In brief - Eurokey v Giles decision holds important lessons for brokers
In determining claims between brokers and their clients due to the clients' lack of or insufficient business interruption cover, Australian courts would be wise to adopt the decision in Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  EWHC 2989 (Comm) which clearly sets out a statement of principles regarding brokers' obligations to clients.
Business interruption cover claims against brokers on the rise
Most insurance brokers would agree that when a client does not have business interruption cover and an unforeseen event occurs which interrupts the conduct of their business for at least eight to twelve weeks, that client's business is highly unlikely ever to recover from the interruption.
We have seen a growing number of cases where clients make claims against their insurance brokers for:
- failing to advise them to obtain or retain business interruption cover, or
- failing to advise them of the importance of ensuring that their level of business interruption cover is adequate to cover the client's annual fees and income
Surprisingly, the law of Australia presently lacks a comprehensive statement of principle in this area. The purpose of this article is to summarise briefly the state of the authorities in Australia and to propose that an accepted decision of the European High Court of Justice which, in the authors' opinion, is consistent with the current law of Australia, ought to be adopted by Australian courts that determine claims between brokers and their clients arising out of the client's inadequate or absent business interruption cover.
Brokers' obligations clarified in Geoffrey W Hill & Associates v Squash Centre
In Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012, the insured was the owner of a squash court which was damaged by fire. The fire caused approximately $200,000 worth of damage, but the insured only had cover in the amount of $100,000. Accordingly, a co-insurance clause had the effect of reducing the relevant pay out by 50%.
The broker who arranged cover for the insured acted on the basis of the following oral instructions: "I want insurance for $350,000 for contents, the building for $20,000, burglary for $7,000, a loss of profit for $100,000 with a six months indemnity period, a burglary policy for $7,000 and cash in transit for $2,000." The relevant proposal form, which was completed by the broker, contained the following: "NOTE: The sum insured should represent the gross profit for twelve months (adjusted for the trend of the business). When the indemnity period is to exceed twelve months the sums insured should be proportionately increased." The broker did not communicate the substance of this note to the insured and did not seek clarification whether the $100,000 figure was calculated on the basis of six or 12 months. The insured sued the broker for failing to ensure that its level of cover in respect of business interruption insurance was adequate.
The trial judge at first instance (with whom the Court of Appeal agreed on appeal) found in favour of the insured. His Honour also stated the following three principles which were approved by the Court of Appeal and have been cited in a number of academic texts thereafter:
- Where a broker receives ambiguous instructions from its client, the broker is under a duty to clarify those instructions. In this case, the insured's instructions were ambiguous, the broker failed to seek clarification of those instructions, and as a result the broker failed to discharge its duty in that regard.
- The importance of discharging the duty referred to in the preceding subparagraph is amplified when the association between the insured and the assured has been short. In this case, the broker had not had any prior dealings with the insured.
- Where a broker receives instructions from a client which, if followed, would expose the client to risk, the broker is obligated to inform the client of all of the attendant risks before accepting the instructions. This does not require the broker to provide an exposition of the relevant law, but it does require the broker to provide practical advice as to the potential consequences if the risks were to be realised. In this case and even if the client's instructions were not regarded as being ambiguous, the broker received their client's verbal instructions, completed the proposal form which contained the relevant warning, but failed to communicate the risks associated with underinsurance to its client. Accordingly, the broker failed to discharge its duty in this regard as well.
Court finds in favour of insurance agent but acknowledges failure in duty of care
In Roy v Edmond Vienneau Assurance Ltee (N.B.C.A)  N.B.J. No 2, it was alleged that a defendant insurance agent failed to renew the plaintiff's fire insurance policy on his stock and equipment. The stock was destroyed in a fire three days after the policy expired.
The majority held that an insurance agent, in the absence of a contract or an undertaking to renew, has no duty to automatically renew policies of insurance. Perhaps more importantly, the prior relationship between the parties was comprehensively analysed to determine whether a duty of care existed.
Although the majority held in favour of the insurance agent, J.A. Rice outlined in his dissenting judgment that the insurance agent "as a knowledgeable and experienced" agent who was "aware of his responsibilities to his customer" failed to exercise the degree of due care required of him in the circumstances. In coming to that decision, J.A. Rice noted that the posting of a warning of an expiry of the policy through the mail, without further inquiry as to the insured's awareness of the termination of coverage, constituted a lack of reasonable care.
Eurokey v Giles: insured sues broker over failure to advise properly on type and scope of business interruption cover
In Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  EWHC 2989 (Comm), the premises of the insured (a waste recycling company) was damaged by a fire which occurred in May 2010. The broker arranged combined cover for the insured which included cover in respect of business interruption. Its turnover rose from £3.2 million in 2005 to £16.8 million in the financial year ended August 2009. Eurokey's accounting year ended on 31 August, and its 31 August 2007 accounts showed turnover of £8.18 million and gross profits of £2.15 million. There were two other co-insured entities which had turnover of £1.5 million and £0.5 million, and gross profits of £202,000 and £168,000, respectively.
