In this recent decision, the Commercial Court clarified the extent of insurance broker’s duties when assessing a client’s insurance cover for business interruption.
The Claimant, Eurokey Recycling Limited (“Eurokey”), a waste recycling company, suffered a fire at its factory in Leicestershire. Eurokey made a claim under its insurance policy with their insurers Paladin in respect of the losses incurred as a result.
Paladin, in dealing with Eurokey’s insurance claim concluded that Eurokey was under insured for material damage and business interruption cover and consequently Paladin threatened to avoid Eurokey’s insurance cover. Settlement for the insurance claim was consequently reached between Eurokey and Paladin in the sum of £1.5million.
The settlement was insufficient to cover Eurokey’s losses and so Eurokey commenced proceedings against its insurance broker Giles. Eurokey alleged that it had been underinsured as Giles failed to give Paladin the correct information regarding Eurokey’s business and therefore their insurance was calculated incorrectly. Eurokey’s claim for damages was in the sum of £17 million, being the difference between the settlement sum that Eurokey received and the sum it alleged it would have received had Paladin been properly advised.
Giles contended that whilst they had a duty to take reasonable steps to ascertain the nature of Eurokey’s business and the level of insurance required, it was not expected to calculate the sum to be insured. Giles denied any wrongdoing, submitting that they correctly relied on the information that Eurokey had provided
Eurokey’s claim was dismissed. The Commercial Court reviewed Eurokey’s instructions to Giles and the advice provided by Giles’ as a result. On this basis the Commercial Court were satisfied that Giles had provided an adequate explanation of the business interruption cover to be taken out by Eurokey. Further, the sum to be insured for business interruption was based upon the information that Eurokey had provided to Giles and Giles had no reason to believe that the figures provided were inaccurate.
In the decision, the Commercial Court clarified an insurance broker’s duties when assessing business interruption insurance cover. The Commercial Court confirmed that whilst an insurance broker is not required to calculate the sum to be insured, they should provide sufficient advice in order for their client to calculate this sum along with an appropriate explanation of the relevant insurance terms. In order to provide such an explanation an insurance broker is required to take reasonable steps to obtain an understanding of the nature of their client’s business and insurance needs, however this does not require a comprehensive investigation. The Commercial Court emphasised however that the type and level of assessment of a client’s business interruption insurance needs depends on the circumstances and is fact specific. Factors that should be taken into account when evaluating the scope of assessment required include the client’s sophistication, whether the client is well informed about their business and whether there is an ongoing relationship with the broker. In applying these principles the Commercial Court found that Giles had complied with their duties.
This case provides useful guidance to brokers in respect of the scope of their duties when providing clients with advice on insurance cover for business interruption. However it is important to note that the level of duties identified are fact specific, depending significantly on a client’s level of sophistication and so brokers should be prepared to adapt their approach according to the nature of their client.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.