Journal of Financial Regulation and Compliance

Duties of insurance brokers

John Virgo Philip Ryley
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John Virgo Philip Ryley, (2004),"Duties of insurance brokers", Journal of Financial Regulation and Compliance, Vol. 12 Iss 2 pp. 128 -
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 Journal of Financial Regulation and Compliance
Downloaded by President University, President Univ At 06:25 18 March 2017 (PT)
Journal of Financial Regulation
and Compliance, Vol. 12, No. 2,
2004, pp. 128131
Henry Stewart Publications,
13581988
Page 128
Volume 12 Number 2
Duties of insurance brokers
John Virgo* and Philip Ryley
Received (in revised form): 31st March, 2004
*Guildhall Chambers, Broad Street, Bristol BS1 2HG, UK; tel: +44 (0)117 930 9000;
e-mail: John.Virgo@GuildhallChambers.co.uk
John Virgo is a barrister specialising in
nancial services law and regulatory
issues.
Philip Ryley is an associate and Head of
the Compliance and Training Consultancy
at TLT Solicitors, Bristol and specialises in
nancial services, general insurance and
mortgage regulation, including supervision
and enforcement issues.
ABSTRACT
KEYWORDS: insurance brokers, insurance
brokers duties, arranging insurance
cover, notifying insurance claims
In this brief paper the authors consider the
duties owed by professional indemnity insurance
brokers to their insured clients. Given the pre-
valence of claims for nancial mis-selling this is
an important issue of concern to all authorised
advisers. Any failure to obtain or maintain
cover leading to uninsured loss will naturally
attract the potential attention of the brokers
own insurers. The authors summarise what the
law expects of brokers in standard situations.
The issue of obtaining professional indem-
nity insurance cover, particularly for perso-
nal investment rms, has exercised the
nancial services industry quite acutely
since 2002. This has largely arisen from tra-
ditional insurers to the market withdrawing
from it or the reluctance of insurers to oer
cover on terms which comply with the
Financial Services Authoritys (FSA)
requirements. The absence of complaint
cover of course breaches the FSAs rules,
the Principles for Business (PRIN 4
nancial prudence) and the threshold con-
ditions (Threshold Condition 4 adequate
resources). From 15th January, 2005 rms
carrying out insurance and re-insurance
mediation services will need to satisfy the
levels of cover required by the Insurance
Mediation Directive (IMD) which will
increase the burden on smaller personal
investment rms. Some assistance in obtain-
ing cover may be obtained by agreeing to
carry larger excesses within limits pre-
scribed by the Interim Prudential Source-
book for Investment Firms (IPRU (INV))
but this is only to be had at the expense of
carrying extra levels of readily realisable
own funds. Cover will generally be
arranged through brokers and it is accord-
ingly timely to look at the scope of the lat-
ters duty of care to insureds in this area.
STANDARD DUTIES
The scope of a brokers responsibility in
each case may of course depend on the pre-
cise terms of engagement but in the
absence of any attempt to dene the scope
of responsibility in any terms of business
agreement, the core minimum duties will
generally include the provision and compe-
tent operation of a strategy for:
arranging suitable cover
making appropriate notications under
the terms of cover arranged.

ARRANGING COVER
It has been held that the ordinary function
of the insurance broker or other intermedi-
ary is to receive instructions from his prin-
cipal as to the nature of the risk or risks,
the rate or rates of premium at which he
wishes to insure, to communicate the mate-
rial facts to the potential insurers and to
obtain insurance for his principals in accor-
dance with the principals instructions and
on the best terms available . . . In many
cases those duties will include advising his
client on the type of insurance best suited
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to his requirements and subject to his cli-
ents instructions, exercising reasonable care
to obtain insurance which will best meet
those requirements.1 The duties thus
described are easy enough to follow.
