300m in respect of its liabilities under the original policies and claimed against the reinsurers. The reinsurers denied liability on the ground that the reinsurance cover in respect of each vessel had terminated 48 months after attachment and prior to the casualty.26 The original policy terms provided that the cover would continue until delivery. In an interim judgment Phillips J held that the claim against the reinsurers failed.27 This judgment28 relates to the alternative claim against the brokers who were found liable for the reinsured’s loss for not being able to claim against the reinsurers. Phillips J emphasised that the reinsured wrote large lines on the original insurance because the brokers informed them that excess of loss reinsurance cover had been negotiated on terms ‘as original’.29 The brokers failed to inform them that, in contrast to the original insurance, the reinsurance was subject to the 48-month clause. Phillips J found that had the insurers been given this information they would not have accepted the reinsurance and would have written greatly reduced lines on the original insurance. They claimed as damages the payments that they had to make in consequence of being induced by the brokers’ misrepresentation to write larger lines on the original insurance. Broker’s failures in this transaction were:
1 Failure to inform the insurers that the reinsurance cover obtained for them was subject to the 48-month cut-off.
2 Failure to inform the insurers that the reinsurance cover available was subject to a 48-month cut-off. The brokers should have appreciated the significance of the clause and made clear to the insurers.
3 Failure to take steps to protect the insurers when the construction periods of the vessels were extended beyond 48 months.
4 Failure to draft the contractual wording with clarity. The brokers negotiated the terms of the cover on behalf of the prospective reinsured. The brokers were bound to exercise reasonable skill and care in drafting these documents so as to ensure that they gave clear expression to the terms that had been agreed.
A similar matter came before the Deputy Judge Mr Colman, QC in Sharp v Sphere Drake Insurance (The Moonacre),30 in which the broker did not explicitly warn the assured about an exclusion clause in the policy which provided a defence for the insurers in an action by the assured against them. The assured lost his claim against the insurers but he was successful in suing his brokers for negligence. The judge adopted the analysis made in Youell and the duties set out by Phillips J and found that the broker failed to exercise the standard of care to be expected from a professional broker and was in breach of contract and of duty to the assured.31
Duties apply on renewal
As stated above, the broker’s duty at the placement of the risk applies on the renewal of the policy and the broker owes a duty of care and how the duty is characterised depends on the facts of each case. Another list of duties of brokers is seen in Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd32 in which case, on renewal of the policy, the cover was restricted to the assured’s commercial property management activities whereas in the previous policies which expired, there had not been such a restriction in the cover. Hamblen J ruled that the broker’s duty to exercise reasonable skill and care involved contractual and tortious duties to the assured and the judge listed the duties as follows:
1 to exercise reasonable care and skill in the fulfilment of the assured’s instructions and the performance of its professional obligations;
2 carefully to ascertain the assured’s insurance needs and to use reasonable skill and care to obtain insurance that met those needs; 33
3 carefully to review the terms of any quotations or indications received;
4 to explain to the client the terms of the proposed insurance; and
5 to use reasonable skill and care to draw up a policy, or to ensure that a policy was drawn up, that accurately reflected the terms of the agreement with the underwriters and which was clear and unambiguous so that the client’s rights under the policy were not open to doubt.
Moreover, specifically applicable to Dunlop, the broker owed duty to explain any changes to the terms of the assured’s expiring policies necessitated by the state of the professional indemnity insurance market or the changes to the assured’s structure.
A further illustration of the application of the abovementioned principles is seen in Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd34 in which case Camden Market in North London was insured against material damage, loss of profit, liability and terrorism. The policy was subject to the Survey Condition, which stated that ‘cover under this Policy is conditional upon’ receipt of acceptable survey reports and also ‘completion to the Underwriters’ satisfaction of all requested risk improvements within timescales stipulated by the Underwriters’. The clause concluded by stating that: ‘Underwriters reserve the right to amend the terms of the cover (which for the avoidance of doubt includes the withdrawal of cover) if either [condition was] not satisfied.’ Stallholders in the market were using liquefied petroleum gas portable heating appliances (PHAs) and the insurers required them to be removed immediately. The broker did not specifically draw the assured’s attention to the Survey Condition. There was a major fire in the market caused by a PHA which ignited the clothes on one of the stalls. The insurers settled the claim for the amount of 70 per cent of the whole loss. The assured sued the broker for negligence and the court accepted the claim. The broker was in breach of several duties which will be mentioned below. Here it is to be noted that one of the duties that the broker was in breach of was the duty to obtain a policy which meets the assured’s requirements as he failed to obtain a policy which allowed the claimants to use PHAs, as they had wished. When the insurer asked about the removal of the appliances the broker ought to have appreciated that the policy did not meet the assured’s needs as the broker knew that PHAs were continuing to be used in the market.
