All round protection for brokers: how protecting the underwriter can protect your client and protect you!
Our March 2021 article ‘Insurers bound by the small print? I should cocoa!’ briefly noted that the judgment in ABN Amro considered the scope of a broker’s duty to procure cover that meets the insured’s requirements and protects it against the risk of litigation. But what does that mean in practice, and can it really extend, as was argued in this case, to a duty to explain unusual clauses to underwriters?
One of the many roles brokers perform is in relation to policy placement, which role involves advising their clients and dealing with underwriters. As part of that exercise a broker must: (i) ensure that it understands its client’s instructions and in the event of uncertainty query, clarify or confirm the instructions given; (ii) explain to its client the terms of the proposed insurance; and (iii) ensure that a policy is drawn up, that accurately reflects the terms of the agreement with the underwriters and which are sufficiently clear and unambiguous such that the insured’s rights under the policy are not open to doubt. It is well-established law that in the performance of these tasks, a broker must exercise reasonable care and skill.
If the coverage is unclear, the client will be exposed to an unnecessary risk of litigation, and the broker will be in breach of its duty.
The scope of this duty was considered in the recent ABN Amro Bank case. By way of brief factual background, the claimant bank provided instructions to its broker that it required cover against its clients defaulting under a finance agreement. The broker placed the risk with RSA under an all risks marine policy. A bespoke clause was added to the policy midway through the policy period which had been drafted by the bank’s external lawyers. The effect of the clause was to provide the equivalent of trade credit insurance.
When subsequently presented with a £33.5 million for financial losses suffered by the bank, the insurer refused cover on the basis that the clause had widened the scope of the policy beyond what a marine policy would ordinarily provide. That disputed claim resulted in litigation, as part of which the court had to consider the role of the broker and what it was required to do in order to fulfil its duty to arrange cover which clearly and indisputably met the client’s requirements, and did not expose the client to an unnecessary risk of litigation.
On the facts, it was held that:
- a reasonably competent broker would have advised its client from the outset that the credit risk market and not the marine insurance market was a more appropriate market in which to place the cover the bank had instructed it to obtain. Such advice would have enabled the bank to make an informed decision as to how to proceed;
- having gone to the incorrect market, it became important for the brokers to explain to the underwriters what the clause was intended to cover; and
- any reasonably competent broker would have specifically pointed out the clause to the underwriters and talked through the amended wording and its implications.
The broker argued that this effectively imposed an unprincipled “duty to nanny”. The court clarified that there was nothing in its reasoning or conclusions which was intended to suggest that brokers generally owe duties to their clients to explain particular clauses, including unusual clauses, to underwriters.
Rather, in order to fulfil its duty to obtain cover that met the bank’s requirements and did not expose it to an unnecessary risk of litigation, and thereby protect its client’s position, the broker needed to give information to underwriters and discuss the implications of that information. In doing so, it would avoid problems which would potentially arise in the future if underwriters did not share the bank’s understanding of the unusual clause.
As such, the requirement did not amount to a duty to protect underwriters, it was about the steps that needed to be taken to fulfil the duty of a broker to protect its own client.
Having failed to take those steps, on the facts of this case the broker was in breach of its duty and consequently liable to the underwriters and the bank for costs.
In this case, protecting the underwriter was a necessary part of protecting the client, and, in turn, protecting the broker from the consequences of failing to obtain cover that met its client’s requirements.
Authors
Fenchurch Law awarded “Gold” for client care experience
We’re delighted to announce that Fenchurch Law has achieved a ‘gold’ award from the independent Investor in Customers (IIC) assessment process for a fourth year running.
IIC is an independent client experience agency which conducts client experience assessments, helps develop insights into client satisfaction, and awards annual accreditations. IIC also compares the views of staff and senior management to identify how embedded the customer is within the company’s thinking.
Comments from Fenchurch Law clients included:
“They have always been a solid, consistently high-quality business, who add genuine value for policyholders”.
