An insurance broker who fails to consider the insured’s loss history, the foreseeable claims and arranged for appropriate coverage was held to have breached its legal duty to arrange appropriate crime coverage for the insured may be liable for breach of their duty of care. The Court accepted that employee dishonesty coverage is “core” to a commercial policy and the need for it should be assessed properly, even if some insurers consider it to be a “throw in” coverage.
Duraguard Fence Ltd v Badry,2019 ABQB 783, per Mah J.
Facts + Issues
The Defendant Howard, Douglas Farnell Insurance Services Ltd (“HDF”) was an insurance brokerage firm. The Defendant Farnell was one of its principals. The Plaintiff Duraguard Fence Ltd. (“Duraguard”) was a customer of HDF. Its sole principal was Champigny. Champigny relied on Mr. Farnell’s expertise and followed his recommendations.
Farnell switched Duraguard’s insurer. All discussions of Duraguard’s insurance requirements focused on its physical assets. There was no discussion of employee dishonesty. Champigny did not disclose an incident involving an employee who uttered two forged cheques totalling $8,000. On the switch to the new insurer, the limits for all categories of crime coverage, including employee dishonesty, were reduced from $10,000 to $5000. It appears this reduction was not discussed with Champigny and that, if Mr. Champigny noticed, he went along with it as he did all of Farnell’s recommendations.
One of Duraguard’s employees committed credit card fraud. The total loss was eventually determined to be $589,000. Farnell assured Champigny that the loss would be covered. In fact, unknown to Farnell, the $5,000 limit was an aggregate rather than per occurrence limit. The insurer Peace Hills issued a cheque to Duraguard for $5,000.
The issue was whether Farnell breached either his duty of care or his fiduciary duty by failing to assess Duraguard’s insurance needs and secure proper insurance with respect to employee dishonesty.
Both sides called experts on the relevant practices in the insurance industry. The Defence expert (MacWilliams) opined that dishonesty coverage was typically treated as a “throw in” for Commercial General Liability policies. However, the insured’s expert testified that “crime coverage is ‘core’ to a commercial policy”.
HELD: For the Plaintiff; judgement for $243,500, representing the likely coverage amount ($250,000) for enhanced employee dishonesty coverage less the amount already paid ($5,000) and the maximum premium that would have been paid by the Plaintiff ($1,500).
The Court held that a broker’s duty is to assess the client’s risks, give advice and recommendations on appropriate coverages for each of the relevant risks, and after taking instructions, implement those coverages:
- The Court summarized the relevant law:
[39] In essence, as stated by the Supreme Court of Canada in Fletcher [Fine’s Flowers and Fletcher v Manitoba Public Insurance Corp [1990] 3 SCR 191] at paras 58, 59 and 61, that duty of care is as follows:
[58] In my view, Fine's Flowers stands for the proposition that private insurance agents owe a duty to their customers to provide not only information about available coverage, but also advice about which forms of coverage they require in order to meet their needs.
[59] The duty of care owed by an insurance agent was further elaborated in G.K.N. Keller Canada Ltd. v. Hartford Fire Insurance Co. (1983), 1 C.C.L.I. 34 (Ont. H.C.) (conf. on appeal (1984), 4 C.C.L.I. xxxvii (Ont. C.A.)). It was held in that case that where the customer adequately describes the nature of his or her business to the agent, the onus is then on the agent to review the insurance needs of the customer and provide the full coverage requested. Should an uninsured loss occur, the agent will be liable unless he or she has pointed out the gaps in coverage to the customer and advised him or her how to protect against those gaps.
...
[61] In my view, it is entirely appropriate to hold private insurance agents and brokers to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client. Subtle differences in the forms of coverage available are frequently difficult for the average person to understand. Agents and brokers are trained to understand these differences and to provide individualized insurance advice. It is both reasonable and appropriate to impose upon them a duty not only to convey information but also to provide counsel and advice.
- The Court summarized the expert evidence on this point.
[40] In actualizing this duty, both the experts retained by the parties, Mr. Gordon on behalf of the plaintiff and Ms. MacWilliam on behalf of the defendants, made similar observations.
[41] On page 7 of his report, Mr. Gordon states:
In summary, we observed that both the insurance industry and its insurance brokerage subsector have imposed upon themselves a common element of duty to assess the client’s insurance needs. In defining what this means, the industry provides some (but not pervasive) reference to the requirements of (1) advice on limits and additional coverages and (2) information (losses and pricing) to help the client make a decision on these.
