Brokers' Duties – Business Interruption
Whilst not exactly a reason for brokers to jump for joy, the recent case of Eurokey Recycling Limited v Giles Insurance Brokers Limited has at least reversed the trend of brokers' duties becoming more onerous with each reported case.
The key aspect of the judgment relates to what duties brokers have to advise clients on Business Interruption cover.
Giles was instructed to place cover for Eurokey in respect of its waste recycling plants. Cover was obtained with Paladin on the basis of turnover of £11m and Business Interruption cover of £2.5m for a 12 month indemnity period. In fact, turnover was £17.6m (and projected to increase). Accordingly, the Business Interruption figure should have been higher. Eurokey also argued that it had expected a 24 month indemnity period.
A fire took place at Eurokey's main plant shortly after inception and Eurokey sought to recover under its policy with Paladin.
All parties accepted that Eurokey was significantly under-insured. Eurokey obtained a relatively low settlement with Paladin and sought to recover the balance of what it said it should have recovered by way of a negligence claim against Giles.
Eurokey complained that Giles was responsible for the underinsurance. In particular, it argued that Giles had failed to explain how the Business Interruption figure should be calculated. As usual, there was a dispute about who said what to whom. This became particularly relevant as the Court found that Giles' pre-renewal report was not, in itself, sufficient to enable Eurokey to understand how business interruption was calculated.
The Court found that Giles had not been negligent. Essentially, it preferred Giles' witness evidence to that of Eurokey. The Court believed that (a) Giles had been through the pre-renewal report with Eurokey, (b) Eurokey had calculated the level of Business Interruption cover (not Giles), (c) Eurokey understood the basis on which this should be done and (d) Eurokey took an informed decision to choose a 12 month indemnity period (rather than 24 months).
The decision highlights the importance of witness evidence and how each case turns on its specific facts. It emphasises how important it is to keep records of advice given in meetings (see '6' below).
Guidance for brokers
The Judge provided the following guidance on Business Interruption. Whilst the broker's duty remains high, it is now clear that the client cannot simply work on the assumption that the broker will understand the client's business for insurance purposes:
1. A broker is not expected to calculate the Business Interruption sum insured or choose an indemnity period. However, a broker should provide sufficient explanation to enable the client to do so;
2. A broker must take reasonable steps to ascertain the nature of its client's business and its needs;
3. A broker must take reasonable steps to ensure its client understands the term 'Insurable Gross Profit';
4. A broker is not expected to carry out a detailed investigation into a client's business;
5. The sophistication of the client is important. However, this will be case specific. It cannot be assumed that an SME will have any understanding of insurance. In this case, Giles was considered to have given sufficient guidance for a relatively sophisticated client;
6. The burden is on the broker to demonstrate what advice it has given. Brokers must therefore keep written records of such advice where possible.
7. A broker is not expected to verify information provided by a well-informed client unless he has reason to believe it is not accurate.
Causation and Contributory Negligence
Despite having found against Eurokey, the Court went on to consider the causation and contributory negligence arguments.
He found that Giles' arguments on causation would have failed. However, unlike in the famous Jones v Environcom judgment, the Claimant could prove that it would have been able to find insurance cover for the correct amounts.
The Court also said that, had it found against Giles, it would have found that Eurokey was 50% contributorily negligent for its loss. It said that Eurokey understood the figures within its accounts and should have been aware that they were not the same figures that were being used to obtain insurance.