No longer the scapegoat – the future of professional negligence claims against insurance brokers
Following recent judgments in England and Wales moving in favour of insurance brokers and their professional indemnity insurers, this article provides an overview of the standards required of insurance brokers and other professionals who advise insured clients in several key jurisdictions. As we demonstrate, the current global trend seems to be that the insured client can no longer simply look to their advisers when faced with a declined/avoided insurance claim; the insured must take some responsibility for their own actions and/or omissions.
England and Wales
The recent judgment in Dalamd Ltd v Butterworth Spengler  clarified the appropriate test for causation in brokers’ negligence cases. This decision follows a number of prevalent judgments in recent times, which together, appear to indicate a trend in respect of professional negligence cases against insurance brokers.
The judgment in Dalamd confirmed that when professional negligence on the part of an insurance broker is alleged, a court should assess, on the balance of probabilities, whether an insurance policy was voidable or would not have provided an indemnity, for reasons other than the insurance brokers’ negligence.
Dalamd follows the recent judgment in Avondale Exhibitions v Arthur J Gallagher  in which HHJ Keyser QC reviewed the duties of insurance brokers to explain the obligations of disclosure to clients. The judgment emphasised the importance of the client’s role in the placement process, shifting the balance in favour of the insurance broker.
It was accepted in Avondale that there is no general duty on insurance brokers to ask oral questions or give oral explanations to their clients. The Judge determined that as long as an insurance broker has clearly highlighted the duty of full disclosure to the insured client and its significance to the placement process, then the insurance broker has discharged their duty. In Avondale, the material paperwork included numerous proposal forms prepared over a six year period, but as the broker clearly highlighted the need to make full disclosure, this was sufficient. There was nothing to suggest that the insured client was not as savvy as any ordinary businessman who had the opportunity, having been clearly directed, to check the accuracy of the information prepared before committing to a commercial contract.
Traditionally, insurance brokers have been seen as an easy target in situations where no insurance cover is available to the insured due to their heavy involvement in:
- The placing of risk with the insurer (and therefore presenting key material on behalf of the insured)
- The claims process.
These decisions, however, reflect a tightening up of the test that an insured must satisfy before any claim against a broker will succeed. In England and Wales, the broker can no longer be seen as the scapegoat.
This is a theme which we are also seeing in Australia.
In Australia, while there is no overarching Commonwealth authority on this issue, a number of state courts have decided brokers’ negligence cases. Ultimately, basic common law negligence principles will apply, however, it may also be necessary to consider the Corporations Act 2001 (Cth) and any state civil liability legislation.
Of significance to current trends is the 2017 decision of SKM Industries Pty Ltd v Australian Reliance Pty Ltd which concerned the insurance broker’s conduct when advising on policy renewal for its insured client, SMK. SMK argued that the broker ought to have questioned the sufficiency of growth estimates provided by SMK. The court however found that insurance brokers are entitled to rely on the information provided by their clients, if the brokers take steps to understand the nature of those instructions and provide advice on the insurance available, that responds to those instructions.
The reasonableness of a broker’s actions will take into account factors including:
- Commercial sophistication
- Terms of insurance previously provided
- Whether the broker took on additional responsibility when completing an application or renewal
- Any indication that the instructions provided by the client could be incomplete or inaccurate.
Again, the insured cannot see the insurance broker as an easy target when things do not work out as planned. However, the decision in SMK must be read in the context of the 2012 NSW Supreme Court judgment of Horsell International Pty Ltd v Divetwo Pty Ltd, which held that it was not enough for an insurance broker to simply provide a brochure describing the policy coverage; the insured client must be provided with all necessary information to make an informed decision.
It will be interesting to see how the case law develops in Australia, particularly given the New South Wales Court of Appeal decision of Globe Church Incorporated v Allianz Australia Insurance Ltd [26.02.2019] which held that an insured’s cause of action against an insurer arises when the insured event occurs, not when indemnity is declined. This may mean that insureds who are left unexpectedly without a cause of action for limitation reasons, may seek to put the broker in the firing line.
In Ireland, while there is no recent case law on this particular point, it is accepted that the insurance broker must ensure that the insurance obtained meets their client’s needs as precisely as possible. The test “whether the professional has proved to be guilty of such failure as no practitioner of equal specialist or general status and skill would be guilty of in acting with ordinary care” was set out in Dunne v National Maternity Hospital .
Therefore, an insurance broker must exercise reasonable skill and care in carrying out the service that they have agreed to perform, thus satisfying the standards of a reasonable, competent broker in the market at the time.
However, given the relatively few cases involving insurance brokers and their duties, if asked to rule on this subject, the Irish courts would in all likelihood look to other jurisdictions - and England and Wales in particular - for persuasive authority, suggesting that the approach in Ireland will too shift in favour of the broker and their professional indemnity insurers.
In the United States, an insurance broker’s standard of care varies from state to state. In light of this, it is important to establish what jurisdiction a claim is brought in and what standard applies.
