Brokers' duties to advise on BI insurance clarified
The decision in Eurokey
In the recent case of Eurokey Recycling Ltd v Giles Insurance Brokers Ltd, Mr Justice Blair considered a broker's duty to advise its clients in relation to the level of business interruption insurance it required.
Eurokey Recycling Limited (Eurokey), a waste recycling company, purchased a commercial combined policy arranged by Giles Insurance Brokers Limited (Broker) with a Lloyd's syndicate. The policy covered, amongst other things, business interruption (BI) costs. The BI cover was declaration linked and written on a gross profit basis with a 12 month indemnity period. In 2010 there was a fire at Eurokey's premises, causing substantial damage. After the fire, it became apparent that Eurokey was significantly underinsured for both stock and machinery cover and for BI losses.
Insurers threatened avoidance due to the underinsurance but ultimately settled with Eurokey for c£1.5 million. Eurokey sued the Broker for the shortfall between the settlement and full recovery under the policy on the basis that it had negligently advised it as to how the sums insured should be calculated and negligently failed to arrange sufficient cover.
Mr Justice Blair, sitting in the Commercial Court, agreed that the Broker was under a duty to properly advise Eurokey as to the type and scope of the cover it required and was required to provide a sufficient explanation of BI cover to allow the client to calculate the correct sum and fix the correct indemnity period. A broker was not, however, required to conduct a detailed investigation into his client's business or to calculate the sum or indemnity period himself. On the facts of Eurokey the court found that the Broker had satisfied its duty to provide a proper explanation of the basis of BI cover.
Underinsurance has become a major issue in the UK over recent years, with the tough economic climate meaning that many businesses are not prioritising the proper valuation of their insurance cover in the fear of increased premiums. The repercussions for policyholders and brokers alike are clear. For the policyholder, if they are underinsured and their policy contains an "average clause", they may not be able to recover the full amount of any claim and will have to fund the shortfall themselves. For brokers, the failure of a policy to meet a claim in whole or in part is a common ground for negligence actions.
Following the decision in Eurokey, the duty of a broker in relation to placing BI cover is significantly clearer and that is to be welcomed. However, whilst the Broker here was ultimately not found to have been negligent, it is still the case that brokers must take care to ensure that clients understand the importance of carefully valuing their business and its assets. Brokers will need to work closely with their clients to ensure that they understand both (i) the correct basis for valuing their business and (ii) the length of time it might take their business to recover following a loss.
Importantly, in Eurokey the evidence was crucial, and brokers would be well advised to record critical information and conversations or meetings with the client or even consider seeking written confirmation from their client that they have understood the advice provided by the broker and the consequences of being underinsured.