High Court provides a reminder of the key principles relevant to broker negligence claims

In Infinity Reliance Limited v Heath Crawford Limited [2023] EWHC 3022 (Comm), the High Court provides a reminder of the key duties of insurance brokers and summarises the elements that must be proven in a broker negligence claim. The judgment also provides a useful example of how a claim of contributory negligence may operate to reduce the amount recoverable by a claimant insured.

BACKGROUND

The Claimant Insured was an online retailer selling personalised gifts for infants and children. It leased a warehouse owned and operated by a third party, which it used to both store and personalise the goods it sold. In May 2021, a fire rendered the warehouse unusable, and the Insured was required to find and fit out suitable new premises for its business.

The Defendant was the Insured's insurance broker and for the 2020/2021 policy year, the Insured's Business Interruption (BI) insurance coverage was placed with Aviva Plc. The Insured's BI cover was based on a forecast gross profit of £24.9m over two years on the traditional "sum insured" basis. This form of BI insurance requires an insured to forecast its insured profit for the indemnity period and fix the premium in advance. The price of this premium certainty is the risk of underinsurance. If the insured has underestimated the risk, the insurer will apply average to any claim and reduce pro rata the indemnity that is paid by the proportion of under-insurance.

BI cover may alternatively be placed on a different basis – "declaration-linked cover". For this type of cover, while an insured must still declare its turnover and profit in advance to allow an initial premium to be assessed, the insurer agrees not to apply average and at the end of each period of insurance, the insured's actual performance may be considered, and premium adjustments made.

Earlier placements

In an earlier policy period, 2017/2018, the Insured's BI cover was placed by a different broker with a different insurer on a declaration-linked basis. However, from the 2018/2019 placement, the Insured's BI cover was placed by the Defendant on a sum insured basis with Aviva.

The Defendant broker's evidence (given by its director, a Mr Leyens), was that in advance of this placement, the Insured's then Finance Director made it clear that the Insured did not want BI cover on a declaration-linked basis because it had previously been surprised by a premium adjustment request. The Insured instead wanted to ensure that its premiums were fixed in advance.

By the time of the 2019/2020 renewal, the Insured's Finance Director had been replaced. The Court accepted that the Defendant did not, at the renewal meeting or ever, raise the possibility of declaration-linked BI cover with the Insured's new Finance Director. The broker's explanation was that this was because, from their point of view, it had been made clear the previous year that the Insured's firm preference was not to purchase cover on a declaration-linked basis.

At the 2019/20 renewal meeting, the parties discussed how to calculate the sum insured for BI purposes and following the meeting, the Defendant broker sent the Insured a two-page generic document entitled, "How to Calculate Gross Profit". This document was prepared as guidance that would apply to any sort of BI cover and was not prepared specifically for the Insured or by reference to their policy. The Insured's Finance Director read the document and "became convinced" on a broad-brush analysis that the cover from the previous year was ample and left it unchanged.

The 2020/21 renewal

By the time of the 2020/2021 renewal, the impact of Covid-19 had had a largely positive effect on the Insured's business but also made future projections about financial performance uncertain. At the pre-renewal meeting, a decision was made to remove £200,000 of cover for additional increased costs of working. Declaration-linked BI cover was again not discussed. Following the meeting, the Defendant broker circulated a further copy of the generic document on how to calculate the sum insured for BI cover.

The Insured's Finance Director completed a revised calculation of gross profit of £24.9m that "adhered slavishly" to the guidance document. However, in doing so he also included a 10% upwards adjustment. The figure of 10% was given only as an example in the guidance document and had no application to the Insured's business. This meant the upwards adjustment that was intended to reflect the expected future performance of the insured’s business was not made on the basis of an actual forecast.

The claim

Following the fire at the warehouse, the Insured suffered extensive loss of turnover and equipping alternative premises came at a high cost. Ultimately, the Insured's cover was insufficient leaving its losses partially underinsured. The Insured's cover was based on a forecast gross profit of £24.9m over two years but the correct figure would have been closer to £33m. Accordingly, when the Insured settled its claim with Aviva, the insurer applied the principle of average.

