English High Court Clarifies Brokers’ Duties to Clients
In New Zealand, England remains the primary source of court cases about insurance brokers’ duties. In this newsletter, we consider a recent English High Court case about insurance brokers’ duties of care to their clients, and the activities they must undertake to comply with those duties.
While English court cases do not bind New Zealand courts, they remain highly influential, particularly given the lack of cases on this area of the law in New Zealand.
Avondale Exhibitions Limited v Arthur J Gallagher Insurance Brokers Limited  EWHC 1311 considered whether an insurance broker satisfied the duty to advise an insured of the duty of disclosure, and to gather information from the insured in order to comply with that duty.
The insured’s claim for fire damage to its business premises was not met, and the insured’s policy was avoided ab initio by its insurer because one of the co-owners to the business failed to disclose two prior criminal convictions that both resulted in the co-owner serving prison sentences.
The insured and the insurance broker accepted that those convictions were material facts that should have been disclosed to the insurer. However, the insured argued that:
- The insurance broker had, in fact, been told of the two convictions and negligently failed to pass this information on to the insurer, or
- In any event, the insurance broker was negligent in failing to ask the right questions to elicit that information from the insured.
Relevant previous case law
The English High Court summarised the English law relating to the duties of insurance brokers in relation to the duty of disclosure as follows:
- The insurance broker should take reasonable steps to ensure that the proposed policy is suitable for the client’s needs. By definition, a policy that is voidable for non-disclosure is not suitable.
- It is not sufficient to rely upon written standard form explanations and warnings annexed to proposals or policy documents. An insurance broker must be satisfied that his or her client in fact understands the position.
- However, an insurance broker will not be negligent if he or she fails to ask questions about the risk that he or she had no reason to ask.
- Failing to give oral advice to the client about the duty of disclosure (as was the position in this case) is not necessarily indicative of a breach of duty.
In relation to the insured’s first argument, the insured did not persuade the court that he told the insurance broker about the two convictions. The judge noted that the available documentation (proposals etc.) supported the insurance broker’s position that he had not been told.
This is a good example of a court placing weight on the contemporaneous documentation in order to determine a credibility issue. If the insurance broker had made a contemporaneous file note of what the insured had disclosed to him (or the fact that he disclosed nothing), the whole court case would probably have been avoided.
In relation to the second argument, the court held the insurance broker was not in breach of his duty of care even although he asked no oral questions of the insured about the duty of disclosure. The judge summarised the role of an insurance broker to be:
‘an intermediary between the client and the insurer and, in particular, to ensure that correct information and all material information is given to the insurer.’
The judge based his decision that there was no breach on the following factors:
- The insured had not called an expert insurance broker to give evidence supporting the insured’s contention that the insurance broker had failed to meet the standard of care of a reasonably competent insurance broker by not trying to elicit material facts orally.
- The insured was more sophisticated about insurance that he was willing to admit.
- The insurance broker had identified specific documentation that was important and he had made clear the need to check the accuracy of the information provided to the insurer.
- The broker did have an initial meeting with the insured and so there was no justification for finding a duty to require specific oral enquires or advice as suggested by the insured.
No doubt, many insurance brokers will be relieved to read the outcome of this case. However, it is a reminder of the care needed when advising insureds about the duty of disclosure and ensuring that insureds comply with it. The circumstances may not need to change much before the outcome of this case would have been different.