Very few brokers have standard terms of engagement, setting out precisely the duties and obligations they are prepared to assume to their principals. When a claim comes along, the courts will look at the standards to be expected of a reasonably competent broker. In reaching a judgment they will be heavily influenced by expert opinion that seeks to impose high standards.
An intermediary might reasonably expect, perhaps, that his conduct will be governed by codes of conduct. While breach of a code of conduct may be evidence of professional negligence, adherence to the code will not help if the law has already set a higher standard. Knowing the code therefore, is only part of the equation.
A salutary example arises from the recent case of Bollom v Byas Mosley. In this case, the defendants had arranged insurance on a commercial premises. Under the policy there were the usual conditions precedent. Provisions for the safety of the property were to be maintained in good order at all appropriate times. Whenever the insured property was closed, the security devices were to be properly fitted out and put into full operation.
When the yard alarm was turned off one weekend, a fire broke out and caused £8m worth of damage. The insurers repudiated liability, because of the breach of the yard alarm but, negotiated a settlement of £5m.
The manufacturer then sued the broker. Both parties agreed that an insurance broker's duty extends to taking reasonable steps to ensure that the client is aware of the terms of his insurance. In particular, his attention should be drawn to any terms of the breach that may result in his being uninsured. The defendant claimed that the manufacturers were under-insured, so their potential recovery had been reduced in any event. The judge however held, that the broker was at fault in not taking steps to ensure that the client understood the basis on which the insurance was written, and the consequences of under-insurance.
The ABI code in respect to personal lines business requires a broker to “explain all the essential provisions of the cover” and to “draw attention to any restrictions and exclusions applying to the policy”. The GISC commercial code requires intermediaries to provide adequate information to enable commercial customers to make an informed decision. They should explain the differences in, and relative costs of, the type of insurance that would suit the commercial customer's needs. This should include taking into account the knowledge held by the commercial customer. Furthermore, intermediaries must advise clients of significant or unusual restrictions, exclusions or conditions, again taking into consideration the knowledge of the commercial customer. Under the IBRC code, the current duty is to explain the nature of warranties or exclusions – but only if the customer asks.
Intermediaries will be concerned that even commercial customers have to be treated as if they were ignorant of the business. When the ombudsman assumes jurisdiction for many of these cases, there will be a further rub. Where the law provides for an inadequate remedy, the ombudsman can apply any statements of good practice that may be laid down in codes.
One would question whether the problem of insurance small print is not being laid at the door of the intermediary. The intermediary will protect himself only by careful written records of advice, or by entering into specific, or express agreements with his clients restricting his duties.
At its more extreme, this trend will require him to take each client through every clause and condition in the policy and get them to sign off. Either that, or intermediaries should only do business with firms that have risk managers with an FCII qualification.
Tony Howe is managing director of The Collegiate Group of Companies