All round protection for brokers: how protecting the underwriter can protect your client and protect you!

ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWHC 442 (Comm) (‘ABN Amro’)

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:

1. 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;
2. 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
3. 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

Joanna Grant, Partner