Insurance programmes in the Middle East often see a number of intermediaries being involved in placement. The insured will instruct a local broker to act as its agent (the 'producing' broker). The local broker may then require the assistance of a 'placing' broker (e.g. a Lloyd's broker) to place the risk. Both owe duties to the insured. In the recent English High Court decision of Dunlop Haywards (DHL) Ltd & Ors v Barbon Insurance Group & Ors [2009] EWHC 2900 (Comm) the duties of both producing and placing brokers were examined when a claimant insured claimed against its producing broker for failure to obtain the insurance policy it had been instructed to obtain. 1
Although decided on English law principles, and without breaking new legal ground, the review of brokers' duties in the Dunlop case is a useful reminder for the (re)insurance industry generally as to the principal duties of (re)insurance brokers, both as between each other where placing and producing brokers are instructed – particularly in light of the often lengthy broking chains in the Middle East - and to their principal client, in relation to obtaining (re)insurance of the type and extent of cover required. Similar principles are likely to be applied by the local courts to duties relating to the placement of (re)insurance in Middle Eastern markets; especially in the DIFC, being a common law jurisdiction founded on the English system, with its laws drawing to an extent on English law jurisprudence.
Facts
The facts in the case arose from a failure of professional indemnity cover arranged for the insured (C), who carried on business as commercial property consultants. Part of C's business included providing valuations for lenders. C received several claims from lenders alleging negligent or fraudulent valuations had been carried out by one of C's directors. C's professional indemnity insurance had been arranged in two layers. C had engaged the producing broker (D), who in turn engaged a placing Lloyd's broker (L), who placed the cover in the market.
Whilst the primary layer insurers accepted C's claim, the excess layer insurers declined an indemnity on the basis that the policy was limited to the group's commercial property management activities only, which did not cover liabilities for property valuation services.
C sued its producing broker (D) for failing to obtain the requisite excess insurance cover on the basis that C had instructed D to obtain a renewal of excess cover which included protection for C's valuation activities (as per the terms of the expiring policy) and not on the limited terms in fact obtained. D in turn made a third party claim against the placing Lloyd's broker (L) alleging that it was responsible for the policy wording.
Duties of 'producing' and 'placing' brokers
The court considered the duties that apply to brokers in the context of the above relationship.
The court held that it is a fundamental duty of any agent to exercise reasonable skill and care in the performance of the functions which he has undertaken on behalf of his principal. That duty applies to (re)insurance brokers as to any other agent. What the core duty requires in the context of a particular client/broker relationship will depend on all the circumstances. A broker's duties under English law are also to be considered against the UK Financial Services Authority's ("FSA") 2004 Insurance Code of Business Sourcebook ("ICOB") relating to insurance intermediaries and the FSA Principles, both of which provide, amongst other things, for a firm to conduct its business with due care and diligence, in addition to a duty to communicate to its clients in a way which is clear, fair and not misleading.
Although the ICOB rules did not strictly apply on the facts in Dunlop, 2 the court considered that the ICOB rules were nonetheless informative as to the conduct expected of a broker, including that of D. Primarily on this basis it was held (and was in fact common ground) that D's duty (and indeed that of any broker) to exercise reasonable skill and care included contractual and tortuous duties to C to do the following:
(i) to exercise reasonable care and skill in the fulfilment of
its instructions and the performance of its professional
obligations;
(ii) carefully to ascertain the client's insurance needs and to
use reasonable skill and care to obtain insurance that met those
needs;
(iii) carefully to review the terms of any quotations or
indications received;
(iv) to explain to the client the terms of the proposed insurance;
and
(v) to use reasonable skill and care to draw up a policy, or to
ensure that a policy was drawn up, that accurately reflected the
terms of the agreement with underwriters and which was clear and
unambiguous so that the client's rights under the policy were
not open to doubt.
The fundamental duties that arise in a client/broker relationship will also arise generally in a producing broker/placing broker relationship, although the court in Dunlop recognised that there are clearly differences in the relationship between a client and his (re)insurance broker, and between the producing broker and the placing broker he employs to place the cover. For example, as (ii) above is essentially the function of the producing broker it is not a duty that applies to the placing broker.
Judgment
Giving judgment for C, holding D liable, the court held that D was in breach of its duties in relation to the renewal of C's excess professional indemnity insurance. D had failed to review the terms of the cover and identify a particular limitation, which it in turn failed to draw to the attention of C. Whilst C's finance director (a 'sophisticated buyer' of insurance) had not read the policy terms in detail, by which he would likely have noted the limiting condition, C was not at fault for failing to check the policy terms. C had no reason to doubt the services of D, which had assured it that the policy "covered all bases", such that C was entitled to rely upon D to obtain excess cover on the terms required.
D had failed to exercise reasonable care and skill in obtaining excess insurance which provided cover in respect of C's valuation work in accordance with the terms of the expiring cover and as C had requested and required. In the claim by D against L, the latter was held liable for contributory negligence of 20% in respect of D's liability to C on the basis that L was negligent for failing to query the change in cover requested from cover for C to cover for the group for commercial property management.
Application in the Middle East context
The discussion of the applicable duties that attach to placing and producing brokers is important in the Middle East context.
The producing broker is expected:
(i) to exercise reasonable care to ensure that its instructions
received on behalf of the client are understood and, if necessary,
to seek clarification; especially when instructions appear to be,
amongst other things, potentially disadvantageous or detrimental to
the client or inappropriate to its business;
(ii) to seek such information about the client's business,
circumstances and objectives as might reasonably be expected to be
relevant in enabling the broker to identify the client's
requirements;
(iii) to supply sufficient information about the proposed policy to
enable the client to make an informed choice about its purchase of
(re)insurance, which should include taking account of the main
benefits and exclusions of the cover;
(iv) to review all information received from the placing broker and
to advise them promptly if the details of the cover or the
participating (re)insurers do not meet with approval or reflect the
instructions given; and
(v) to be aware that even where the insured is a sophisticated
purchaser of insurance services, it is not sufficient for a
producing broker to require the insured to read the terms of cover
to identify differences in the type of cover purchased, from the
type of cover the broker was instructed to procure.
The placing broker is expected:
(i) to advise the producing broker of the key features of any
proposed cover, including the essential cover and benefits and any
unusual restrictions, exclusions, warranties, conditions or
obligations before any instructions to bind cover are given;
(ii) to be aware of the potential disadvantages to the insured of
restricting the cover requested and should expressly query or seek
clarification of instructions received from a producing broker,
especially where these are changed; and
(iii) to obtain clear authority from the producing broker before
agreeing a limitation or restriction or change in cover, and to
draw attention to anomalies, ambiguities or inconsistencies which
may arise from the instructions received from the producing
broker.
It is important for every intermediary in the broking chain to be aware of their duties to the insured. Good practice dictates that a producing broker will set out its terms of business in an accessible and understandable document with their clients. Producing brokers appointing placing brokers would be well-advised to ensure that the duties they have undertaken to the insured are suitably documented and understood by placing brokers. The intermediary chain often crosses geographical boundaries, and it is important to understand the international context of the intermediary arrangements.
Footnotes
1 The case also involved arguments relating to rectification of a policy, although this aspect falls outside the scope of this article.
2 This was because the excess insurance was a 'contract of large risk' to which the application of the majority of the ICOB provisions are excluded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
