Thousands of consumers make use of the services of a broker, to procure insurance from an insurance company. In such instances, two separate agreements come into existence.1The first is between the consumer and the broker and the second is between the consumer and the insurance company (represented by the broker). While both agreements involve the consumer, they are distinct from each other and contain separate obligations. As such, a broker may still be liable for the damages sustained by a consumer in circumstances where the consumer's insurance company has lawfully rejected their claim.
Duties of brokers
A broker's duty of care towards a consumer stems from being paid for their expertise by a consumer who does not share their knowledge.2 The standard of care expected from a broker is equivalent to that of a reasonably competent broker. This duty of care is implied, by law, into every agreement. A broker should therefore take great care to ensure that the cover sourced from an insurer meets a consumer's needs, that the consumer is properly advised regarding the wording of the policy and also informed of any changes thereto. 3
The decision in Stander v Raubenheimer demonstrates the point that a broker should source cover which meets a consumer's needs. Mr. Stander built a new house and telephonically requested his broker to inform his insurer of his new place of residence. Stander, however, neglected to inform his broker that his new house, in contrast to his old one, contained a thatched roof. The broker, in turn, neglected to question Stander about the structure of his new house. A fire later destroyed the house, together with its contents. Stander's insurer refused to pay the claim due to the fact that they had not been notified of the thatched roof which amounted to an increased risk. Stander sued his broker for the damages he suffered. The court found the broker to be liable for Stander's damages because the broker had undertaken to ensure that at all relevant times Stander was covered for any damage sustained to the contents of his property no matter where it was situated or how it was constructed.
Consumers are unique and different in many ways. Brokers should accordingly have intimate knowledge of consumers' needs. Unfortunately, all too many brokers are simply in pursuit of the commission brought about by attracting new consumers, forgetting in the process their fiduciary duty to act in the best interests of consumers by sourcing cover that meets consumers' needs. Conduct such as this represents a significant financial, reputational, and regulatory risk for brokers and should be guarded against.
1 Van Niekerk, "Juta's Insurance Law Bulletin"
2 Henley and Kemp, "The Law of Insurance Broking"
3 Prof Robert Merkin, "The Legal Position of Insurance Brokers' in the 1999 SA Mercantile Law Journal"
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