Declaration Of Material Fact And Risks To The Broker.

[FullyComp]

Some of you will have received the Countrywide newsletter for July and it's worth reading the disturbing case highlighted on the back of it about a broker who insured a company that recycled fridges. They used plasma cutters on fridges containing flamable gas and the whole place burned down after there had been several previous smaller fires.

The insurer refused indemnity due to non-disclosure of the use of plasma cutters and previous fires. The company claimed against the broker for failing to warn them about the dangers of non-disclosure. The broker defended the claim by showing various forms which advised the firm about disclosure obligations.

The case the went to arbitration and it was decided that the use of standard duty-of-disclosure forms with proposals and policies warning the insured about failure to disclose material fact was not good enough and that the broker should also explain the obligation to disclose, the nature of material facts and the consequences of not disclosing etc.

Basically it was ruled that the broker should make sure the insured understands the situation either in writing or verbally at point of sale and at renewal.

Countrywide then helpfully quote a suggested wording to be used by brokers in their declarations.

In this case the broker who, no doubt, thought they did everything correctly to inform the insured about disclosure of material facts lost the case and their PI insurer picked up a very large bill less the excess. The disturbing thing here is that there apears to be no responsibility placed on the insured for their own actions.

Proposal forms always had a declaration that the insured signed and then we have additional broker declarations which included warnings about disclosure of material fact and recently the FSA suggested that additional wording stating the importance of reading the documents before signing and understanding the consequences is included in the declaration.

But now it's not even good enough to have these forms issued 'as standard generic' but they must be personalised and confirmation from the insured obtained at point of sale and renewal that they have received and fully understood the message.

This has set a precedent and leaves the broker wide open to a lawsuit on a simple technicality even if they have done what is reasonably expected to bring the importance of disclosure to the attention of the insured whilst the insured can opt out of any corporate resonsibility to look after their own interests because if the insurer refuses to pay they can just sue the broker stating they were not aware of how important it was to make the disclosure.

Where will it end?

[Mike Cranny]

The case is Environcom.com and you can find it here http://www.out-law.com/page-11025

An insurance broker must be satisfied that the client fully understands the duty of disclosure. This will usually require a specific oral or written exchange when the insurance is first taken out and at renewal

There are two aspects to this. Utmost Good Faith is one, and the other - much wider and quite different, is "what is the duty of the broker to the client"

The problem is that Insurers of commercial risks still have the outmoded and plainly ridiculous principle of Utmost Good Faith on their side. Consumers a have much better sensible deal, backed up by ICOBS and FOS.

UGF was introduced a time when "the underwriter knows nothing....." Its time has gone, and even though everyone was brought up on it, it goes back to the days when slavery was still legal. Just because it is old, doesn't make it right.It is used to support poor underwriting practice and is always operates in favour of the Insurer because insurers ignore the fact that it applies equally to them

Because of UGF in commercial contracts, an insurer can turn a claim down with the benefit of hindsight and the chances of the client over turning it in court are usually remote. All the insurer has to prove is that a fellow member of the "prudent underwriter" club would do likewise.

The client then will sue the broker - this is so much easier. The role and duties of the broker are often very wide and poorly understood.

Fact finding and presenting the case to the insurer accurately is one of them. The only real protection to the broker is to do the job with more than the usual skill and diligence, and to keep contemporaneous and accurate records.

The broker needs to be a professional. It is hard to see how they can survive unless they are professionally qualified, or have studied the legal and theoretical side of their trade. Relying on a tick box approach has never worked.

Finally, everyone should work towards the abolition of utmost good faith and its replacement with simple good faith.
Claims should be paid by insurers, not by brokers or policyholders. Insurers should underwrite properly, before the claim, and removing the safety net of UGF would help.

[davidmd]

For commercial business (other than some financial lines) proposal forms have long gone. This makes the broker's job even more onerous. I believe there is still a temptation out there for brokers to become complacent and roll on the same programme year on year and on new business merely copy the existing programme and try to compete on cost. This is the wrong approach.

The case decision makes it clear that a broker must interrogate a client as to requirements and trade processes. My advice is always to first of all understand the client's business operations and risk appetite and then design an insurance programme rather than the other way round.

On this case the broker was found not at fault as insurance would not have been available but they did incur very substantial legal costs.

This is yet another reason as to why we must all strive to improve and raise the bar of professionalism.

[FullyComp]

Thanks for the link Mike. This shows the outcome and it's good to see some common sense prevailing with the decision.

[waltham pitglow]

I have no sympathy...stop bleating,

You have a duty of care to the customer. Try exercising it rather than trying to cut corners.

Also read the details of the environcom case before offerring such an opinion.

Mike Cranny is right that the fault lies often with the underwriters who turn down claims under rather archaic laws that protect them.

But exams are not the answer, qualifications are not the answer.

Learning and development is and there is a lot of value in three little piggies but ultimately it is about us sitting down with clients and making reasonably sure that our customers know just how awful insurers can be and trying to make sure that they do not have a chance to crack the whip when unfairly when a claim arises.

What I do not understand is why the FSA does not do more about making sure the insurers treat customers fairly when it comes to dealing with claims.

Waltham

[waltham pitglow]

The broker in this case was very much at fault (hence the judgement). Because tghe judge decided there risk could not be insured there was no financial loss so no damages.

I repeat, the broker was slaughtered by the judge in his judgement

It is well worth reading

[Mike Cranny]

The broker was at fault - Yes. It failed to drill down and extract the teeth of truth from the client's mouth.