The Insured then claimed against the Defendant broker for the shortfall, alleging that had it received proper advice from the broker, it would have been fully insured for its loss. In particular, the Insured alleged that:

1. The generic document that the broker provided on how to calculate the sum insured was misleading and ultimately led to the Insured purchasing insufficient cover.
2. The broker should have recommended a different type of BI cover (declaration linked cover) which would have produced full recovery from insurers.
3. The broker should have realised that the Insured required additional cover for costs it would incur to fit out alternative warehouse space in the event of a fire or similar event that rendered the warehouse unusable.

The Defendant broker admitted it had acted in breach of duty as explained below but disputed causation in part and alleged that the Insured was responsible for its loss by way of contributory negligence.

DECISION

The judgment of Paul Stanley KC (sitting as a High Court Judge) considered each of the elements required to bring a successful broker negligence claim: breach of duty, causation and loss, including contributory negligence.

Breach of duty

The Court emphasised the well-known principle that a broker's contractual and common law duty is a duty to use "reasonable skill and care in and about obtaining insurance on [the client's] behalf" (JW Bollom & Co Ltd v Byas Mosley & Co Ltd [2000] Lloyd’s Rep IR 136). A broker must learn enough about the client's needs and business to make sensible recommendations. It must tell the client enough about insurance to enable the client to make an informed decision and an effective purchase. What will be required to do that with reasonable care will vary depending on the commercial sophistication of the client.

The Court summarised the key authorities that provide guidance about the expected standards of brokers in a number of relevant respects including Dalamd Ltd v Butterworth Spengler Commercial Ltd, Standard Life Assurance Ltd v Oak Dedicated Ltd, Eurokey Recycling Ltd v Giles Insurance Brokers Ltd:

• To perform the agreed service properly, a broker should take reasonable steps to understand the client's business and its insurance needs but that does not require the broker to conduct a detailed investigation into the client's business.
• The broker should aim (reasonably) to match as precisely as possible the risk exposures which have been identified with coverage available (i.e. to recommend "sufficient and effective" cover if it is available in the market).
• How far the broker, instructed to place specific insurance, is obliged to assess the client's needs beyond that particular instruction is a case-specific question.
• To enable the client to take an informed decision, the broker must take reasonable steps to ensure that the client understands the key terms of the cover that is being obtained.
• Where the market offers a variety of different terms which might meet the client's needs, the reasonable broker will take care to explain the range of available cover and the advantages and disadvantages of each so the client can make an informed choice.
• The broker should take reasonable steps to enable the client to understand the key aspects of the placement process, for example, the information that underwriters will require or that the insured should provide.

The Court confirmed that these duties apply on renewal as much as on original placement of a risk although noted that "A broker comes to renewal with an existing fund of knowledge. The broker need not begin each renewal pretending to forget all that and start again. But it cannot simply assume that renewal is all that is required, even if nothing appears to have changed. A broker must apply its mind to the client's present circumstances and the sufficiency of cover to those circumstances."

Breach of duty and causation: calculation of sum insured

The Defendant broker admitted that it breached its duty by providing inaccurate information about how to calculate the sum insured for BI purposes. The Court characterised this breach as serious - it went beyond "a mere omission to give guidance" and consisted of the "positive provision of inaccurate and misleading guidance, on two occasions, accompanied by specific recommendations to rely upon and follow the inaccurate guidance note". The Court found that the broker's breach did in fact lead to the under-estimation. The error was a cause of the loss such that but for the mistake, the Insured would have been fully insured.

