UK: Professional Negligence and the Scope of Brokers’ Duty to Notify

This recent professional negligence case on the scope of a broker’s duty to make notifications under a policy gives guidance on brokers’ standard claims handling practices and may have implications for broking standards generally.

In 1994 Alexander Forbes Europe Limited bought the business of the insurance brokers Nelson Hurst Financial Consultants Limited (NHFC), from the Nelson Hurst Group (the Group). The Group’s professional indemnity brokers, SBJ Limited (SBJ), arranged E&O cover to run from March 1994 to February 1995 by way of both a group policy and separate cover for NHFC. Two policies instead of one overall Group cover were arranged for regulatory reasons. The case turned on SBJ’s actions in relation to the separate NHFC policy, which required notification during the policy period of any claims made, or circumstances giving rise to claims, but the scope of their duty was considered in the context of their knowledge of the two policies.

As is now well known, the Securities and Investment Board’s (SIB) 1994 "Review of Past Business", concerning advice given about investments in personal pension schemes, resulted in industry-wide firm reviews, which aimed at identifying potential cases of poor advice and informing investors of their rights. As a result of these developments, claims were notified to the Group in December 1994, including one by a certain schoolteacher, Mrs Patterson. NHFC made this notification in the form of a letter about Mrs Patterson’s claim enclosing various papers including a memorandum discussing the SIB’s Review and NHFC’s own subsequent reviews.

Notification of Mrs Patterson’s claim should have been made under the separate NHFC policy but was mistakenly transmitted by SBJ to the underwriters of the Group policy. SBJ did not realise their mistake until after the end of the policy period.

NHFC’s professional indemnity insurers were persuaded retrospectively to accept liability for Mrs Patterson’s claim, in the event below the excess, but declined to accept that any wider notification of circumstances had been made. NHFC therefore incurred and failed to recoup a professional liability loss of the kind which the package of two policies had been designed to absorb. NHFC’s new owner Alexander Forbes Europe Limited sought to recover this loss from SBJ, being the only source left, via an action for professional negligence.

The parties disputed almost everything in this case but the central issue, which the court had to resolve in deciding whether or not SBJ had been negligent, was the scope of their duties of care to the insured. SBJ accepted that they owed duties in both tort and contract to the insured. It fell to the court to consider how wide these duties were and whether or not they had been broken. The resulting decision gives some specific guidance on the standards expected of brokers handling claims, which also may be viewed as helpful general guidance about how brokerage firms must act as responsible entities.

According to NHFC the issues were very straightforward. They asked SBJ to notify the underwriters. SBJ notified the underwriters under the wrong policy, in the full knowledge of the existence and purposes of the two policies. The question put by NHFC to the court was whether what SBJ did or did not do on receiving the notification package fell short of the duty owed by a reasonable broker to its client. NHFC submitted that SBJ had indeed fallen short and caused the loss complained of because if valid notification of Mrs Patterson’s claim and the surrounding "circumstances" had been made then both the instant individual’s claim and subsequent further claims would have been recoverable under the 1994/5 policy.

What actually happened was that SBJ received a package of papers which were on the face of it not entirely consistent or clear. The letterhead used was in fact not NHFC’s but that of another subsidiary of the Group. NHFC admitted in correspondence that they had lost Mrs Patterson’s file and appeared generally somewhat disorganised. The pivotal letter was headed "Notification under our Group E&O Policy" and made no mention of the separate NHFC policy. For their part, SBJ tried to show that in assessing and acting on this material they had not been negligent because they were by contrast orderly, followed standard working practices and had carried out their client’s instructions literally to the letter.

According to SBJ, the issue for the court was to decide how the request for notification should have been read. SBJ argued that they had made the notification with reasonable skill and care because the individual brokers concerned had followed their standard practices; having read the material given to them they had taken it to mean what it overtly said it meant; and they had been reasonable in not second guessing communications from clients who were themselves brokers.

In attempting to ascertain what the scope of the broker’s duty was and whether they had broken it, the court heard evidence from several witnesses for SBJ as to their working methods and also from experts on both sides as to what practices and standards prevail in the market.

SBJ’s expert witness suggested that the duty of a broker, unless specifically agreed otherwise is to act as a conduit between the insured and the insurers and make certain that all relevant information is provided and a clear strategy exists to handle the issue notified. It goes without saying that SBJ in this case thought their strategy was sufficient. Expert evidence for NHFC, attempting to counter SBJ’s argument that since NHFC were also in the broking business they didn't need their hands held, suggested that the extent of a broker’s duty to clients who were themselves brokers would be precisely the same as that owed to all other sophisticated professionals unless this was otherwise agreed or, for example, reduced remuneration was agreed.

The judge David Mackie QC held that brokers have a duty "going beyond being a post box merely looking at a heading and passing material on". It was for SBJ to "get a grip on the proposed notification, to appraise it and to ensure that the information was relayed to the right place and in the correct form".

It had become apparent to the judge that whatever standard working practices had been employed by individual brokers, the discrepancy between what the client at first glance appeared to be saying and what was really required of SBJ had not been picked up as in his opinion it was SBJ’s duty as an entity so to do. SBJ was found liable because they failed to show reasonable care in a situation in which SBJ "as a company was well aware of the existence of the two separate policies and in 1994 had recently negotiated both of them". The judge held that "quibbles about letterheads, headings and references to the Group are no answer when SBJ was closely aware of and had negotiated E&O cover for the Group".

It is worth noting that SBJ’s arguments in defence about individuals doing everything that could be expected of them, did not survive the point that evaluation was of SBJ’s performance as an entity. The judge decided "this fell short of a reasonable standard judged by the measure of expert evidence and common sense".

Therefore broker firms have a duty to be alert to possible desirable actions in response to correspondence from a client and must have a firm-wide strategy in place which ensures that when such information is received from clients, the broker is alive to making such notifications accurately and promptly. They have to consider what they receive and give advice in the context of their overall knowledge, even where the client is himself a broker and so could be expected to have similar knowledge.

This decision clearly has a number of implications in relation to insurance broking. Brokers should check the working practices of their claims handling teams and the clarity of their communications with both placing brokers and clients in order to ensure a good level of alertness. The responsibility falls on the broker company as an entity, rather than on the individual brokers, to ensure that sufficient strategies are in place so that documents are not read purely at face value and attention is paid to detail.

In terms of possible time frames for picking up mistakes, the judge commented in relation to any reservations which might be expressed by underwriters on receipt of a notification of claims from the broker, that a competent broker should assess the situation and advise and act promptly, albeit given only a brief opportunity. In this case a total window of three working days was considered to have been sufficient time for a competent broker to investigate the underwriters’ concerns in relation to the notifications.

Brokers should be aware that such strategies and alertness must apply to all their communications with clients even, and perhaps especially, if they are fellow professionals who may assume that a lesser level of detail is required in communicating on subjects of which they and the brokers have common professional knowledge. Nobody wants, as the judge put it, to "teach their expert grandmothers to suck eggs" but it may nonetheless be necessary to second-guess professional clients. SBJ will be somewhat comforted by the judge’s comment that they had made a "clear but honest mistake". Nevertheless this case shows that there is no substitute for an organised and consciously rigorous approach.

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