Reminder to brokers of the need to advise insureds on policy terms

In RR Securities Ltd v Towergate Underwriting Group Ltd [2016] the Court held a broker liable for failing to advise its insured client that certain safety precautions were required by insurers as a condition precedent to cover under a property policy.  The case serves as a reminder to brokers of the importance of advising clients on the terms of the policies they place, particularly onerous terms such as conditions precedent.

Background

The claim involved the insured JBR Leisure Ltd ("JBR") (acting by its assignee RR Securities Ltd) bringing proceedings against its insurance broker, Towergate Underwriting Group Ltd ("Towergate").

JBR was an operator of amusement arcades and other associated activities, principally in Southend. In 2008 JBR engaged Towergate to arrange property insurance (covering both buildings and contents) for various properties owned by it. A policy was placed for 8 July 2008 to 7 July 2009 through Equinox Underwriting ("Equinox") (the "Policy").

One of the properties covered by the Policy was a converted church known as the "Rock Factory" in Southend. The Rock Factory was used by JBR for storage of games machines while they were not in use in its arcades or other venues. On 22 December 2008 a fire was deliberately started at the Rock Factory which led to the loss of all games machines stored there.

JBR claimed under the Policy but Equinox declined cover on two grounds:

1. JBR was in breach of a condition precedent to liability requiring it to comply with Equinox's Minimum Security Requirements ("the MSS"); and
2. JBR was in breach of a Reasonable Precautions clause in the Policy.

JBR accepted ground (1) (but not ground (2)) and accordingly did not pursue its claim against Equinox.

JBR issued proceedings against Towergate alleging negligence in the placement of the Policy. Towergate accepted liability shortly before trial in that it had failed to draw the MSS to the attention of JBR prior to inception of the Policy but Towergate disputed both causation and quantum.

Decision

HHJ Waksman QC ruled on the following causation issues before him at trial:

1. If Towergate had notified JBR of the MSS, would JBR have implemented them (thus complying with the condition precedent to liability)?
2. Even if JBR had implemented the MSS was it in any event in breach of the Reasonable Precautions clause (such that it would have no insurance cover)?
3. If JBR had implemented the MSS would the fire have happened in any event?
4. Even if JBR could not show that the fire would have happened in any event does it still have a valid claim (against Towergate)?

Issue (1) – Would the insured have implemented the MSS?

The question of whether JBR would have implemented the MSS was treated as a question of fact by the Judge. Having heard evidence from a Mr Remblance for JBR, the Judge concluded that JBR would have implemented the MSS if they had been drawn to JBR's attention by Towergate. In reaching this conclusion, Judge Waksman relied upon the following factual findings:

• The minimal cost involved in implementing the MSS particularly in the context of the Policy premium of £17,000 and the value of the games machines likely to be stored there (agreed to be at least £155,000);
• The Rock Factory was the obvious location for JBR to store a large number of games machines given its size, suggesting that security at the property would have been a key concern; and
• Mr Remblance had installed exterior security lighting at the Rock Factory in light of security concerns.

Judge Waksman rejected Towergate's submissions on the point, most of which went to Mr Remblance's credibility.

Issue (2) – Breach of the Reasonable Precautions clause

The test under English law in relation to Reasonable Precautions clauses in insurance contracts requires the party relying on the clause (ordinarily the insurer) to show recklessness on the part of the insured (per Lloyd LJ in Sofi v Prudential). This test was agreed between JBR and Towergate.

Again focusing on the factual position, Judge Waksman concluded that JBR was not in breach of the Reasonable Precautions clause as:

• there was a system in place for locking or securing all doors and windows;
• after a security breach at the Rock Factory involving a former employee Mr Remblance changed the locks at the property; and
• Mr Remblance installed exterior lighting because of security concerns.

Judge Waksman rejected Towergate's submission that the fact of Equinox declining cover for breach of the Reasonable Precautions clause was evidence of recklessness. The Court had to proceed on the basis that JBR had disputed Equinox's allegation of breach.

Issue (3) – Occurrence of the fire notwithstanding the MSS

Judge Waksman dealt with the third issue very briefly, concluding that even if the MSS had been implemented this would not have stopped a determined intruder from breaking a window, gaining entry to the Rock Factory and starting the fire. It is notable (and Towergate submitted) that there was no conclusive evidence as to how the perpetrator had obtained entry to the property but Judge Waksman proceeded on the basis that skylights at the property were the most likely candidate.

Issue (4) – Does JBR have a claim in the absence of proof the fire would have occurred?

This issue did not arise for determination given Judge Waksman's finding on Issue (3). However, the Judge commented (obiter) on the case put forward by Towergate which was based on the obiter comments of David Steel J at first instance in Jones v Environcom and of Rix LJ in the subsequent appeal. In summary, Towergate submitted that if no fire would have occurred had Towergate not been negligent in failing to advise of the MSS then this would amount to extending the scope of an insurance broker's duty beyond advising on obtaining insurance cover. It would involve imposing a duty on Towergate (which it had not intended to accept) to advise JBR on security precautions that it should take at the Rock Factory.

Judge Waksman noted that, had he been required to rule on the point, he would have rejected Towergate's submissions. In the Judge's view the facts of the present case could be distinguished from those in Environcom as Towergate's duty was to advise JBR of security precautions (i.e. the MSS) required by insurers and, had Towergate fulfilled that duty then the MSS would have been implemented. Judge Waksman suggested that this entailed "a much closer and direct connection between the "insurance cover" duty and any putative expansion of that duty to cover the taking of security precautions…arguments based on what loss is and is not within the scope of a broker's duty is highly context-dependent."

Quantum

Judge Waksman found in favour of JBR on quantum.

Comment

The case is a timely reminder for insurance brokers of the importance of drawing policy requirements, in particular conditions precedent to insurers' liability, to the attention of policyholders at the time of placement of the insurance.

Of interest to brokers will be the obiter comments of Judge Waksman in relation to Issue (4) which suggest that the scope of a broker's duty to its client will not necessarily be limited to a duty to advise in relation to the placement of insurance. While the judgment does not constitute authority on the issue it appears that the courts may in future entertain arguments as to a wider interpretation of the scope of duties which a broker will be deemed to have assumed to its client.

Although Judge Waksman did not consider the terms of Towergate's engagement with JBR, brokers should look to clearly set out in their engagement terms the matters on which the broker will and will not be advising the client. When placing a policy of insurance which includes conditions precedent, brokers may also wish to draw to the policyholder's attention the existence of the condition(s) and also spell out what the policyholder should do to ensure compliance with the condition(s). In view of the changes to English insurance law arising from the Insurance Act 2015 this issue is likely to become more important as insurers seek to protect themselves by including more conditions precedent in policy wordings.