The recent case of "Dunlop Hawyards (DHL) Ltd v Erinaceous Insurance Services Ltd v Lockton" [2008] EWHC 520 Comm has shed further light on the potential pitfalls that may arise where more than one broker is involved in placing insurance on behalf of an assured. This means the involvement of several parties who may not all be in contact with each other and do not necessarily have contracts with each other. This can result in details as to the type and scope of insurance required becoming "lost in translation", with the consequence that the assured finds itself with inadequate cover when it makes a claim, the underwriter refuses to indemnify the assured and a dispute ensues as to who is liable for the loss and in what proportion.
In this case, the claimants were property consultants, whose business included commercial property management, surveying and valuations. They were part of a group of companies who instructed brokers to consolidate and renew the professional indemnity insurance for all companies in the group except those carrying on insurance-related business. Brokers were instructed to obtain a primary layer of cover of £10 million on an each and every claim basis, together with an excess layer of cover for the claimants for an extra £10 million.
The producing brokers were not Lloyds brokers so they instructed sub-brokers who were Lloyds brokers to place the cover.
The sub-brokers placed both the primary and excess layers of cover. However, the excess insurance was stated to follow the primary policy so far as applicable except that the indemnity provided by the excess policy was limited to "the Insured's Commercial Property Management activities only". This wording was clearly stated on the slip for excess insurance that was drawn up by the sub-brokers and scratched by the excess insurers.
The claimants subsequently faced claims for negligent and / or fraudulent valuations which, if proven, might impact on the excess layer. They therefore notified the excess insurers who denied liability on the basis that the claims arose out of valuations not commercial property management activities.
The claimants sued the producing brokers for failing to fulfil their instructions and obtaining inadequate cover. Those brokers sought in turn to claim an indemnity or contribution from the sub-brokers on the grounds that they failed to draft a slip or policy wording that accurately reflected the agreement of excess insurers to provide cover on the same terms as the existing cover, additionally that they failed to carry out producing brokers' instructions to procure excess cover on the same terms as the existing cover.
It should be noted that no claim was made against the excess insurers, although the producing brokers sought to have them joined as defendants under CPR 19.2(2) on the basis that there might be an argument for rectification of the insurance contract and joining the excess insurers as defendants would ensure they were bound by any decision of the court regarding rectification. The court however did not agree. The judge was of the view that no sustainable case could be made for rectification because the wording on the slip limiting cover to the claimants' commercial property management activities was very clear.
The court was then faced with an application by the sub-brokers to strike out the producing brokers' claims against them for indemnity and contribution. The sub-brokers argued that according to the terms of agreement between the two brokers, the producing brokers were responsible for correcting any errors made by the sub-brokers. They further stated that their role was limited to advising on the key features of the proposed insurance cover and passing on underwriters' quotations to the producing brokers. They were not obliged to interpret or construe those quotations. Furthermore, it was the producing brokers who were solely responsible for advising the assured in relation to its insurance requirements and sub-brokers had no contact with the assured themselves.
Again, the judge did not agree. His view was that the producing brokers had a good arguable case against the sub-brokers for failing to comply with the instructions they were initially given to renew the professional indemnity cover on no worse terms than the existing cover except with the consent of the producing brokers.
The sub-brokers then argued that they owed no duty of care to the claimants. In particular, they did not assume a responsibility to the claimants, made no direct representations to them and even if they had, the claimants had not relied on those representations. The sub-brokers' case was that the terms of the sub-broking agreement precluded such an assumption of responsibility by them to the claimants.
The judge rejected these arguments and found that the sub-broking agreement was designed to prevent the sub-brokers from competing directly with the producing brokers. It was not intended to prevent a tortious relationship arising between the sub-brokers and the assured. It did not negative a duty of care owed by the sub-brokers to the claimants to exercise reasonable care in placing the renewed cover on the instructions of the producing brokers.
The substantive case in the above matter has yet to be heard so it is not presently clear what proportion of liability each of the brokers might have to bear. However, in another recent case, "Darryl Fisk v Brian Thornhill" [2007] EWCA Civ. 152, the placing broker was held by the Court of Appeal to be liable for a contribution of 25% of the damages paid by the producing broker to the claimants. In that case, both brokers were criticised by the court for relying on outdated information regarding the construction of the building in question. The answers provided in the proposal form regarding the building's construction were unclear and incomplete and when the cover was placed with different insurers the following year, the placing broker gave a warranty to the effect that the building was of standard construction, which it was not. When the building was damaged by a flood and underwriters refused cover, the assured sued the producing broker and recovered damages. He then in turn sued the placing broker and recovered a 25% contribution.
Whilst the extent of fault may be difficult to determine with regard to each broker, the courts are apparently willing to attribute and apportion liability where they deem it appropriate. Therefore, even where a sub-broker is not directly instructed by the assured, he remains exposed if he takes steps which could prejudice the assured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.