The British Commercial Court has handed down a favourable decision for insurance brokers, staunching a recent trend towards treating brokers as insurers of last resort.
Although not binding in Australia, Eurokey Recycling Ltd v Giles Insurance Brokers will carry persuasive weight when Australian courts are deciding negligence claims. Eurokey is a waste recycling company that used Giles to place its insurance, including business interruption cover.
The case centres around a business interruption claim, made after a fire destroyed its main premises in 2010. Eurokey’s combined commercial insurers threatened to reject the claim, after finding the firm was grossly underinsured, having declared its turnover at £11 million, whereas it should have been £17 million.
Eventually, Eurokey had to accept a sum that was significantly lower than its losses, prompting Eurokey to sue Giles.
A broker’s duties
Eurokey alleged that Giles had given no explanation of how to calculate the appropriate business interruption sum insured and had erred in seeking cover for a turnover of only £11 million. It also alleged Giles had not paid attention to accounts provided to it after the policy had been placed, that clearly showed the firm’s turnover was more than £17 million.
However, the judge sided with Giles, accepting its evidence that the broker had calculated the gross profit sum insured with figures supplied by Eurokey, which was responsible for knowing what its turnover was. However, the broker did come in for some criticism, for errors in its documentation.
UK law firm Mills and Reeve says in making his decision, the judge laid down some principles brokers should apply to business interruption advice:
- The broker has to provide a sufficient explanation to the client to enable them to calculate the appropriate sum insured and indemnity period. This will probably require an explanation of the terms used in the business interruption formulae in the policy wording.
- To do this, the broker needs to take reasonable steps to ascertain the nature of the client’s business and its insurance needs.
- Reasonable steps should be taken to ensure that the client understands the term “gross profit” in a business interruption context.
- Much depends on the circumstances of the case – the broker’s obligations to assess its client’s needs will depend on the client’s sophistication.
- Advice does not necessarily have to be repeated annually if given previously and understood, as long as the same person is dealing with the client’s insurances.
- If a client who appears to be well informed provides a broker with information, the broker is not expected to verify it unless there is reason to believe it isn’t accurate.
- If express instructions are given after all these requirements have been met, then the broker must be careful to adhere to those instructions.
Beale and Company Partner Ed Anderson says the case will be extremely useful for defending claims on the scope of the duty of care owed to commercial or sophisticated clients.
“Although the court was clearly influenced by the claimant director’s unreliable evidence and possibly a suspicion that he had deliberately underestimated turnover to reduce the premium, there is no duty to advise on matters of which a commercial client should be fully aware, or which they had been advised on in prior policy periods,” he says.
“Perhaps most helpfully, it can be
used to argue the limits on the post-placement duty of care, even where information does come into a broker’s possession that demonstrates deficiencies in the cover obtained.”