BROKERING THE DEAL – WHY ARE CLAIMS AGAINST INSURANCE BROKERS ON THE RISE?

The insurance broker market has experienced significant changes recently, largely driven by widespread mergers, and inflationary pressures. These shifts have coincided with a noticeable rise in professional negligence claims against brokers. Mark Healy and Isabel Shier examine the reasons why.

Key Drivers Behind Rising Broker Negligence Claims

1. Mergers and Acquisitions (M&A) 

As a consequence of smaller firms being acquired by ‘bigger players’ in the broking sector, particular challenges have arisen which have created claims exposure for the acquiring party such as:

      (i) Lack of Uniformity in Management Practices

Each smaller firm typically has its own unique approach as to how clients and documents are managed. These practices may not align with the acquiring firm’s standards, or current best practices. Inconsistent broking practices can lead to errors, miscommunications, or service lapses, heightening the risk of claims. 

To mitigate the risk of this occurring, pre-merger proper due diligence is essential in this context. This will ensure that any future risks can be properly considered and assessed. Post-merger, detailed file reviews should be carried out to standardise the broking approach and to mitigate exposure to future claims.

      (ii)Staff Turnover 

The brokering sector has seen considerable movement of personnel in recent years, particularly following M&A. Departing staff can leave behind incomplete or poorly maintained client files, which claimants may later exploit when pursuing negligence claims. 

Staff departures that may take place as a result of a merger can also create significant barriers to successfully defending claims where critical witnesses may no longer be available if and when a claim arises in the post-merger period. This can significantly weaken a broker’s Defence.

2. Impact of the COVID-19 Pandemic on Client Meetings 

The shift from in-person meetings to online or email communication during the pandemic has significantly affected how brokers interact with clients.

Email exchanges, while convenient, are inadequate as the sole form of communication when attempting to explain complex policy details and concepts to clients. This can lead to misunderstandings, resulting in insufficient coverage. This lack of clarity often serves as the foundation for negligence claims.

In order to adopt best practice, brokers should resume in-person meetings or use platforms like MS Teams to ensure proper communication. Ensuring contemporaneous notes are taken on these meetings provides crucial evidence should future disputes arise.

3. Underinsurance Due to Inflation 

Inflationary pressures have led to a significant rise in underinsurance, particularly for property damage claims, where the insured amounts fail to keep pace with increased replacement / rebuild costs. This has become a frequent basis for negligence claims against brokers, as clients often argue that their broker failed to adequately consider, assess or advise on the sufficiency of their coverage[1]. Costs inflation is currently running at approximately 30%, which creates huge scope for underinflation scenarios to arise.

On a more general level, certain risks may require the assistance of expert specialist advice (such as accountancy advice for Business Interruption Cover) to avoid underinsurance arising for client. A broker has nothing to lose, and everything to gain, by proposing to clients that they obtain such expert advice.

4. Increased Digitalisation / Automated Processes 

As the insurance world becomes increasingly digitalised with an increasing number of automated processes being engaged by both Insurers and Brokers (which will be added to by the growing prevalence of A.I.), the scope for broker negligence claims increases, where such processes tend to be uniform in nature and do not generally provide for the tailored approach required for the needs of individual clients. It remains the case that clients require detailed explanations of certain aspects of insurance cover (such as the application of the averaging clause), and automated processes can often lead to such advice being overlooked.

Broker Responsibilities: Avoiding Negligence Claims

Insurance brokers are subject to the obligations imposed by the Investment Intermediaries Act 1995 (“The 1995 Act”).

In broad terms, Section 35 of the 1995 Act requires that an insurance broker:

• Acts honestly and fairly in conducting its business activities in the best interest of its clients and the integrity of the market.
• Acts with due skill, care and diligence.
• Seeks appropriate information from the client regarding their financial situation and insurance objectives.
• Makes adequate disclosure of relevant material information regarding commissions.
• Makes reasonable efforts to avoid conflicts of interest.

Practical Steps to Reduce Claim Exposure:

The practical application of these statutory requirements for a broker in dealing with its clients should involve the following considerations:

• When assessing the needs of a client, whether at policy inception or renewal, in person meetings are preferable, where insurance requirements are properly discussed and evaluated, and, more importantly, recorded, this ensures no ambiguity arises in relation to what was discussed.
• A broker should consider whether any outside expertise is required to adequately assess a client’s interests.
• Detailed guidance should be provided in relation to buildings insurance where the required cover is on a rebuild/reinstatement basis rather than on market value.
• An insurance broker should research all available insurance products on the market and provide impartial advice to his clients as to why certain policies are being recommended.
• Renewals involving a roll-over of an existing policy can be especially perilous for brokers. Clients’ insurance needs can change significantly from year to year, brokers should therefore carry out an annual assessment of a client’s insurance requirements even when an existing policy is being rolled over. A broker’s obligations for renewals are no less than those when incepting a new policy.
• An insurance broker should discuss and outline all material facts when a client is completing a proposal form and highlight the potential consequences of failure to disclose material facts. A broker should also highlight and discuss any onerous terms such as specific conditions precedent to indemnity under the policy, or any warranties that may apply[2].

When it comes to defending a professional negligence claim against an insurance broker, there is no better evidence of a relationship between broker and client than contemporaneous notes of meetings, supported by email or hard copy correspondence. An insurance broker is considered a professional in their field and must act accordingly. It is common for a client bringing a claim against an insurance broker to argue that they did not properly understand a particular insurance concept or calculation, and in the absence of written records or notes detailing such explanation to a client, a Court will often find against the broker who does not have supporting documentary evidence.