UK: Brokers' Duties and Liabilities

In this article, we consider the development of brokers' duties and liabilities in light of a recent case before the court.

Since the FSA challenged the insurance industry in 2004 to achieve contract certainty, there have been huge advances in the documentation and recording of insurance placements.  Brokers have often been at the forefront of this process and have significantly improved their own systems. Nonetheless, difficulties still remain and disputes continue to arise where an insured finds that it does not have the cover that it sought to obtain. This can be a particular problem where a placement involves both a producing broker, who received instructions from the client, and a placing broker who negotiates the insurance with the underwriters.

The role and obligations of the parties in this situation were examined in detail by the Commercial Court in the recent case of Dunlop Heywoods v Barbon (2009).

Dunlop Heywoods v Barbon

The assured carried on business as a property consultant and had professional indemnity insurance for its professional activities for the year up to July 2005. The assured went through a merger and instructed the producing broker to place £10 million primary layer cover and £10 million excess layer cover on no worse terms than the current policy. The producing broker wrongly issued instructions to the placing broker that cover was required on the excess layer for "commercial property management" activities. A Limiting Clause was used to obtain cover on that basis. Subsequently, claims were made against the assured in relation to its valuation work. The excess layer insurers rejected the claims on account of the Limiting Clause.

The assured brought proceedings against the producing broker on the basis that the broker had been asked to obtain cover which protected the assured in respect of its valuation activities. The producing broker argued that, either as a matter of construction or by a process of rectification, the policy did in fact cover valuation activities. The excess insurers, who were joined to proceedings, disputed this. The judge ruled as follows:

• The Limiting Clause was effective in restricting cover to commercial property management activities.
• There was no basis for rectification.
• The producing broker was in breach of duty by instructing the placing broker to limit cover. The producing broker was liable for its own default and also for the defaults of the placing broker.
• The assured had not been contributorily negligent in failing to notice the draft Limiting Condition.
• The placing broker was in breach of duty by failing to query any instructions which were adverse to the assured's interests. The claim by the producing broker against the placing broker succeeded, but damages were reduced by 80 per cent to reflect the producing broker's own contributory negligence.

Breach of Duty by the Producing Broker

Of particular interest is the judge's examination of the duties owed by the producing broker to the assured. The producing broker breached its duty to the assured to exercise reasonable skill and care in the following respects:

• Failing to review the terms of the pre-placement documentation and the policy properly and carefully and in failing to identify the Limiting Condition;
• In failing to draw the Limiting Condition to the attention of the assured and to advise them of the difference between the terms of the excess insurance actually obtained and the terms of the expiring excess insurance cover for 2004; and
• In failing to exercise reasonable skill and care in obtaining excess insurance which provided cover for the assured's valuation work in an amount of £10 million excess £10 million, in accordance with the expiring 2004/2005 cover and as the assured had requested and required.

Was the Assured at Fault?

The producing broker alleged fault against the assured due to its failure to review the Renewal Review and Report (RRR). It is likely that, if the assured had reviewed the RRR, then the Limiting Condition would have been objected to. However, the producing broker was employed to obtain cover on the relevant terms and, in that context, to conduct the necessary reviews of the RRR to make sure that cover was being obtained on the relevant terms. Therefore, the assured had no reason to believe that the producing broker had obtained a quote for a fundamentally different and reduced cover and then had failed to identify that such was the case.  

In all the circumstances, the judge found that the assured's reliance on its professional broker to do its job properly was reasonable, and so the assured was not at 'fault'.  Furthermore, the judge found that even if there was fault on the part of the assured, the causative potency of that fault and, in particular, the degree of blameworthiness involved, paled into insignificance in comparison to the fault of the producing broker.

Duties Owed by the Placing Broker

With one qualification, the duties which apply to the client/broker relationship also arise in the producing broker/placing broker relationship. These common duties require the placing broker:

• To exercise reasonable care and skill in the fulfilment of its instructions and the performance of its professional obligations.
• To carefully review the terms of any quotations or indications received.
• To explain the terms of the proposed insurance.
• To use reasonable skill and care to draw up a policy, or to ensure that a policy was drawn up that accurately reflected the terms of the agreement with underwriters and which was clear and unambiguous so that the assured's rights under the policy were not open to doubt.

The qualification related to the duty "carefully to ascertain the client's insurance needs and to use reasonable skill and care to obtain insurance that met those needs". It is the function of the producing broker rather than the placing broker to ascertain the assured's insurance needs.

In order for the placing broker to perform its duties to obtain quotations and place insurance, it is necessary for the placing broker to take care to ensure that instructions are understood and to query instructions given. The judge found that the placing broker was negligent in failing to query the instruction to limit the surplus cover to commercial property management activities. The potential detriment and disadvantage to the assured arising from the instruction would have caused a reasonably competent broker, in the position of the placing broker, to query, clarify or confirm that instruction.

Important Risk-Management Lessons for Brokers

This case highlights important risk management issues for the producing broker and placing broker, including the need for the brokers to:

• Understand the insured's business.
• Confirm the insured's instructions and clarify any ambiguities.
• Ensure that the correct breadth of cover is obtained.
• Provide clear warnings in relation to any unusual restrictions in cover.
• Ensure clear instructions from the producing broker to the placing broker which accurately reflect the insured's requirements.
• Ensure clear communication from the placing broker to the producing broker of the underwriter's requirements, limitations on cover and any variations on terms sought.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.