Silence is not always deadly – insurance brokers’ duty to explain disclosure to insureds

• United Kingdom

• Insurance and reinsurance

08-06-2018

Introduction

It is fairly well-understood that, when explaining the pre-inception disclosure duty to his client, an insurance broker will more often than not have to go further than simply provide it with standard-form documents containing an explanation.  Whilst it is a question of fact whether further communication is required, the consequences of non-disclosure can be so draconian (or at least were so prior to the Insurance Act 2015), that Courts deciding the question will usually decide in favour of the broker’s client. However, the Court’s decision in Avondale Exhibitions Limited v Arthur J. Gallagher Insurance Brokers Limited [2018] EWHC 1311 (QB) shows that this is not always the case.  The Judgment also emphasises the Court’s need to be presented with expert broking evidence in all but the most egregious cases of breach of duty.

Allegations

The claimant alleged that the broker failed to take proper steps both (i) to bring to the claimant’s attention the importance of disclosing the prior convictions of one of its key individuals who ran the business and (ii) to elicit the relevant information from the claimant.  This was in fact its alternative case, its primary case being that the broker had actual knowledge of the convictions and as such was under its own duty to disclose them to insurers.

The claimant argued that the broker was not entitled to rely only on explanations of the disclosure duty in the standard-form documentation supplied to the claimant because:

• the documentation was complex and bulky. 
• the individual was not a sophisticated businessman.
• the enquiry regarding convictions was a simple one to make.

• there were occasions on which the questions ought to have been asked e.g. at the initial meeting and when there was a change in personnel at the broker.

Judgment

A key part of the Court’s reasoning in rejecting the claim was due to the fact that there was no expert evidence on broking practice before it.  The Judge noted that the Court requires such evidence to reach a finding of breach of professional duty unless “the practice or conduct complained of has no rational basis or is so obviously unsupportable as to require no such evidence for it to be found negligent”.  He observed that it was “striking and significant” that the claimant had not put forward expert evidence as to the proper standard of care and that the lack of such evidence significantly limited, although did not altogether exclude, a finding of breach of duty. 

Thus the Court went on to opine on the claimant’s arguments and made the following observations: 

• The simplicity of the material question and consequences of non-disclosure was not relevant.  If it was, then the duty to give oral explanations would always arise, which the claimant did not argue is the case.
• The individual did not appear to have peculiar intelligence or unusual business acumen, but was nonetheless as “savvy” as an ordinary businessman.  He also appeared to have paid more attention to the documents than he was willing to admit in evidence.
• As to documentation, the material paperwork regarding disclosure was limited in amount and clearly highlighted.  Further, the factual bases of the proposal were clear, concise and easy to read and verify or correct, in circumstances where the letters from the broker also contained full explanations of the disclosure duty and drew proper attention to them.
• The Court did not agree that the occasions identified by the claimant made it incumbent on the broker to communicate the explanations and queries allegedly required.

In the course of considering the documentation the Court made an interesting observation on the fact that convictions were not specified to be material information in the documentation.  The Judge stated that unless all possible material facts were set out (which is clearly impossible), specific mention of a few could be misleading.  This suggests that it may not be wise for brokers to include examples of material information in standard documentation seeking to explain the disclosure duty.

Comment

Of course a diligent broker will almost always discuss disclosure with his client prior to inception and at renewal.  It is clearly dangerous simply to rely on explanations in standard-form documentation, particularly in light of the modifications to the duty introduced by the Insurance Act 2015.  However, this decision shows that a Court will not always allow insureds to blame brokers for their own failures by using predictable excuses such as pleas of ignorance, lack of sophistication and inability to understand allegedly complex documentation.

Please do not hesitate to contact the authors if you would like to discuss any aspect of this article in more detail.