[42] Then on page 8, Mr. Gordon lists both core and optional insurances for small businesses (noting that crime is one of the core insurances) and states:
A competent and diligent commercial insurance broker would assess its client’s needs and risks in each of these insurance areas and, if needed, offer insurance solutions.
[43] Similarly, Ms. MacWilliam comments as follows on page 4 of her report:
An insurance broker is responsible for determining the client’s insurance needs and arranging coverage that best meets those needs:
- determine the facts about the risk the client wishes to cover
- check on those facts, to ensure they are accurate
- assess the client’s requirements
- place the insurance according to the client’s directions
- provide evidence, when required, that the insurance is in place
[44] In essence, the broker’s duty is to assess the client’s risks, give advice and recommendations on appropriate coverages for each of the relevant risks and, after taking instructions, implement those coverages.
Farnell was held to have breached this duty.
- Farnell did not discuss with
Champigny the adequacy of the $5,000 limit for employee dishonesty
or the fact that the limit had been reduced from $10,000. Also,
Farnell did not determine whether the $5,000 limit was an aggregate
amount or per occurrence limit before committing Duraguard.
- The Court held that Farnell knew
additional coverage was available. He also knew that Duraguard had
already suffered a loss that exceeded the $5,000 limit (theft of a
post pounder worth nearly $8,000) .The Court held that if Farnell
asked about previous employee dishonesty, he would have learnt of
the forged cheques totalling $8,000. These events were relevant in
determining risk for crime loss. It was held that given the loss
history, Farnell should have known the $5,000 limit was
inappropriate.
- Mr. Justice Mah held that a loss of
this magnitude was foreseeable and that just because Duraguard had
not experienced a loss of this kind before did not mean it was not
reasonably foreseeable. Furthermore, it was held that Farnell
should not have relied on the trustworthiness of Duraguard’s
employees, particularly given the two previous crime losses.
- The Court held that Farnell ought not to have treated crime coverage as a “throw-in” or “extra” because crime coverage is core to a commercial policy. The fact that some insurers consider crime coverage a throw-in does not detract from its importance. The broker is in a different position with the insured. The notion of a “throw-in,” with no room to discuss a customer’s particular vulnerabilities or sensitivities, is antithetical to the notion of customization as being central to the broker’s role:
[72] The fact that some insurance companies at the time treated crime coverage as a “throw-in” does not detract from its importance for a business of any size, nor does it dictate that the insurance broker should similarly treat it, in cavalier manner, as a “throw-in”. The broker works for the insured and is therefore in a different position with the insured than the insurer.
[73] The idea of a “throw-in” with no room to discuss a customer’s particular sensitivities or vulnerabilities, as occurred in this case, is antithetical to the notion of customization, as discussed in para 61 of Fletcher, as being central to the insurance broker’s role.
[74] It does not seem onerous to me that an insurance broker would, at the time of taking over a commercial account and at each renewal, discuss specifically with the customer each coverage that is proposed to determine whether it is sufficient to meet the company’s risks, which of course would continue to evolve. For example, the executive summary for 2005 at Exhibit 1, Tab 2 lists some forty areas of coverage. Surely it is not too much to ask the insurance broker to review each area with the customer before placing the insurance. After all, the customer is paying for the coverage, even if some are “throw-ins”.
Mr. Farnell’s breach caused Duraguard’s loss.
- It was held that the underlying loss
was caused by the dishonesty of the employee. The Court held that
while Duraguard may have created the environment that allowed the
fraud to be carried out by failing to implement proper controls,
the actual loss claim in this case was the loss from
underinsurance, which was caused by Farnell’s breach.
- The Court held that had Farnell conducted an active assessment into the risk of crime loss the two previous losses would have come into play. Justice Mah held that on considering this information, Farnell should have determined whether the $5,000 limit was an aggregate or per occurrence amount and, on learning that it was an aggregate amount, he should have concluded that it was insufficient given the past loss history.
- Justice Mah held that on learning of the aggregate limit Champigny would have asked Farnell to recommend appropriate coverage. Further, the Court held that Farnell would have found the appropriate level of coverage was $250,000 and found an insurer offering this coverage for a premium of $1,000 to $1,500. The Court held that Champigny would more likely than not have purchased this coverage.
The Court held that there had been no breach of fiduciary duty on Farnell’s part.
- It was held that although breach of
fiduciary duty is often pleaded as an alternative cause of action
in this type of case the causes of action are distinct despite
often being merged.
- It was held that the fact that Champigny relied on and trusted Farrell and always followed his recommendations did not create a fiduciary duty. Farnell was an outside vendor and had no authority to bind Duraguard to a contract with a third party.
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