By Alex J. Potts, Sedgwick Bermuda
In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  EWHC 2989 (Comm), the English Commercial Court has confirmed the nature of an insurance broker’s duties to its clients when obtaining Business Interruption Insurance (BII) cover.
This case arose out of a broker’s negligence claim, brought by a waste recycling company that had suffered significant losses following a fire. The court dismissed the claim on the basis that the broker had satisfied its duty of care, and it was the company’s own acts or omissions that had resulted in it being under-insured.
The court summarized the broker’s obligations as follows:
- A broker is not expected to calculate the BII sum insured or choose an indemnity period (which are matters for the commercial client).
- A broker must, however, explain to the client the method of calculating the sum insured, technical policy terms such as “estimated gross profits” and “maximum indemnity period,” and relevant considerations when choosing a maximum indemnity period.
- A broker will need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but not necessarily by way of detailed investigation. The nature and scope of a broker’s obligation to assess a commercial client’s BII needs will depend upon the circumstances, including the client’s sophistication, and the number of times the broker has met the client in the past.
- Although BII is for commercial clients, the level of client sophistication will vary enormously. It cannot be assumed that a small or medium-sized enterprise (an SME) will have any understanding of the nature of BII cover.
- If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
- Having satisfied these obligations, a broker must exercise reasonable care to adhere to express instructions as to the BII cover to be obtained.
Although the outcome of the case turned on its own facts, the legal principles are important to the way in which insurance brokers conduct themselves when placing BII risk in the London market, and they should be of interest to brokers’ professional indemnity insurers.
The court made two observations of relevance to the London market collectively. The court noted that, notwithstanding the contract certainty initiative in the London market, there were certain aspects of standard BII policy wordings, such as the definition of gross profit and the calculation of indemnity periods, which still remained unclear for clients, brokers, loss adjusters, and even some insurers. The court also noted that the insurance industry, unlike other parts of the financial services industry, did not yet have standard procedures in place for the identification and recording of sophisticated clients.
It remains to be seen whether the same standard of care is imposed on brokers in the Bermuda insurance and reinsurance market, given certain differences in market practice in London and Bermuda, and the sophisticated nature of many Bermuda (re)insureds.