As will be seen below with regard to the broker’s post-contractual duty, at the pre-contractual stage as well the broker is not classified only as a post box that passes documents between the assured and the insurers. In Jones v Environcom Ltd,35 the insurer sent various documents to the broker regarding the assured’s duty of disclosure and material facts. The assured was engaged in the business of electrical goods waste recycling, operating from premises in Lincolnshire. In 2004 Environcom installed a state of the art refrigerator line which was designed to extract and destroy CFC chemicals present in the compressors within refrigerators. The work process involved the removal of compressors bolted to the bottom of the refrigerators. In most cases the bolts could be removed by spanner, screwdriver or hammer, but some had to be removed by the use of plasma guns. The evidence showed that the use of plasma guns gave rise to a risk that hot metal splatter and sparks could ignite fridges being processed. It indeed proved to be the case that the plasma guns caused ignitions in fridges. There was also a series of fires. The insurer rejected the claim on the grounds of material non-disclosure of the use of plasma guns in the process of de-manufacturing fridges and the occurrence of further fires in addition to two previous claims. The evidence showed that the broker had not specifically warned the assured of its duty of disclosure, but had sent various documents to the assured which referred to that duty. This was not however sufficient for the broker to perform his pre-contractual duty of care owed to the assured. David Steel J confirmed that ‘The broker must satisfy himself that the position is in fact understood by his client and this will usually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal (particularly if a new person has become that client’s representative).’36
Duty of disclosure and not to misrepresent material facts
As referred to in Chapter 4 under section 19 of the Marine Insurance Act it is the brokers duty to disclose to the insurer material facts or not to misrepresent them when the assured passes the relevant information to the broker at the pre-contractual stage. Moreover, under s.19(2) the broker is under an independent duty to disclose material facts which are known by him but not known by the assured. If the broker is in breach of his duty under section 19 the insurer may avoid the contract given that the broker is the assured’s agent and his breach of duty of good faith is in fact the assured’s breach.
The broker owes duty of care to the assured regarding performance of his pre-contractual duty of good faith. In Jones v Environcom Ltd37 and Synergy Health (UK) Ltd v CGU Insurance plc (t/a Norwich Union)38 it was held that a broker:
• must explain the consequences of failing to observe the duty of good faith;
• must indicate the sort of matters which ought to be disclosed as being material (or at least arguably material);
• must take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention;
• must take reasonable care to disclose any material facts of which the brokers themselves were aware and not to make material representations to insurers which it knew to be untrue.
Additionally, the broker must take reasonable care to obtain insurance that clearly meets the assured’s requirements. Furthermore, a reasonable broker is required to know the difference between material and immaterial facts.39 As already mentioned above, a broker’s role is not simply passing communications between the assured and the insurer but also to exercise reasonable care and skill to ensure that the assured understands the insurer’s requirements, which includes the duty of good faith.
The broker that has been instructed by the assured might appoint a sub-broker to place the risk with the insurer. For instance in Fisher v Smith40 a broker who was based outside Liverpool instructed a sub-broker who was in Liverpool and who would be able to make terms on the spot for a satisfactory premium with a Liverpool underwriter. Moreover, if the risk is desired to be insured at Lloyd’s, a broker who does not have licence to insure risks at Lloyd’s has to appoint a placing broker who does have the licence.41 In Tudor Jones v Crowley Colosso Ltd,42 a broker who carried on his business in the USA appointed a broker in London to insure the islands that the assured acquired in the Bahamas. Similarly, in Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd,43 the assured’s in-house brokers appointed Forbes as placing brokers as they wanted to obtain insurance from Lloyd’s for renewal of the professional indemnity insurance for the assured.
It is important to distinguish the contractual relationships between the parties involved when a broker appoints a sub-agent. The assured has his contract with the producing broker who enters into a sub-agency agreement with the placing broker. Consequently, there is no privity of contract between the placing broker and the assured.44 The placing broker’s contractual claims will be made against the producing brokers and the producing broker’s contractual claims will be brought against the assured. The assured may suffer loss – for instance they may not be able to claim under the insurance contract for the reason that the broker did not place the cover that the assured required – as a result of the placing broker’s negligence. In such a case, in principle, the producing broker will be liable to the assured for breach of contract and he will be liable vicariously for the placing broker’s negligence. As seen below, in BP plc v Aon Ltd (No.2),45 it was held that a direct action by the assured against the placing broker may be acceptable if the latter assumes responsibility to the assured. The placing broker’s fee will be paid by the producing broker who then will claim his remuneration from the assured.
