Construction Insurance and UK Construction Contracts

Marshall Levine and Roger ter Haar KC

Document

Page 107

CHAPTER 7 Appointing insurance brokers and the role of insurance brokers

General

7.1 The description of placing insurance in the previous chapter illustrates that placing insurance in respect of construction projects is a highly specialised task requiring sophisticated knowledge of the interrelationship between the construction projects with their attendant risks and the law and practice of insurance contracts. 7.2 The vast majority of insurances relating to construction projects and to participants in construction projects is placed through brokers with specialist knowledge of the relevant insurance markets and their practices, and on behalf of relatively sophisticated clients. Thus, this chapter discusses the duties and liabilities of brokers. 7.3 This chapter considers first the position as reflected in reported cases concerning brokers, and then the position under the Insurance Conduct of Business Rules (“ICOB”) introduced by the FSA pursuant to the Financial Services and Markets Act 2000, including the guidance recently given by the Court of Appeal as to their interpretation. Note that failure to comply with the standards prescribed by ICOB may be evidence of negligence at common law, even where the ICOB rules are not strictly applicable: Dunlop Haywards v Barbon Insurance.1

Common law duty of care

7.4 It is trite law that the broker will owe the usual professional duty to perform his function with reasonable skill and care (although a high standard of care will be demanded of a broker operating in a specialist market such as the construction insurance market).2 Generally this duty requires the broker to arrange effective cover, suitable for the client’s requirements, and to give all advice and assistance reasonably incidental to that core task.3 This same obligation is owed both in contract4 and in tort. Failure to place the risk at all is almost always negligent; placing the risk in a manner that gives rise to contention as to whether there is effective insurance will be negligent absent a convincing explanation. Note, moreover, that in a proper case

Page 108

the broker’s obligation in tort survives the termination of the contractual retainer: see Cherry v Allard 5 where a broker, whose retainer had been terminated, owed a duty to give proper, timely and accurate advice as to the status of policies that it had been engaged to place, but had agreed to attempt to cancel following termination of the retainer. 7.5 Further, it should be noted that the individual broker, as well as his employer, may owe a personal duty of care, at least in circumstances where the broker concerned has been wholly or mainly responsible for the performance of the retainer and/or where there is evidence of a strong personal “connection” between the individual broker and the client. The test is whether there was an objective assumption of personal responsibility rather than what the individual broker intended or understood to be the position.6 7.6 It is also the insurance broker’s duty to act as representative and advocate for his client when a claim has to be notified to or negotiated with insurers. Particularly where brokers are acting in the Lloyd’s market in respect of reinsurance recoveries, brokers are likely to receive funds. In those circumstances brokers have a duty to account - see Equitas Ltd v Horace Holman & Co Ltd.7 7.7 Finally, it should be noted that a broker can owe a duty of care to a third party who has a direct financial interest in the existence of the relevant policy, and is involved in procuring it: see Punjab National Bank v De Boinville,8 where a bank required its customer to effect insurance to protect the position of the bank. The bank later took an assignment of the relevant policies. The Court of Appeal held that a duty of care was owed to the bank. It is submitted that a broker placing joint names insurance in a construction context will owe a duty to all those who ought to be insured under such a policy, although the position is not free from doubt (see Texas Homecare v Royal Bank of Canada 9 for a decision going the other way, although note that in that case the claimant had no direct interest in the insurance policy: it was merely commercially interested to see that the counter party to a transaction it was undertaking was insured against its liabilities).

Placing and producing brokers

7.8 In complex or specialist cases it is common for two brokers to be involved: a producing broker, engaged by the client, who takes instructions as to what cover is required, assists in the preparation of a proposal for insurance, and advises the client generally, and a placing broker, whose function is to take the proposal to the market and obtain quotations. Producing and placing brokers will owe duties of care to the client (insured), although the content of these duties may differ: the producing broker will owe client facing duties in relation to advising the client on the proposal

Page 109

and on the terms and conditions of the proposed policy, whereas the placing broker’s duties are more likely to relate to the more technical tasks of obtaining suitable quotations and placing the insurance within the appropriate market.10 7.9 Further, where an error occurs causing loss to the client, contribution proceedings commonly arise as between the two brokers. See, for examples of such proceedings, Dunlop Hayward v Barbon 11 and Fisk v Thornhill.12

Agency issues

7.10 A frequently litigated question concerns the precise role of the insurance broker as agent. This issue often arises when a breakdown in the flow of information between insured and insurer (and vice versa) can be identified. 7.11 The general rule is that the broker is the agent of the insured and not the insurer: see Searle v Hales & Co;13 Winter v Irish Life;14 Re Great Western.15 It follows that where full disclosure is made to the broker, but the broker fails to pass on the relevant information to the insurer, the insured is liable to find that his claim against the insurer fails, and he is thrown back on his remedy against the broker. This principle has been criticised by the Court of Appeal,16 but it remains good law. 7.12 Further, the broker is agent for the insured to agree the terms of the policy: Zurich v Rowbery.17 The insured will accordingly be bound by the terms agreed by the broker as his agent. This can give rise to problems as discussed below. 7.13 Despite the general rule, the broker can be agent of the insurer for certain limited purposes. For example, the broker may be the agent of the insurer for the purpose of issuing policy documentation notwithstanding that he has acted as agent for the insured in transmitting a proposal form to the insurer.18 In HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd Auld LJ commented that:

The role of an insurance broker is notoriously anomalous for its inherent scope for engendering conflict of interest in the otherwise tidy legal world of agency. In its simplest form, the negotiation of insurance, the broker acts as agent for the insured, but normally receives his remuneration from the insurer in the form of commission; he may, in certain circumstances, act for both. Where there is reinsurance of an insured risk, the same broker may act on behalf of the insurer in placing the reinsurance.19

The rest of this document is only available to i-law.com online subscribers.

If you are already a subscriber, click Log In button.