Insurance broker negligence: what do brokers in the UK need to ask their clients?

In Infinity Reliance v Heath Crawford, a business suffered loss when a warehouse which it used burnt down. Although it had the benefit of business interruption (BI) insurance, it had bought cover on a "sum insured" basis. 

As a result, its premiums were fixed in advance and the insured forecast its insured profit for the period of the policy. As the insured's business grew faster than expected, it was underinsured and was treated as having chosen to self-insure itself in part: so the insurer (legitimately) applied a discount to reflect the underinsurance.

The experts in Infinity Reliance agreed that a reasonable insurance broker would have recommended "declaration linked" cover instead to the insured in this case, since it was company with an unpredictable turnover. 

Under this type of policy, an initial premium is assessed but, at the end of each period of insurance, the actual performance is examined. If the insured had done better than expected, an additional premium is paid (if it has done worse, some of the premium is returned) – but claims are usually paid in full.

What duties do brokers owe?

Insurance brokers must exercise "reasonable skill and care in and about obtaining insurance" on their clients' behalf. As the judge in Infinity Reliance put it, brokers are there to "bridge the gap" between what the client knows about its own business and what the broker knows about cover that is available in the market.

As a result, brokers must take reasonable steps to understand their clients' business and insurance needs and to recommend sufficient cover. These duties apply as much on renewal as when placing insurance for the first time for a client.

What was the issue in Infinity Reliance?

One of the defences run by the insurance broker was that the insured had made it "crystal clear" that it did not want declaration-linked BI cover; that was because the insured wanted premiums fixed in advance.

The judge accepted that a business may prefer to take the risk of underinsurance and have stable premiums: "Those may not be very sensible preferences, but it does not mean that they are not real preferences". Furthermore, a broker must respect a client's informed decision, even if it is a bad one.

But the issue here was that the insured's decision had not been "informed". Here, there had not been a thorough exploration of how the cover placed might affect the insured's future claims. The broker ought to have "hammered home" the risk of underinsurance, that would lead to every claim being reduced, "because it is an aspect of insurance that may not be obvious to the typical client, even an otherwise financially literate one".

Furthermore, even where a preference has been expressed in the past, a reasonable broker must check that it remains a "genuine and informed" preference at renewal.

What was the outcome?

Accordingly, the broker was found to be in breach of its duty. The judge then considered the degree to which the insured itself had been "responsible" for its loss.

Insureds do not generally owe duties of care to themselves. The issue arose recently in Technip Saudi Arabia v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company whether insureds have a duty to act prudently in order to minimise or avoid loss under their policy. An insured has no such duty (in the absence of express wording to the contrary), although it should not prejudice the insurer's rights if there is a potential claim against a third party.

In Infinity Reliance, though, there was reference to earlier case law which has found that, in a broker's negligence case, the question is whether the insured has neglected "what would be prudent in respect of their interests". While that does not mean that insureds should do their brokers' jobs for them, it does mean that if it is only the insureds that can do something – for example, providing figures which only they have – then that must be done properly. Here, the insured had not provided correct figures to the broker. As a result, the judge concluded that the loss recoverable from the broker should therefore be reduced by 20%.

Osborne Clarke comment

The judge highlighted that broker negligence cases are highly fact specific. Nevertheless, it is clear that brokers must ask the right questions when ascertaining their clients' insurance needs. Although sometimes they are instructed only to place a specific type of insurance cover, usually they will be asked, more generally, to recommend suitable insurance to cover risks of a general class. As such, they need to explain to their clients the pros and cons of the different type of insurance cover that is available.