Most large corporations will employ an insurance broker to advise on the company’s insurance needs and to place its insurance programme. The market and regulatory regime in which brokers operate has changed markedly in recent years. Brokers became subject to regulation by the Financial Services Authority in January 2005. The Market Reform programme, aimed at increasing efficiencies in the London insurance market generally, has improved processes throughout the market for all participants, including brokers. This can only be a good thing for brokers’ clients.
In this article, Tim Bull, head of professional risks at Reynolds Porter Chamberlain LLP, looks at some of the recent decisions on brokers’ liability which clarify the extent of brokers’ duties and responsibilities, and considers what guidance can be drawn from them for those responsible for instructing brokers on behalf of corporations.
Retainers
At the most basic level, the duties and responsibilities of a broker will be determined by the scope of the broker’s retainer. Issues can arise when a sub-broker is involved. There are circumstances when your broker will instruct a sub-broker to place part of the insurance programme, for instance, in order to access the Lloyd’s market, foreign insurers or other specialist markets. Ordinarily, there is no contractual relationship between the insured company and the sub-broker. The insured company’s contract is with its broker, which will be responsible for the errors or omissions of its sub-broker.
It can be problematic if a sub-broker has a direct relationship with the insured company, but no formal contract is in place. This issue may arise when a multinational company instructs a broker with a global network to place its insurance programme. The company may have a formal retainer with one part of the broker network, but the broker may involve other companies within the network to place the insurance programme.
Example
This is precisely what led to problems in BP Plc v Aon Ltd & anor [2006]. BP entered into a service agreement with Aon Texas to place an all-risks cover for its oil and gas construction projects throughout the world. Aon Texas involved Aon’s London office in the design of the programme and to place part of the risks in the London insurance market. There was considerable direct contact between Aon London and BP. When Aon London failed to effectively place parts of the cover, BP sued all the Aon companies, including Aon London. Aon London argued that it had no contract with BP, and that BP’s contract with Aon Texas precluded any duty in tort arising between it and BP. The court disagreed. It held that, it was necessary to consider, first, whether Aon London had assumed any responsibility to BP, and, secondly, whether the contractual framework in place precluded the imposition of any duty of care by Aon London to BP.
In this case BP was successful. Aon London found itself with an unlimited liability to BP. The contractual arrangements put in place between Aon Texas and BP, which included a liability cap, were ineffective as between Aon London and BP. The lack of any formal contract with the sub-broker worked in favour of the insured company, as it was not bound by the contractual liability cap. In other circumstances, the lack of any direct retainer may work in favour of the broker. In practice, if it transpires that a sub-broker is doing much of the work and the insured company has a direct relationship with that sub-broker, it makes sense to regulate that relationship with an agreed retainer, or, if preferred, an agreement that the insured company’s sole recourse will be to the principal broker.
Duty to obtain cover that clearly meets the insured’s requirements
Two recent cases have confirmed the broker’s duty to obtain cover that clearly meets the insured’s requirements.
Standard Life Assurance Ltd v Oak Dedicated Ltd & ors [2008]
In Standard Life the court had to determine issues of liability in a claim by a life insurance company, Standard Life Assurance (SLA), against its professional indemnity underwriters and insurance broker, Aon. SLA had received numerous claims arising out of the mis-selling of mortgage-endowment policies and had paid compensation totalling over £100m to more than 97,000 investors. The court agreed that, on its true construction, the policy did not permit the aggregation of related claims made by separate claimants. The effect of the excess provisions in the policy was that a separate excess of £25m was applicable in respect of each one of the 97,000 claimants. SLA then pursued a claim against the broker, alleging that it had breached its duty in failing to arrange cover that met SLA’s requirements.
The parties agreed on the nature of the duties owed by the broker to SLA:
- It is a broker’s duty to identify and advise the client about the type and scope of cover the client needs and, in so doing, to match as precisely as possible the risk exposures identified within the client’s business, with the coverage available.
- Having identified what cover the client needs, it is the broker’s duty to arrange insurance cover that clearly meets those requirements. Coverage is only clear in so far as it leaves no room for significant debate. Coverage will be unclear and the broker will be in breach of duty if the form of it exposes the client to an unnecessary risk of litigation.
- If the cover that is needed by the client is not available, the broker must take care to ensure that the precise nature of what is and is not covered is made entirely apparent to the client.
- In relation to the preparation of the policy, the broker must be careful to ensure that the policy language fully encompasses the needs of the client.
- The duties of the broker on the renewal of an existing policy are no different from on the initial placement. At each renewal the broker must ensure that the cover arranged meets the client’s needs in the most appropriate manner.