“I have been very impressed by Fenchurch Law in all my dealings with them. I particularly value the fact that, unlike the majority of the large law firms, they never act for insurers and accordingly there is no conflict of interest”.
“Fenchurch Law is clearly passionate about what it does. They have given invaluable advice to me and my clientele and I would recommend and have recommended them to many clients and contacts”.
“Great to have a customer facing law firm with the level of expertise Fenchurch Law has”.
“The service that they offer is a real value add to my clients so a great strategic partnership”.
Sandy Bryson, Director at IIC, commented: “Investor in Customers has been working with Fenchurch Law for 4 consecutive years. Every year, the firm has demonstrated that it provides its clients with an exceptional experience attaining IIC’s highest award for client experience, Gold, each time. There is, and always has been, a genuine passion and culture within the whole Fenchurch Law team to continue to improve its service to all its clients and to consistently deliver the highest quality outcomes for them. It is such a pleasure to work with the firm.”
David Pryce, Managing Director at Fenchurch Law added: “Providing an exceptional service is one of our key principles. Improving outcomes for our policyholder clients is number one priority and we are confident that the IIC process will help us improve every aspect of our service in the future”.
‘Deliberate acts’ exclusion disapplied: Supreme Court decision on Public Liability
The Supreme Court has rejected attempts by an insurer to rely upon an exclusion clause under a public liability policy, in a case arising from the death of a customer following an assault by door staff at a bar in Aberdeen.
The security company’s insurance provided cover for accidental injury or death, but excluded "deliberate acts wilful neglect or default". The policy was governed by English law and there was no suggestion of any difference in approach under the law of this jurisdiction or Scotland in relation to the issues on appeal. The customer’s widow claimed against the insurer pursuant to the Third Party (Rights against Insurers) Act 2010, following liquidation of the security company employer, based on vicarious liability for wrongful acts of its employees.
The Supreme Court held that a “deliberate act” was something carried out with the intention of producing the insured outcome i.e. in this case, acts intended to cause injury. In reaching this conclusion, their Lordships recognised the commercial context of the policy to cover the business of “Manned Guarding and Door Security Contractors”, including unintended consequences of incidents at the bar door, which commonly involve deliberate physical acts. If every intentionally performed act was classed as deliberate for purposes of the exclusion, there would be no coverage for many accidental injuries the policy was designed to insure.
The same was true if “wilful neglect or default” was construed as extending the exclusion clause to acts embarked upon with reckless disregard for the consequences, in the sense of proceeding despite a known risk of injury, or not caring if such a risk may arise. Interpreting the exemption in that way would seriously limit the cover provided and lead to a “commercially unlikely exclusion, given the nature of the [insured]’s business”.
There was no determination in the earlier proceedings of intention to injure, or even recklessness, and it is not the role of appellate courts to make findings of fact. Following ejection from the bar due to intoxication, the customer hit out at security staff and was taken in a neck hold for up to three minutes, resulting in death from asphyxiation. In sentencing remarks, Lady Wolffe found that the employee’s actions were: “badly executed, not badly motivated … you believed you were acting in defence of your fellow door stewards and to minimise the danger you felt Mr Grant posed to others.”
The insurer was therefore unable to avoid liability. Following a series of pro-policyholder decisions, this appears to be another example of the Supreme Court’s willingness to take account of public policy considerations to avoid stripping insurance contracts of much of their content, and confirms that exclusion clauses will be construed based on the words used in their “documentary, factual and commercial context”, in accordance with principles set out in Wood v Capita Insurance Services Ltd [2017].
The decision is helpful for policyholders in demonstrating that conscious performance of an act with intention to cause insured damage must be established, in order to trigger a deliberate acts exclusion, and mere recklessness will not suffice. Whilst recklessness will be enough to prove breach of a reasonable precautions condition (Fraser v Furman [1967]), insurers face a higher evidential threshold in relation to ‘deliberate acts’.
Burnett or Grant v International Insurance Company of Hanover Ltd [2021] UKSC 12
https://www.supremecourt.uk/cases/docs/uksc-2019-0121-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