As indicated in the foregoing, the arran-
ging of suitable cover will include a duty
to take care to ensure that the risk is prop-
erly presented to the insurers. In this
regard, it is trite law that the information
required to be disclosed in obtaining cover
is that which passes the awareness test of
materiality.2 This is information which
would have aected the insurers judg- and notify claims and circumstances is
ment in the sense of reinforcing a decision
to contract or in the sense that together
with other information it might have been
sucient to lead to dierent contract terms
but considered alone in the present case it
would have made no dierence to the con-
tract or its terms. If material in this sense
then the information (or the withholding
of it) will be taken to have induced the
particular contract. Thus if the . . . non-
disclosure of a material fact did not in fact
induce the making of a contract (in the
sense in which that expression is used in
the general law of misrepresentation) the
underwriter is not entitled to rely on this
as a ground for avoiding the contract.3
The importance of the broker obtaining
sucient and detailed information as to the
risk presented for cover is thus obvious.
Virgo and Ryley
NOTIFYING UNDER THE POLICY
The standard professional indemnity insur-
ing clause oers coverage to the insured
against any claim rst made during the
period of insurance and in respect of any
claim or loss to which a notied circum-
stance has given rise. In the latter instance,
any claims in fact then arising out of the
relevant circumstance are deemed for the
purposes of the policy to have been made
during its subsistence. At renewal any new
policy will generally exclude cover for
claims or circumstances which ought to
have been raised during the earlier policy
window. It is accordingly crucial for bro-
kers acting on renewals or administering
notications to be able to give clear advice
and guidance on request to insureds as to
the scope of notications which may be
made to insurers at any time. This requires
a clear strategy to be in place for handling
the relationship between broker and
insured and insurers.
CLAIMS NOTIFICATION
Central to operating a strategy to identify
the need for a correct understanding of
these terms. As to what amounts to a claim
the primary meaning of the word . . .
whether used in a popular sense or a strict
legal sense is such as to attach itself to
the object that is claimed; it is not the same
thing as a cause of action by which the
claim may be supported or as the grounds
on which it may be based. In the Oxford
dictionary the word claim is dened
as, rst, a demand for something as due; an
assertion of a right to do something.4
It has further been held the words
claim made require not only the asser-
tion of a claim, or of some remedy as due,
but also the bringing of that assertion to
the notice of the assured.5 But a claim
means a potential claim and not a mere
possibility of a claim. Thus, an occurrence
such that there is a mere possibility of a
Page 129
 Duties of insurance brokers
claim is not an occurrence likely to give
rise to a claim.6 Further, a practice of
attempting to give notice of every occur-
rence without analysis of the grounds
therefor, that the same may give rise to a
claim is of no eect and vexatious.7 A
duty to give immediate notice of a claim
means with all reasonable speed in the cir-
cumstances.8
INFORMATION TO BE PROVIDED
The information/particulars which need to
be provided as part of giving notice do not
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mean a precisely formulated claim with full
details . . . but must be such . . . notice as
will enable the parties to whom it is given
to take steps to meet the claim by preparing
and obtaining appropriate evidence for that
purpose.9 The duty is therefore to give the
best particulars the insured can reasonably
give.10 It must be clear though that the
notice is given formally as a notice. It must
not be some mere piece of casual conversa-
tion . . . it must be something much more
formal than that, something that would
indicate to the Companys agent . . . that
notice was being given.11
At one time there was some authority
that if the insurers received all the necessary
information about a claim from a third
party it was unnecessary for the insured to
provide the same information so that an
absence of formal notication could not be
relied upon to avoid cover.12 This view has
not, however, prevailed and more recent
decisions indicate that insurers might rely
on the breaches provision even where they
have information from a third party.13
CIRCUMSTANCES
As to circumstances which may give rise
to claims a distinction can be drawn
between knowledge of the identity of a
claimant, where a claim is in fact made,
and knowledge of circumstances which
may give rise to a claim by as yet unidenti-
able individuals. In the latter case, what
Page 130
has to be reported are the circumstances, of
which the identity of a claimant will be
but a part. Standard policies oblige the
insureds upon request . . . to give to the
insurer such information and assistance as
the insurer may reasonably require. One
item of information may therefore be the
identity of the claimant(s). The circum-
stance feared as one which may give rise to
claims does not, however, require the
insured to be able necessarily to predict
actual claims. The test of materiality for
notice is a weak one [a circumstance]
which may give rise to a claim, not which
is likely to give rise to a claim. It has been
pointed out that latter factor is important
for, together with the additional require-
ment that the assured shall give underwri-
ters as soon as possible full details in
writing of the circumstances which may
give rise to a claim it enables underwri-
ters to adopt or require such immediate
steps as they think appropriate to minimise
or advert any potential loss. I do not think
therefore that there is any justication for
demanding too much of the test that the
notied circumstance may give rise to a
claim.