In this chain of relationships the producing broker owes duty of care to the assured as analysed above. In Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd,46 Hamblen J discussed the duties that may be owed by the placing broker against the producing broker. In Dunlop, HPC appointed Forbes as placing broker to renew the assured’s professional indemnity insurance. The assured, DHL, provided property consultancy services, including substantial commercial property valuation work for banks and building societies. DHL received a number of claims from various lenders said to arise from the provision of negligent and/or fraudulent valuation reports carried out by a director of DHL. DHL’s professional indemnity insurers refused to indemnify DHL for the reasons that when the policy was renewed it was renewed by limiting the cover to DHL’s ‘commercial Property Management activities only’. DHL therefore sued the brokers for negligence. The producing broker was found liable to the assured but the court also discussed the relationship between HPC and Forbes. It was agreed as part of the instructions to Forbes that cover was to be no worse than the expiring cover.
The duties owed between the placing and producing brokers are akin to those owed by a producing broker to the assured, namely:
• to exercise reasonable care and skill in the fulfilment of its instructions and the performance of its professional obligations;
• to carefully review the terms of any quotations or indications received;
• to explain the terms of the proposed insurance; and
• to use reasonable skill and care to draw up a policy, or to ensure that a policy was drawn up, that accurately reflected the terms of the agreement with the underwriters and which was clear and unambiguous so that the client’s rights under the policy were not open to doubt.
Moreover, in order to perform its duties to obtain quotations and place insurance, it is necessary for the placing broker to take care to ensure that the instructions are understood. A placing broker would be expected to query, clarify or confirm instructions which appear to be:
• unclear, ambiguous, or inconsistent with other information with which he is being provided;
• illogical or absurd;
• potentially disadvantageous or detrimental to the client or inappropriate to its business; or where:
• there is a disadvantage to the client arising from a change in instructions;
• there is other good reason to believe that they do not meet the client’s requirements as relayed by the placing broker.
It was also agreed by the broking experts that in general a placing broker would be expected:
• to obtain clear authority before agreeing a limitation or restriction or change in cover; and
• to draw attention to anomalies which may arise from the instructions received from the producing broker.
Applying these principles, Hamblen J held that a reasonably competent broker in Forbes’ position should have appreciated that the Limiting Condition constituted a fundamental change in the basis of cover in that DHL was giving up excess cover for its riskiest activity (valuation), that there was no obvious reason for this, and that the reduction in cover would be occurring when DHL’s existing policy still had three months to run. A reasonably competent broker would therefore have queried the apparent instructions, and Forbes had been negligent in failing to do so.
It should be noted that a placing broker does not owe a duty of care to the assured to ensure that the terms of the policy were drawn to the assured’s attention; it is the duty of the producing broker alone.47
The duty of care owed by the broker is continued at the post-contractual stage. In Youell v Bland Welch & Co Ltd (No.2),48 the facts of which are given above, the reinsurance contract was worded ‘as original’. This meant that the reinsurance contract is meant to provide a back-to-back (identical) cover with the original insurance. On the other hand, while the original insurance contract did not provide such a limitation, the reinsurance cover was expressly limited to 48 months after each insured vessel has come on risk. As explained above, the broker was found negligent for drafting the reinsurance cover in a way not matching with the original insurance cover. Moreover, Phillips J held that the broker was also in breach of his post-contractual duty of care by not seeking to extend the cover after the contract was concluded and when it became clear that the construction of the vessel would take longer than 48 months. The judge noted that the insurers had wanted reinsurance ‘as original’ and the brokers had been unable to obtain this. Phillips J was of the view that in these circumstances it should have been clear to the brokers that, if construction of the hulls was delayed to the extent that reinsurance cover was likely to lapse, the insurers would want extension of that cover, if it could be achieved. Furthermore, the brokers should have taken into account that the insurers would rely upon them to take appropriate action if there was a risk of construction of a vessel overrunning beyond the 48-month period of cover.49