Breach of duty and causation: declaration linked BI cover

The Court rejected the broker's argument that there was no breach of duty in failing to recommend declaration-linked cover. The broker had argued that the Insured had expressed that it did not want such cover, but the Court explained that this was not an adequate answer to the Insured's complaint because:

1. When, in 2018, the Insured's then Finance Director expressed her preference for no declaration linked cover, a reasonable broker would not have accepted this without providing further advice. While a broker must respect a client's informed decision, even if it is a bad one, it must ensure that decision is an informed one. The Defendant needed to but failed to ensure that the Insured understood the disadvantageous consequences of the decision, including the risk of underinsurance that would lead to every claim being reduced by average.
2. Even where a preference has been expressed, the reasonable broker should check that it remains a "genuine and informed preference at renewal, especially as circumstances change". While it will be unnecessary to reprise the topic at length year after year, a broker should be alert to changes of circumstance. The broker, however, failed to explore the topic on renewal, despite the increased unpredictability of Covid on the Insured's business and the appointment of a new finance director and his continuing requests for information about how to calculate the sum insured for BI cover, which would have prompted "any reasonable broker to advise that declaration linked cover would match Infinity's requirements manifestly better than the cover it was buying".

The Court found that if the broker had, in 2020, raised declaration linked cover with the Insured, they would have instructed the broker to obtain it.

Breach of duty and causation: business-critical premises

A broker must take reasonable care to obtain and maintain a "detailed" understanding of the client's business. What is required is enough detail to identify the main risks that the client faces which might require insurance. A broker is not expected to second-guess or audit information it is given, but it is necessary to follow up reasonably obvious gaps or uncertainties. The Court found that given the broker's knowledge that the warehouse was critical to the Insured's operations (which had become apparent in 2019 following a cyber-incident), the broker breached its duty by failing to initiate a dialogue about what would happen if there was a serious and long-term problem with the warehouse. If raised, this would have led to a dialogue which would have resulted in a sum reasonably sufficient to cover necessary equipment of the warehouse owner being added as additional increased costs of working cover under the BI cover.

The Court did not, however, go so far as to find that the Defendant breached its duty by failing to recommend additional cover as it did not know enough to make such a recommendation.

Contributory negligence

The Court accepted the Defendant's argument that the Insured's Finance Director was at fault in how he calculated the BI sum insured in 2020. He had been provided with a reasonably clear explanation and it was plainly prudent to follow it carefully. However, the Finance Director failed to do so and had applied the 10% example figure in the guidance document as opposed to adjusting the figure to reflect the expected future performance of the insured’s business, which a reasonable person in his position would not have done.

The Court found that the Insured's careless failure to apply a reasonable methodology when calculating the sum insured was a cause of the loss. The Court concluded that while the Defendant's breaches were more significant in terms of "causative potency", the Insured, through the Finance Director, also had substantial responsibility. It was therefore just and equitable that the Insured's damages be reduced by 20%. The Insured was entitled to the amount by which the settlement was reduced by the application of average, with the appropriate reduction for contributory negligence.

COMMENT

This decision provides a helpful summary of the key elements of a broker's duty that apply both on placement and at renewal. While what is required of a reasonable broker will depend in part on the nature of the insured and the risks involved, the decision is a reminder of a broker's responsibility to ensure that a client's decisions are informed and that it understands the nature of cover being obtained. The judgment shows the particular dangers that can arise when covers are renewed from year to year. There may often be a temptation on the part of the broker and insured each to assume the other is sufficiently knowledgeable about the insured's business and the cover purchased. Changes in business practice, performance or personnel are all flags to ensure that sufficient attention is paid at renewal in every relevant class of insurance.

Brokers must be astute to the business needs of their clients in order to secure appropriate insurance coverage that properly responds to the client's needs. A broker must turn their mind to a client's present circumstances and the sufficiency of its cover for those circumstances at each renewal and cannot simply rely on past placements to satisfy this duty.

The decision also serves as a helpful reminder to insureds. Even where using an insurance broker, an insured's engagement in the placement process and at renewal is critical not only to ensure that the insurance correctly responds to their business needs, but to also neutralise any argument of contributory negligence by the insured.