A broker needs to decide how much information a client needs to understand the extent and limitations of his policy. Waltham Pitglow explains the golden rules of the GISC commercial code

A case passed across my desk recently that raises many questions about the regulation and risk management of an intermediary business.

The GISC commercial code says (roughly) that we must give sufficient information to a commercial client to enable them to make an informed decision about choosing the right insurance for their needs. But, when deciding what to explain, an independent intermediary may take into account the insurance knowledge of the customer when deciding what to explain.

A broker would look pretty silly tying an FCII insurance manager of a multinational to a chair and insisting that he explains every last word of the new fire insurance policy. On the other hand, choosing how much to bore a customer to death and ensuring they understand what they are buying can sometimes be something of a balancing act.

No records
The case in question was of a retired builder who had bought a pub to renovate and run as a family concern. The individual concerned had never owned a licensed premises, but the broker had acted for the family building firm for many years and knew that the owner had been used to arranging commercial insurances.

The broker had explained many aspects of insurance to the owner of the building firm, but had kept no records of those conversations which had generally taken place at renewal.

The pub was being refurbished and the most suitable policy appeared to be a Pub Pack policy issued by the Aardvark (it was the only name left when AXA and Aviva merged) Insurance Company. In time honoured fashion, the insurance company had added 16 warranties to the policy:

  • Three related to the unoccupancy
  • Five related to the catering premises that the pub would become
  • Five related to the licensed premises that the pub would become
  • Three related to nothing in particular.

    The broker sent the policy when it arrived from the insurer (having dusted off the cobwebs) to the insured with those immortal words: "Please read the policy carefully and let us know if you have any questions or there is anything you do not understand."

    A fire occurred at the premises and the insurer avoided the policy for breach of the alarm warranty.

    Irrespective of the legal issues - a convoluted subject in its own right - consider the situation from the regulatory perspective of operating a well-managed business with an eye to a joint venture of risk management between the firm and the member of the public.

    Golden Rule No 1: If it is not recorded it did not happen.

    Many brokers will know that past records are not ideal and it is time to make sure that we have a file note that our customers do know and understand some of the key features of the insurance we are arranging. Explanations are required for the duty of disclosure and its effect, the effect of under insurance and the effect of warranties and other unusual or onerous conditions

    Don't wait until something goes wrong. Start the process of educating customers about the key aspects of insurance now and at every reasonable opportunity. This includes inception of the policy, renewal and, changes in risk. Do it in writing and ask the customer to confirm that they have read and understood it. Incorporate the key aspects in your terms of business, if necessary.

    But what about this case and the specifics of an actual policy? The argument is that there are perhaps 50 ways that an insurer can avoid a policy or refuse or reduce a claim. The best way to deal with this is to send a well worded (note the emphasis) policy and a request to read it and revert to the broker with any questions or details of any points not understood.

    Golden Rule No 2: Use a reasonable level of skill and be proactive.

    This customer has never run a pub so, standard terms apart, it is important to explain those aspects which are unusual to the customer as well as unusual to the policy being issued.

    Remember the expression "to allow the customer to make an informed decision". If you, the broker, are not used to the wordings yourself, you are not competent and should either make sure that you become competent, by training and assessment, or leave well alone and refer the matter to someone who does.

    As a builder, the insured in this case should be conversant with unoccupancy terms and conditions and it might be reasonable to assume that the customer has sufficient knowledge. But, ultimately, do you want that decision left to the courts?

    Take time to highlight the unoccupancy conditions and warranties, perhaps by emphasising the details in a letter, and the effect of a breach.

    Golden Rule No 3: Once you have received contract terms on behalf of your client they will normally remain legally binding unless you raise a query with the insurer.

    In this case, there appears to have been a scatter gun approach to the application of warranties by the insurer. Always question in writing any terms of a policy that seem unreasonably irrelevant and, in particular, let an insurer know when your customer cannot or will not comply with policy terms and conditions.

    Of course, this is only a snapshot of the complexities of just one scenario. One could write a book on the subject, but the learning point is a salutary one.

    One of the greatest risks to your customers is that an insurer refuses or reduces a claim.

    Which of these are true and which are false in the event that an insurer turns down a customer's claim for breach of an unconnected warranty and you are sued for negligence?

    a.Your professonal indemnity insurance (PI) may be insufficient to meet the loss

    b.If you act recklessly, or wilfully ignore a regulator's requirements, a PI underwriter may refuse to indemnify you

    c.There is no risk as the insurer cannot refuse a claim unless the breach of warranty caused or added to the loss

    d.You cannot be sued if you have sent the policy to a commercial customer

    e.A PI insurer cannot settle a claim unless you agree

    f.A broker cannot be sued for negligence under a binding authority because he is an agent of the insurer

    This article was contributed by Waltham Pitglow, a specialist insurance investigator.

    The CPD page is edited by RW Associates, specialists in training, competence and compiance. Email to ruy.lopez@rwassociates.softnet.co.uk

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