In Standard Life the court concluded that ‘the cover placed was on no showing clear. It left room for significant debate’. No reasonably competent broker could have come to the view that SLA’s requirements were clearly met. The ability to aggregate claims by different claimants arising from a common cause or source was, as its broker knew, of critical importance to SLA in the context of the professional indemnity cover that it sought.
Ramco Ltd & anor v Weller Russell & Laws Insurance Brokers Ltd [2008]
In this second decision, the claimants, Ramco and Resource Industries Ltd (RIL), were companies in common ownership, trading in surplus army stock. Ramco dealt exclusively with Ministry of Defence (MoD) stock. RIL obtained stock from various sources, although only that obtained under an agreement with Neville Murray, a South African businessman, was relevant to these proceedings.
The stock was destroyed by fire. Underwriters refused to pay the majority of the claims on the basis that most of the stock was not covered under the terms of the policy placed by the broker, Weller Russell & Laws Insurance Brokers Ltd (WR&L). The terms of the insurance policy, placed by WR&L, covered ‘stock… the property of the insured or held by the insured in trust for which the insured is responsible’. Ramco held stock for the MoD as bailee for it, title remaining with the MoD until Ramco had agreed its onward sale. Likewise, under RIL’s agreement with Murray, title in the stock remained with him until RIL had sold it.
This coverage issue was determined as a preliminary issue, after which underwriters accepted liability for the majority of Ramco’s claim, but continued to reject the claim of RIL. Ramco and RIL sued WR&L, alleging that it was in breach of its duty of skill and care in obtaining a policy that was inappropriate for their purposes.
The parties agreed that:
- The broker owed a duty to its clients in contract and tort to exercise all reasonable care and skill in advising them and obtaining appropriate insurance cover.
- That duty required the broker ‘… so far as possible, to obtain insurance coverage that clearly and indisputably meets its clients requirements’.
- ‘… it is not the function of an insurance broker to take a view on undetermined points of law. The protection to be afforded to the client should, if reasonably possible, be such that the client does not become involved in legal disputes at all.’
- The broker is required to explore with the client the nature of its business so as to be able to properly advise what cover was or might be appropriate and, where relevant, to permit the client to make a choice between various possibilities.
Because of the bailment arrangements, the court held that the effectiveness of the insurance cover depended upon the terms on which the bailee companies held the goods. Those terms needed to be investigated by the broker before it could recommend the client to accept a particular policy wording. WR&L was therefore in breach of its duty.
Broker’s duty
Both cases demonstrate that the onus is on the broker to ensure that it understands the nature of its client’s business and to ensure that appropriate cover is obtained. Note, however, that the more sophisticated the client, the more likely it is that the courts will limit the scope of a professional’s retainer if the scope of the professional’s duties have not been spelt out. While a lay client can expect its broker to be wholly responsible for ensuring that it understands its client’s needs and to obtain cover that clearly meets those needs, a large, sophisticated corporation, particularly one with in-house insurance expertise, will be under a greater responsibility to provide the broker with all the information it needs to understand the business and its insurance requirements.
Post-placement duties
The decision in HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd [2007] arose out of the extensive and complex film-finance litigation. The central issue was whether the broker, JLT, which had placed reinsurance for HIH (an insurance company), was under a duty to alert HIH to a change in the number of films being produced, that being a potential risk to the insurance coverage and, therefore, to HIH’s reinsurance coverage.
The Court of Appeal held that this was a complex insurance scheme devised by JLT. The scheme was, in effect, a form of joint venture between several commercial bodies for a high-risk product. Where the broker is at the centre of devising and structuring a risky scheme of that sort for insurers and reinsurers, as JLT was here, it was likely to be under an obligation to carry out post-placement monitoring obligations.
One of the judges also felt that where this issue arose between a lay client (unversed in insurance matters) and their insurance broker, it would be uncontroversial to find that the broker is under a post-placement duty to draw to the attention of the client and obtain instructions in relation to information that might have a deleterious effect on the insurance cover.
The circumstances of HIH are perhaps unique and far removed from the placement of a company’s annual insurance programme. The knowledge and sophistication of an insurance department or risk manager within a large corporation lies somewhere between the lay client and the client in this case, so it cannot be assumed that the courts would impose a similar duty on a company’s broker. The solution, again, is for companies to consider at the time of entering the retainer what post-placement work (if any) they require of their broker and to ensure that it is agreed and documented.
By Tim Bull, partner and head of professional risks, Reynolds Porter Chamberlain LLP.
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BP Plc v AON Ltd & Anor [2006] EWHC 424 (Comm)
HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd [2007] EWCA Civ 710
Ramco Ltd & Anor v Weller Russell & Laws Insurance Brokers Ltd [2008] EWHC 2202 (QB)
Standard Life Assurance Ltd v Oak Dedicated Ltd & Ors [2008] EWHC 222 (Comm)