty to disclose all material circumstances;
- Explain the consequences of failing to do so;
- Indicate the sort of matters that should be disclosed as being material (or at least arguably material);
- Take reasonable care to elicit matters which ought to be disclosed but which the client might not think necessary to mention.
The key requirement is that a broker should take reasonable steps to ensure that the proposed policy is suitable for the client’s needs.
The duties in relation to disclosure are thorough as the broker is more familiar with the definition of what is ‘material’ and the consequences of failing to disclose all material matters on an insurer’s willingness to pay a claim.
The Court Judgment
In the Environcom case the broker negligently failed to advise their client of the client’s disclosure obligations and was lucky to avoid liability due to failings within the clients own procedures and practices. The court considered that the broker had fallen down in several respects:
- Over-reliance on standard form documentation
The broker had failed to make oral or written exchanges on the topic of disclosure to ensure that the client properly understood what was expected of them by the insurer. The broker should meet with their client or discuss in detail the duty to disclose and allow the client the opportunity to raise any queries.
- Assumptions had been made that the client knew which matters to disclose
The broker should not assume that the relevant client personnel will know what constitutes a material matter requiring disclosure and in the Environcom case the broker’s argument that it was obvious that an outbreak of fire was material was rejected. The broker should make it clear which matters that may occur will affect the risk and will therefore be material.
Where there has been a change of personnel at the client company the broker should ensure that the incoming personnel have the requisite knowledge about the disclosure process and obligations.
- The broker failed to make client specific enquiries that were tailor made to the client’s practices and procedures
Whilst the court stated that the broker is only expected to comprehend the general industrial process in place at the insured, the broker must visit the site and carry out site inspections so that questions are asked regarding materials and equipment.
The scope of brokers’ duties continues to develop and clients should be aware that insurance brokers are more than just a gateway to insurers. The broker has duties that if they fail to discharge could make them liable to a professional negligence claim if the client suffers loss as a result.
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.