All states require that insurance brokers conform to a minimum standard of reasonable care, skill and diligence when procuring insurance. The states that adhere to this minimum standard are commonly referred to as ‘order-taker’ or ‘waiter’ states, where the broker is likened to a waiter at a restaurant who takes the order, but is not asked to comment on the quality of the food. This standard appears to be similar to the standard in the Avondale case discussed above; as long as the broker is clear about what the information will be used for and noting the insured clients’ duties, the broker cannot be expected to check the accuracy and amount of information.
However, other states apply a higher standard of care to brokers if “special circumstances” exist between the broker and the insured. The level of such “special circumstances” can vary depending on several factors and can be established in a myriad of ways, for example, where the broker:
- Leads the insured to believe advice will be provided
- Holds him or herself out as an expert in a given field of insurance
- Knows the customer is seeking out and relying on the broker’s advice
- Volunteers information that is inaccurate.
In these states, whether a broker has a duty to ask oral questions or give oral explanations to their clients will depend on the nature of the circumstances as to how the relationship was established and any representations that were made during that process.
Points to remember
While the current trends will be welcomed by insurance brokers and their professional indemnity insurers, there remains no room for complacency – particularly as the courts in England and Wales have clearly set out what standards are expected.
Practical pointers for brokers and their advisors are as follows:
- In all of the above jurisdictions, a broker is always under a duty to advise its insured client of its duty to disclose all material facts and to explain the consequences of failing to do so. It will rarely be sufficient for a broker to rely solely on standard written explanations and warnings forming part of proposal documents as evidence that this duty has been discharged – the insured’s duty needs to be directly explained and highlighted (Jones v Environcom ). This is something which will need detailed consideration internally given the increased reliance on technology and online placing platforms. The correct policies and auditing need to be in place.
- A broker, as an expert adviser in the field of insurance, is under a duty to take reasonable care to elicit from insured clients details which the client may not appreciate are material. The broker must ask the right questions and with the use of technology, proposal forms must be targeted. Generic questions applicable for all insured will likely be viewed as insufficient. This duty is even more important if the advice on general disclosure obligations is inadequate (Jones v Environcom ).
- Since August 2016, the duty of fair presentation introduced by Insurance Act 2015 means that in England and Wales, a broker has a bigger role to play in helping insured clients to: (1) understand what must be disclosed to insurers; and (2) provide information in a clear and accessible manner. Inevitably, the broker’s role has become more involved; ‘data dumping’ is no longer acceptable. There is the potential for claims where brokers take on the role of filtering documents and, therefore, adequate and full information needs to be presented and the broker needs to help the insured understand what this is.
- The sophistication of an insured client will be material. An experienced commercial client will need less ‘hand-holding’ and explanation than an insured client less familiar with taking out insurance cover. Brokers should bear in mind that, even if a client is renewing its insurance cover, the responsible personnel may have changed and repeated explanations and warnings may be required. A broker needs to get to know its client.
- The Australian authorities provide guidance on relevant factors to consider in addition to the commercial sophistication of the insured, which include: (1) the terms of insurance previously provided; (2) whether the broker took on additional responsibility when completing an application or renewal; and (3) any indication that the instructions provided by the client could be incomplete or inaccurate.
- Whilst a broker should consider the nature of its client’s business in conjunction with its insurance requirements, it is not expected to conduct a detailed investigation into its client’s business. In particular, a broker is not under a duty to check the accuracy of figures or information provided by its client unless it has reason to question them (Eurokey Recycling v Giles ). The authorities in England and Wales, the US and Australia all show that as long as the broker makes it clear what the information will be used for and noting the insured clients’ duties, the broker cannot be expected to check the accuracy and amount of information. This should be explained to insured clients at the outset, whether the policy is placed via the traditional ‘face to face’ placement or through technology and online platforms.
- The onus is on the broker to show it has discharged its duties to its client. Record keeping is important. This could be vital to a broker when faced with an insured client who is considering challenging an insurer’s stance on declinature as it could influence whether they to sue the insurer or the broker… or both.
As long as insurance brokers provide clear directions to their insured clients, the view of the courts in England and Wales is that those clients can no longer rely on ignorance and/or a lack of understanding to excuse their own failings. Similarly, insured clients cannot view their insurance brokers (and in turn their professional indemnity insurers) as an easy fall back when challenging coverage. The insured clients must be able to defend any argument that there was a reason independent of the broker’s negligence as to why policy cover has been declined, including their own involvement with the placement.
This is a line of authority we anticipate that the courts in Ireland will also follow and a theme which is prevalent in Australian authorities. However, in the US, once the minimum standard is reached, some states do require a higher standard of care and service from the broker to the insured client. Therefore, the question of applicable jurisdiction (and the potential for forum shopping), remains an important consideration.
Overall, the role of the insured client is becoming more significant and more involved. The insurance broker can no longer be the scapegoat but equally, the broker must ensure the relevant policies and procedures are in place.