In making notications on the insureds
behalf the broker must act as a conduit
between the insured and the insurers and
make certain that all relevant information
is provided and that a clear strategy exists
to handle the issue notied.14
EXAMPLE
A 2003 example of a failure by brokers to
live up to the above standards is provided
by Alexander Forbes v SBJ Ltd.15 In that
case, for years 199495 Alexander Forbes
eected errors and omissions (E&O) cover
through SBJ Ltd. For regulatory reasons
the cover eected was separate from an
umbrella policy for the benet of the
group maintained by the parent holding.
The policy was a claims-made one with
standard requirements to notify claims and

circumstances as a condition of cover. In
late 1994 Alexander Forbes received a com-
plaint of pensions mis-selling which it
reported to the brokers. In doing so it
drew attention to a potential for other
claims arising as a result of the Pensions
Review obligations that were to be
engaged. The brokers inadvertently
reported the single claim to the group
insurers and not to the relevant professional
indemnity (PI) underwriters responsible for
dealing with this insured subsidiary. In
addition, the notication was not one
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which extended to reporting the risk of
further claims of a similar kind which the
implementation of the Review might
bring out. When the mistake as to the
identity of the underwriter to notify was
appreciated, a late out-of-time notication
was made to the correct insurers. The latter
agreed to cover the actual complaint of
mis-selling but refused retrospectively to
provide blanket cover for all claims arising
from the Pensions Review. There was no
mechanism for requiring the insurers to
accept a block notication out of time.
The court held that the brokers had been
negligent not only in omitting to forward
notication to the correct insurers but that
SBJ Ltd ought also to have considered and
advised in respect of the need for a blanket
notication of circumstances. It was indi-
cated the damages which could be claimed
for these defaults would be such sum as
would have been obtained if a blanket
notication had been given, which the
court concluded the insurers would have
been obliged to accept. In principle these
would cover not only the lost indemnity
Virgo and Ryley
(minus excess) but any defence (legal) costs
that the original policy if operated would
have given.
# John Virgo and Philip Ryley
REFERENCES
(1) Per HHJ Diamond QC in Harvest
Trucking Co.Ltd. v Davis [1991] 2 Lloyds
Rep 638 at 643.
(2) Dened in Pan Atlantic Insurance Co
Limited v Pine Top Insurance Co [1995] AC
501.
(3) Ibid. at 550.
(4) Per Devlin J in West Wake Price & Co v
Chin 1976 2 Lloyds Rep 618 at 627.
(5) Rothschild Assurance plc v Collyear [1999] 1
Lloyds Rep 6.
(6) Lyer Limited v Lowe, Times, 8th January,
1997.
(7) Home Ins Co v Cooper 889 F 2d 746.
(8) Re Colemans Depositories and Life &
Health Association 1907 2 KB 798 at 807.
(9) A S Rendell v Archos Limited 1937 58
Lloyds Rep 287 at 292.
(10) Per Pollock CB in Mason v Harvey 1853 8
Ex ch. 819 at 820.
(11) Herbert v Railway Passengers Assurance Co
per Porter J, 1938 1 All ER 650.
(12) Barratt Bros (Taxis) Ltd v Davies [1966] 1
WLR 1334.
(13) See Pioneer Concrete (UK) Ltd v National
Employers Mutual General Insurance Asso-
ciation Ltd [1985] 2 All ER 395 followed
in Motor & General Insurance Co v Pavey
[1994] 1 WLR 462.
(14) A formulation apparently accepted by
David Mackie QC sitting as a High
Court Judge in Alexander Forbes v SBJ Ltd
[2003] PNLR 317 at para. 29.
(15) See above at Ref. 14.
Page 131
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