The Client was at fault - Yes no doubt about that.

The Insurers however are almost impossible to sue because they hide behind UGF.

The broker is a soft target whilst the insurer sits behind a wall erected in the 18th century and no longer relevant.

It was true once that the "insurer knows nothing" - especially what the subject matter concerned a fort in Sumatra.

It is very sad that one of the strongest arguments for using a broker is that they are much easier to sue in order to get a claim paid, than an Insurer.

[FullyComp]

Actually no-one was 'bleating' as you put it.

This is a discussion forum and we were discussing it. Having read the initial report and not the full report that was linked to later on I was not in possession of the full facts at first.

My concern was that the broker had appeared to have done his best to make the insured aware of his duty to declare material fact. The suggestion was that the broker should get the insured to sign a declaration to confirm that he had read the declaration that he was about to sign which is clearly absurd.

It was also my concern that it appeared to make the broker the scapegoat for any failure by the insured to declare a material fact.

You can only show copy documantion that brings the duty of disclosure to the insureds attention which the broker appeared to have done.

However, as I later said, the judgement was fair in that the broker was not automaticaly held responsible for the insureds loss for the reasons given.

It still follows, however, that the broker must now be able to prove that he has explained the duty of disclosure to the insured AND prove that the insured has understood it....hence the declaration to confirm that they understand the declaration..... A pedant could argue the insured did not understand that either....

It is quite possible to act responsibly, do what you think it fair and right at the time and then slip up on a technicality. This is not necessarily a failure in duty of care as you seem to think it is.

[waltham pitglow]

That is what the judge said and it was an abject failure. This is not about getting the client to sign a declaration but about explaining things to a client so that they understand.

And I think you were bleating...that is my opinion. I also respect the fact that you have looked at it more closely.

I was at the trial and have a transcript of the evidence. It is fascinating and the reason that we have this judgemnent is that, in my opinion, the broker did not do a good job.

did you know that this case is about a certain type of cutter? The insured told the broker that they had lost one of the cutters. The broker did not know what they were and did not ask the client what they were...is that right? they were called Plasma Guns. If you were told by a client that he had lost or has stolen one of these do you thinka competent broker should ask what it is if you do not know?

The broker was told a month before renewal that the current insurer had declined to renew...do you think that was right?

The broker had a long lunch on the day before renewal with the current underwriter and the decision was reversed with a substantial increase in premium and excess (and comission)....do you think that was right?

Ultimately, I do not think that the judge felt that the risk was uninsurable but that the cusotmer would not have accepted the risk control measures that might have been set.

But it seems to me that the point is that the broker did not look after the customer and put the customer first. surely the customer is entiltled to know that there is a declinature so that they can approach another broker

and so the argument and discussion goes on.

Ultimately there are a number of areas where the insurer has the broker by the proverbials:

Average:
Indemnity periods:
Calculation of Gross Profit:
Non-disclosure:
Warranties:

and the list goes on but these are the most common.

Remeber that when things goes wrong you cannot rely on a customer once the lawyers have got hold of them so you need to do something to ensure that the customer understands what they are buying (and can make an informed decision).

In my opinion, declarations are not the answer. The real answer is that the broker gives a clear explanation and then notes his or her file that the xplanation has been given. The courts will trust a broker if it is written down and there is a good record of compliance and treating customers fairly. Thats is the whole weakness of standard letters and templates.

Rememebr the words (my paraphrase) of Professor Jim Gower, Regulation is about protecting a customer from not being made a fool of not about protecting them from making a fool of themselves.

Ask the client for whatever time it takes to explain the key areas and if they refuse, note on the file that they refused giving the date and the time. Develop quality hand outs on the key subjects.

In court case recently an expert broker suggested that it was not good market practice to give too many explanations because the client would become impatient and the broker might lose the bsuiness.....hmmm...nice bit of risk management there...I didn't explain things properly in case I did not get the business!

It is a discussion forum:-)

but let us really get into the discussion about the solution. the broker was severly negligent.

but the insurance companies generally seem to be getting away with murder....what can be done about that. they may have the law on their side but are they treating the customer fairly?

[John B Portwood]

I understand that the broker was advised a month before that the insurer was not going to renew.

I suppose a competent CYA position would be to send the client a letter of the form
-------------------
Your policy is due for renewal in a month's time. We have been advised by your current insurer that they do not wish to invite renewal. We will do our utmost to secure cover with another insurance provider however we wish to point out that the fact that your insurers do not wish to invite renewal is a material fact that must be disclosed on all future insurance proposals.
-------------------

I assume the broker then made attempts to obtain cover but were unsuccessfull - this would take quite some time - and eventually had to go back to the insurer and managed to obtain terms from them. The fact that the premium and excess were higher is irrelevant and the facetious comment about increased commission (what happened to fees?) cynical - the risk has proved to be higher than the insurer previously estimated as claims have occurred.

In view of the closeness to the renewal I assume that the insurer would be prepared to hold covered for a period to allow the proposition to be put to the client and a second letter, no doubt should have gone to the client with.
----------------
We refer to our letter of xxxxxx. We have been unable to secure a quotation with another insurance company and have therefore gone back to your current insurer. They have advised us that, on reconsideration, they are prepared to offer renewal terms at a premium of £yyyyyy.yy and an increased excess of £xxxxx.xx - as the insurance company have imposed special terms on the risk, this is a material fact that must be disclosed on all future insurance proposals.

The insurance company are holding covered for a period of 14 days from renewal date and we await your renewal instructions.
------------------------------------------