Block Notifications and Robo-advice

The recent case of Ocean Finance & Mortgages Ltd v Oval Insurance Broking Ltd provides useful guidance on the often contentious issue of making block notifications to PI insurers.

Background

In the Ocean Finance case the Court was faced with the task of apportioning liability between brokers arising from a failure to advise the insured entity to make a block notification about systemic PPI mis-selling to their Insurers. 

There had been a systemic failure by the insured firm in the sale of PPI cover over several years which was apparent to the producing broker and ought to have been apparent to the placing broker by October 2009 at the time of the relevant notifications under the 2008/9 policy. 

The following year the firm was ordered by the FSA to carry out a past business review of approximately 10,000 past sales. 

The firm made a block notification to its Insurers following the past business review which was accepted by the primary layer but declined by the excess layer on the basis that a block notification should have been made during the previous policy year (2008/9). 

Without cover under the excess layer for the past business review, the insured brought a claim against the producing broker seeking to recover the uninsured losses. 

The producing broker settled the claim and brought a contribution claim against the placing broker on the basis they should have made a block notification under the 2008/9 policy. 

The Court's decision

The Judgment illustrates the serious problems that can arise if a proper notification of circumstances is not made to the current PI policy.  The insured firm was aware of circumstances that at the time could have, and which eventually did, give rise to the past business review losses, but it (and its brokers) failed to notify these as a block notification which meant there was limited cover available for the past business review when this arose during the following policy year (indeed, there would have been no cover available if the primary insurers had adopted the same approach as the excess layer insurers).  To avoid these problems it is important to make timely and full notifications of circumstances that might give rise to a claim of which the insured firm is aware and to word the notification properly.

Also of note from the judgment is the following:

• As the placing broker had made a notification under the 2008/9 policy without the instructions of the producing broker they had assumed a responsibility to make appropriate notifications (i.e. a block notification) at this time. 

• The placing broker was at fault as they were on notice of facts at the time of the notifications made under the 2008/9 policy from which they should have concluded that a block notification was most likely required .The Court held it was incumbent upon the placing broker to critically analyse adverse FOS decisions against the insured firm (of which it has been made aware) to see if these indicate a block notification is necessary, and to ensure any notification is properly worded to ensure that it takes effect as a block notification.

• The judgment also provides a useful analysis on what amounts to a "block notification". The Court indicated that to have been a valid block notification to the 08/09 policy the notification needed to make clear that it was intended as a block notification and have included the names of all of the potential claimants and identified acts which formed the basis of the circumstances which could give rise to the entire mass of claims. 

The Court apportioned 30% of the responsibility to the placing broker and the remaining liability to the producing broker on the basis the producing broker had a more in depth knowledge of the facts and would have had a greater appreciation in 2009 that a block notification should have been made. 

The future of block notifications

The Ocean Finance case provides useful guidance on the issues surrounding block notifications and will be of particular interest to those involved with the provision of robo-advice. As we have noted before, with automated financial advice tools on the rise providers and distributors are creating all the ingredients for potentially systemic mis-selling risk.

As identified in the EBA's Joint Committee Discussion paper in December, the risk of systemic mis-selling inevitably increases where there is a widespread use of automated financial advice tools. The EBA noted that as the underlying automated technology becomes more widespread resulting in a significant number of consumers transacting in the same way there may be a "herding risk" potentially creating a volume of complaints – or 'systemic or recurring problems' - that may need to be reported as a block notification.

This makes the Ocean Finance case of particular interest in managing potentially systemic risks.