Jonathan Moss, solicitor at Vizards, Staples and Bannisters City and Reinsurance Group, asks if careless talk by brokers is the reason behind a current spate of litigation.
everal decisions of the High Court have acted as a warning for brokers to be wary of "careless talk". The brokers' spin – that celebrated skill comprises clear, concise and persuasive negotiating technique, often combined with unrivalled presentation powers and the ability to convince.
However, increasingly representations by the broker, which have been proved not to be entirely accurate, have been relied upon by the underwriter to his or her detriment and have therefore been actionable in the Courts.
Reasons put forward below explain the recent spate of litigation against brokers, namely the broker's strong desire to perform coupled with the recent characterisation of brokers as the industry's "whipping boys". An analysis of the law should create a certain formula for guarding against possible actions and accusations, thus serving as a means for the broker to protect his position.
The basic rule is that an insurance broker who recommends insurance contracts for which it is paid commission owes a duty of care to the client. That duty is to exercise the degree of professional care which the calling of insurance brokers demands. The standard is that the prudent and experienced insurance broker adviser places the interests of the client first. The general description used by the Court is "the reasonably competent" insurance broker. Such a standard has not always been attained by brokers in a whole manner of ways. Of particular note, the standard has been compromised by incorrect, inconsistent and inaccurate statements made to underwriters. Why then has this been the case?
In arranging cover it is essential that the risk be placed according to client's instructions. The broker should understand the type of client with whom he is dealing and the extent of the client's awareness of risk and insurance and take that knowledge into account when dealing with him. That said, when brokers present the risk they are sometimes overtaken by an enthusiasm to present in such a way that the underwriter is most likely to accept. Consequently, when the broker arrives at the underwriter with his submissions and proposal form, certain mis-statements are made. While written proposals incorporate a prominently placed sentence requesting the underwriter to check all information and to raise queries if not satisfied, this does not exclude the broker from being sued should statements have been made upon which the underwriter has relied. Clear and unequivocal submissions made by the broker at the meeting with the underwriter will be considered to have been incorporated in the terms of the contract between broker and underwriter. When a claim is made, therefore, the underwriter may have found that he has underwritten a risk based on the broker's oral submissions which have left him unduly exposed. The broker must be aware of the position in law.
It is of paramount importance for the broker to realise that what he says is crucial to the terms of the contract.
It is not merely what is written that will bind the parties. This must be acknowledged and addressed by the brokers prior to presentation of a risk to underwriters.
Not only must they not carelessly misrepresent the situation, it goes without saying that they must not willfully misrepresent the situation. The broker when discussing the risk with the underwriter should have a virtual crystal ball before him with the prospect of impending litigation staring him in the face. All efforts must be taken to avoid such eventualities. There appears in the market to be a current wave of criticism levelled against brokers. There is a sentiment in some quarters that brokers are abusing their market position.
There is an increasing resistance/reluctance among underwriters to pay overriding commissions because there is a feeling that brokers are not necessarily acting with all the duty they should towards clients. Such resentment from underwriters may manifest itself in an increasing amount of suits against brokers.
The perception of "the whipping boy" has emerged for various reasons, according to one underwriter. There is an awareness that in a soft market where rates are low the broker fraternity has an edge. This inevitably leads to bad feeling and more specifically to debate about the role of brokers.
The brokers' performance and conduct at the time of placing the risk will therefore be carefully deliberated upon. Their conduct at this time will have a bearing on the direct v broker debate. Consequently, in the future, companies will not be looking at placing work directly or through a broker but determining how to get the best quality service. Should brokers be seen to be inconsistent or wrong with their statements, then their position will be marginalised. But what must the brokers be aware of when discussing a risk with an underwriter?
The case of Hedley Byrne & Co. Ltd Heller & Partners Ltd (1964) AC 465 marked a huge turning point in the law relating to negligent mis-statement. Even prior to this, relationships of a fiduciary nature where incorrect statements were uttered carried consequences. It is arguable that the relationship between broker and underwriter could be considered as one such relationship. The Hedley Byrne case, however, put the matter beyond doubt. The consequences of this case were that in law, two limbs exist when deciding whether a broker can be negligent for words carelessly uttered. Both elements must be proven to determine the scope of the brokers' negligence and whether a claim is actionable.
The first is that the defendant must have voluntarily assumed responsibility towards the claimants. If the broker presents a risk and the information is purely supplied by the broker, then obviously the broker takes on a certain responsibility and this will be recognised by the Court. Therefore, any terms and conditions, pricings and deductibles negotiated orally and accepted by both parties are as a result of reliance upon the brokers.
Two particular cases shed more light on the importance of the content of statements made by brokers. Mutual Life and Citizens' Assurance Co v Evatt (1971) 2 WLR 23 is an important case in that it refers to the implied skill of the representor. A negligent statement causing financial loss is actionable only if the person making it has held himself out as having skill in the subject-matter of the statement. Knowledge that the inquirer intends to rely on the statement is not sufficient. It would appear that if the broker is explaining about the qualities of a particular risk it is more than likely that he will be deemed to possess the requisite skills. However, if his skills lay in other areas of insurance and not the area upon which he was espousing, would that make a difference?
It seems that this will make no difference and the broker may still be liable. The position was revisited in Cherry v Allied Insurance Brokers (1978) 1 Lloyds REP 274. This case proved that brokers are broadly considered to know and intend that what they say is acted upon. It was decided here that the defendants had given information within their specialised knowledge and knew or ought to have known that it would be acted upon. Brokers will clearly often find themselves with a case that they have to answer. Unless precautions are taken therefore, the brokers' spin will ensnare them in the web. Enthusiasm and a desire to get the job done can result in inaccurate representations. The industry's growing perception of brokers as whipping boys may also add to the increase in proceedings against brokers. The message is straightforward – brokers require a heightened awareness of the position in law.