Youell was referred to in HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd (formerly Lloyd Thompson Ltd),50 in which the broker was found to be in breach of his post-contractual duty of care in terms of advising the reinsured regarding the coverage issues against the reinsurers. HIH insured LDT who financed some films which would be made by Flashpoint. The number of films to be made by Flashpoint was identified in relation to three slates of films: the 7.23 slate of six films, the Rojak slate of ten films and the Award slate of five films. The insurance was to cover any shortfall on projected revenue from the making and marketing of the films. HIH reinsured the risk on a back-to-back basis. The assured did not make the number of films stated in the insurance contract and the films that were made did not generate significant revenue. As a result the investors suffered heavy losses, leading to payments by HIH in 1999 and 2000 of US15,611,008, US14,679,473 and US25,092,303 to LDT in respect of the three slates of films. The reinsurers refused to pay to the reinsured in respect of the losses that the latter indemnified. In a separate action, in HIH Casualty and General Insurance Co v New Hampshire Insurance Co,51 the Court of Appeal held that the statements as to the number of films to be made were warranties so that HIH had not been under any liability to make payments and the reinsurers were not under any liability to indemnify HIH for any payments which it did make. HIH then sought damages from JLT for negligence that JLT ought to have warned HIH of the breaches of warranty in respect of the reinsurance and owed a duty of care to do so. The Court of Appeal affirmed Langley J’s judgment that the broker was in breach of his post-contractual duty of care as he did not warn the reinsured about the coverage issues in relation to the breach of warranty. A series of risk management reports of Flashpoint were distributed through JLT in late 1998 and early 1999 and they disclosed that less than the projected number in each slate of films was being produced. It was clear that each of the three slates was not successful and that each of their returns fell substantially short of the projected revenues. Nevertheless, in 1999 and in 2000 HIH made payments to LDT. The Court of Appeal held that JLT’s post-contractual duties were more than to act as ‘a mere post-box’. JLT had a duty of care to seek instructions or at least to ensure that HIH were sufficiently aware of the potential concern to assess what, if any, instructions to give. Lord Justice Longmore52 said ‘an insurance broker who, after placing the risk, becomes aware of information which has a material and potentially deleterious effect on the insurance cover which he has placed is under an obligation to act in his client’s best interest by drawing it to the attention of his client and obtain his instructions in relation to it.’
The risk management reports, prepared and provided by Flashpoint to JLT and forwarded by JLT to HIH, had clearly indicated the film reductions and JLT had read them and had been aware of the reductions and the possible resultant coverage issue, but had not alerted HIH to it. JLT owed a duty to alert HIH to the coverage issue by drawing specific attention to the film reductions indicated in the risk management reports of which JLT was in breach. JLT was nevertheless not liable for the loss HIH suffered as JLT’s breach did not cause the loss. HIH made payments either by not seeking the reinsurer’s view and for some payments they paid although they knew that the reinsurers were disputing the claims.
The post-contractual duties owed by the brokers were discussed in detail in BP plc v Aon Ltd (No.2)53 in which the sub-agent was in breach of his duties to the assured. BP brought a claim for damages in tort against Aon London in respect of the placement and operation by Aon London of a Global Construction All Risks Open Cover agreement. The purpose of the Open Cover was insured on an all risks basis in respect of physical loss and damage to the property of BP involved in oil and gas construction projects throughout the world. In order to obtain cover in respect of any such project, that project had to be declared to the underwriters under the Open Cover. The insurance had been placed by Aon. Aon presented the risk to London, European and US market insurers. It was determined by Aon that Aon London would handle declarations to the open cover emanating from BP’s London office, whereas declarations emanating from Chicago would be handled by Aon companies in the US and transmitted to London.
Aon London declared the risks only to the leading underwriter but not to the followers. As a result BP suffered loss as the following underwriters were never under risk for the declarations were made only to the leader. In an action by BP against Aon the key question was whether Aon London’s representation, judged objectively, was such as to amount to the assumption of a personal obligation as explicitly as if he were personally contractually binding himself to provide the advice, the information or the services.54 Colman J held that an agent could incur personal liability to a client of his principal only if there was an assumption of responsibility by the agent which created a special relationship between himself and the client. Colman J’s conclusion from the cases was:
[T]here has to be an express or implied representation by or on behalf of the agent by words or conduct not only that it is he who will be responsible in fact for preparing the advice or carrying out the services with proper skill and care, but that he personally will accept legal liability if he fails to do so and if the claimant suffers economic loss by reason of his reliance on such assumption of responsibility.