Lawyers Briefing Notes

Fri, 16 Dec 2011

Insurance Brokers and the Duty to Prevent Perils

Where an assured suffers an uninsured loss as a result of a peril which their broker has undertaken to obtain insurance cover for, that broker may be held liable for failing to obtain adequate insurance. Such liability is necessary to ensure the harsh consequences of inadequate or impeachable insurance are borne by the party responsible.

An insurance broker has a duty to advise their client on their obligations under the insurance contract. In particular the broker must make the client aware of their duty to disclose all material circumstances. This duty appears reasonable in light of the presumed competence of the broker in matters concerning insurance.

However in the recent case, Jones v Environcom [2011] EWCA Civ 1152 it has been implied in argument that the duty of the broker should include advising on all matters necessary to eliminate risk. This argument was not addressed fully by the Court of Appeal where the Court was content to dismiss the appeal on the basis of a procedural flaw but in light of the logic of the argument posed the case deserves some analysis.

The case against the broker in Jones emerged following the rejection of Environcom’s cover by underwriters on the basis of non-disclosure. It was claimed by Environcom that the broker failed to inform them of their obligations to disclose material facts. The court of first instance found that in light of the hazardous processes being employed by Environcom they were effectively uninsurable and so the brokers breach caused no loss.

Environcom argued that if they had been told they were uninsurable due to the process being used they would have improved their process to make themselves insurable and thereby would have obtained cover and not suffered the loss. The brokers’ response was that if Environcom had improved their procedures making them insurable, the fire would not have occurred so no insurance claim would arise in any case. The brokers breach had not therefore caused the loss of a chance to claim.

It was this final point that the Court of Appeal was requested to consider. The logic behind Environcom’s appeal was that the broker had accepted that if they had fulfilled their duty and risk improvements had been made, no fire would have occurred. On that basis, but for the brokers’ breach of duty, no fire would have occurred and therefore the brokers should be liable for the loss suffered.

In order to accept this argument it would have to be accepted that the broker could be responsible for fire itself, a necessary step in this argument being that the broker must have had a duty to prevent that fire by advising on fire risks.

Had the issue arisen squarely for determination the consequences of the court accepting that a broker could be liable directly for losses sustained as opposed to failure to secure an insurance contract would increase the brokers potential liability from the coverage of the requested insurance contract to an unlimited sum based on all losses suffered as a result of a peril.

It is arguable that this consequence would be avoided by the Court on the basis of remoteness in that the loss suffered would arguably not be a reasonably foreseeable consequence of the brokers’ breach of duty.

In any case however if future claims are to be pursued on the basis both of failure to obtain adequate cover and failing to advise on risk reduction brokers should seek to limit their liability through contract accordingly and should amend standard procedure so as to ensure particularly that full disclosure obligations are met.