"An insurance broker is retained to arrange house and contents insurance. For one reason or another he fails to do so. Yet he tells his clients he has placed the insurance. They make a small claim on the policy. Unknown to them, the broker pays the claim himself. Then disaster strikes. The clients' house is severely damaged in the September 2010 Canterbury earthquake. The broker says he is not liable for failing to place the insurance. He says the house was not insurable in the first place. That is because one of the clients has convictions for fraud, which led to his previous insurance being cancelled. The broker says these facts had not been disclosed. Had they been, insurance could not have been obtained."
This quotation forms the first paragraph of a recent judgment in the High Court of New Zealand, Marchand v Jackson  NZHC 2893.
The plaintiffs are the trustees of the Marchand Family Trust and owners of a five-hectare farmlet in Tai Tapu, south-west of Christchurch, New Zealand. The farmlet contains a large, modern house with a replacement value probably in excess of NZ$ 1,5 million (approximately ZAR 11 million).
In June 2009 (approximately 14 months before the Christchurch earthquake in September 2010), the plaintiffs retained the defendant, an insurance broker, Mr John Jackson, to arrange house and contents insurance.
The defendant submitted a questionnaire, completed by the plaintiffs, to the insurers, NZI, on 1 July 2009. NZI quoted and provided the defendant with an offer of cover for NZ$ 1,5 million on the house (until a valuation was obtained). The premium was NZ$ 2,215, and the excess NZ$ 500. The defendant negotiated the premium down to NZ$ 2,104 on the strength of his good reputation.
For unknown reasons, the defendant failed to arrange the insurance. No proposal form was completed and no invoice for the premium was submitted.
Despite the fact that the plaintiff knowingly failed to place the cover, he repeatedly assured the defendants that such cover was in place. In fact, in May 2010 Mrs Marchand made a claim for NZ$ 649.20 for a broken pair of spectacles. The defendant then paid the optometrist personally, or ex gratia as he put it.
On 14 September 2010 the plaintiffs' house was severely damaged by the first Christchurch earthquake.
Without informing the plaintiffs, the defendant consequently submitted an application for cover to NZI in October 2010, backdating the application to 30 August 2010 – before the earthquake. He completed the form himself and signed it on behalf of the plaintiffs. Unsurprisingly NZI declined to accept the "risk".
The claim brought against the defendant by the plaintiffs was advanced as a contractual claim in that the defendant had entered into "an ordinary contract of engagement" with the plaintiffs as insurance broker and he breached this duty by failing to procure the insurance.
The defences advanced by Mr Jackson were as follows:
- Firstly, the plaintiffs had not disclosed to him that Dr Marchand had been convicted of fraud and that the plaintiffs had had their prior insurance cancelled. He argued that, had such a disclosure been made, the plaintiffs would have been unable to obtain insurance cover.
- Secondly, if the defendant had obtained cover for the plaintiffs without their disclosure that Dr Marchand had been convicted of fraud, the insurer would have voided the policy for material non-disclosure.
- Thirdly, any contractual liability on the defendant's part should be rebated for contributory negligence by the plaintiffs as they did not receive a policy document from NZI, nor did they question the absence of any communication from their "insurers".
The Court confirmed a well-established principle regarding a broker's general responsibility, summarised succinctly in Ivamy's General Principles of Insurance Law (5th ed., 1986) at p 514:
"It is the duty of the agent to carry out the transaction which he is employed to carry out, or, if it is impossible for him to do so, to inform the principal promptly in order to prevent him from suffering loss through relying on the successful completion of the transaction by the agent. Thus, an agent employed to effect or renew an insurance must effect it or renew it effectively, or, if he is unable to do so, must notify his principal of his inability as soon as possible so as to enable the principal to take steps to insure elsewhere. And where, as here, the client without giving particularised instructions relies on the broker to see that the client is protected and the agent has agreed to do business on those terms, "then he cannot afterwards when an uninsured loss arises, shrug off the responsibility he has assumed."
Unsurprisingly and without any difficulty, the Court found that the defendant had breached this duty.
In respect of the first defence, the Court found that the defendant was in all probability aware of the fraud conviction and cancellation of the previous insurance. Importantly, the Court held that even if the defendant was unaware of this,
"a broker advising a client has a duty to elicit information relevant to a proposal... It is part of the broker's responsibility to explain to the insured his or her duty to disclose all material circumstances. But it seems that that explanation was not given [by Mr Jackson] until October 2010. That duty was also a continuing one. So that on becoming aware of cancellation, and then of convictions, and with the formal policy application not yet having been completed, Mr Jackson had a duty to go back and discuss these matters with the Marchands. Quite inexplicably, he did not. Even more inexplicably, he told them they were covered."
As a matter of probability, it was more likely than not that the plaintiffs would have obtained insurance cover as sought, if the above disclosures were made, had the defendant addressed the issue properly.
The Court gave the contributory negligence defence (which applies in New Zealand in a contractual setting unlike in South Africa) short shrift by finding that, "Mr Jackson's argument in this respect is, "a contention that the plaintiffs were negligent because they relied on his advice and assurances as their professional adviser". The proposition needs only be stated for its falsity to become apparent.
While this case is not unusual, it serves as a reminder to brokers of their obligations when procuring insurance for their clients, which is succinctly stated in our common law as follows2
"...in our law, as in English law, the duty to exercise reasonable care and skill in appropriate cases extends to the duty to take reasonable steps to elicit and convey material information both from and to the insured. This includes information about terms of the policy which, if contravened, might leave the insured without cover. It is part and parcel of the broker's general duty to use reasonable care to see that the insured is covered."3
1. Lenaerts v JSN Motors (Pty) Ltd and Another 2001 (4) SA 1100 (W)
2. To a large extent the duty of a broker is "codified" in the General Code of Conduct under the Financial Advisory and Intermediary Services Act, No. 37 of 2002.
3 Lenaerts v JSN Motors (Pty) Ltd and Another 2001 (4) SA 1100 (W)
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