2006 saw two important developments which brought the broker-client relationship back into focus; one at a case-level and the other at regulator level. A recent case has reminded brokers to ensure that their clients are fully informed as to matters relating to their insurance requirements, not just at the time of placement, but during the currency of the policy. Also the FSA is to perform market failure and cost benefit analysis of mandatory broker's disclosure of commission. If those tests are made and the market has still not come up with its own solution to disclosing commission to clients, FSA may impose its own rules.
The duty of a broker to warn his client about his insurance arrangements is a matter of settled law. In Harvest Trucking v Davis [1991] the Court held that it was a broker's duty to warn his client if the policy contains any "unusual, limiting or exempting provisions". In Tudor Jones and Marsh McLennan Inc v Crowley Colosso Ltd [1997] the Court of Appeal held that it was a broker's duty to warn his client if the cover placed does not meet his client's requirements.
The decision in HIH v JLT [2006] arose out of a long line of film finance insurance disputes. In giving his decision, Langley J confirmed that it is a broker's duty to alert its reinsured client to "any matters of at least potential concern on coverage issues" and, by extension, to any possible defences under the direct policy and under the reinsurance.
An appeal is due to be heard in March 2007 and, whilst the judgment is specific to the case, it is a useful reminder to brokers to ensure that their clients are fully informed as to matters relating to their insurance requirements, not just at the time of placement, but during the currency of the policy.
The broker’s relationship with the client is also central to the wider industry issue of brokers’ commissions. This has been thrust back into the spotlight by recent comments made by John Tiner, the chief executive of the FSA.
According to FSA rules, if a commercial customer asks, the broker must promptly disclose the commission that he receives in cash terms, or the basis for the calculation of the commission. When the rules were introduced in January 2005, the FSA decided not to oblige brokers to disclose their commissions to their clients. It was left to the market to come up with a solution, but since that time, although several brokers have openly supported mandatory disclosure, there has been no market-led solution.
Mr Tiner indicated that the FSA will perform a market failure analysis and a cost benefit analysis of mandatory disclosure. If those tests are made and the market has still not come up with its own solution, the regulator will take the issue into its own hands.
A version of this article appeared in Insurance Day on 10th November 2006.
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The original publication date for this article was 08/01/2007.