A representative of the broker (Mr Evans) met with a representative of the insured (Mr Bisland; this was his first meeting with Mr Evans) in about February 2009 regarding renewal of the policy for the 2009/2010 policy year. Mr Bisland brought with him a pre-renewal report and he and Mr Evans went through it line by line. In relation to business interruption cover, the extant figure of £800,000 was crossed out and replaced with a figure of £2 million. The products liability section of the pre-renewal report required the broker to insert the turnover figure. Mr Evans inserted a figure of £11 million. The court also accepted Mr Evans' evidence that he gave Mr Bisland a detailed explanation of how to calculate gross profits at this meeting for the purposes of business interruption cover. The pre-renewal report was completed on the basis of the insured's 2006/2007 accounts as its 2007/2008 accounts had not been finalised at the time of the February 2009 meeting. The 2007/2008 accounts, which were finalised in July 2009, showed turnover of £9.2 million and gross profit of £2.9 million.
Renewal of the insured's policy was due in April 2010. Messrs Evans and Bisland met on 5 March 2010. Mr Evans prepared a pre-renewal report. There was a dispute as to what Mr Bisland told Mr Evans regarding the insured's projected turnover, however, it appears that the broker left the meeting believing that the correct figure was £11 million. There was a further meeting on 9 April 2010 where Mr Evans provided to Mr Bisland a renewal report which stated that the insured's annual turnover was £11 million. The next day, the renewal report was emailed to the insured. Mr Bisland said that he never noticed the relevant figures in any of these documents (approximately 15 pages long). Mr Bisland then instructed the broker to place cover with Paladin on 13 April 2010, which it did.
The insured sued the broker on the basis that: "…Eurokey had an anticipated turnover of £25m to August 2010, having achieved a turnover of £17.6m to August 2009 (this was the figure in the draft accounts). It was said that, "The correct turnover figure should have been about £27m for the two companies, as the rate of gross profit for Eurokey is 25%-30% and the rate of gross profit for Recoverypak limited is around 40%. This would give an anticipated gross profit figure of £7/8m"..." (at )
The insured alleged that "As regards the law, Mr Evans was under a duty to, and failed to, properly advise the client about the type and scope of cover which the client needs and, in doing so, to match as precisely as possible the risk exposures which have been identified with the coverage available. …Specifically as regards business interruption cover, in order to ensure that Eurokey had sufficient and effective cover, Mr Evans therefore needed to (and did not) explain to Mr Bisland: the meaning and importance of a Maximum Indemnity Period and how to go about selecting an appropriate period, what 'insurable' gross profits were, as compared to the usual meaning of 'gross profits' with which he would be familiar…". (at  - )
The insured sued the broker for £2.9 million in respect of the business interruption component of its claim (there were other issues regarding stock and machinery cover which are not relevant for present purposes).
High Court of England and Wales finds in favour of the broker
The High Court held that the insured should fail in relation to its business interruption cover claim as the amount of cover placed was done on the instructions of the insured after adequate explanation by the broker of the relevant calculations and information required. In particular, the court held (at ) that the following principles apply to brokers arranging business interruption insurance for an insured:
- Whilst a broker is not expected himself to calculate the business interruption sum insured or choose an indemnity period, both of which are matters for the commercial client, the broker must provide sufficient explanation to enable the client to do so. This will include an explanation of the method of calculating the sum insured, which will likely require an explanation of terms such as 'estimated gross profits', 'maximum indemnity period', and the considerations to take into account when choosing a maximum indemnity period.
- In order to do this, the broker will need to take reasonable steps to ascertain the nature of the client's business and its insurance needs…
- …"Insurable 'Gross Profit' is a term of art which means something very different from what an experienced businessman might expect"… the [broker's] duty is to take reasonable steps to ensure that the client fully understands the term.
- An insurance broker providing the type of service that [the broker] was providing in this case is neither required nor expected to conduct a detailed investigation into a client's business. However, and in so far as this was suggested, the broker's duty is not diminished because his firm may offer an enhanced service at additional cost… the above duties apply to any broker who takes on business of this kind…
- The nature and scope of a broker's obligation to assess a commercial client's business interruption insurance needs will depend upon the particular circumstances of the case, including the client's sophistication, and the number of times the broker has met the client in the past …
- In that regard, although business interruption insurance is for commercial clients, the level of client sophistication will clearly vary enormously. It cannot be assumed that an SME (like the claimant in this case) will have any understanding of the nature of the insurance.
- Further, although as a matter of common sense a client may not need annual repetition of advice previously given and understood, this assumes that the responsible personnel remains the same. It also assumes that the giving of the advice can be properly demonstrated by documentation (or otherwise), and the onus is likely to be on the broker to show this.
- If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
- Having satisfied these obligations, where a broker is given express instructions as to the cover to be obtained, he must exercise reasonable care to adhere to those instructions.
It is also worth noting that the experts who gave evidence in this case said that "[business interruption insurance] is commonplace and… complex calculations are [not] necessarily required" (at ). The judge himself agreed that the concept of gross profits is not difficult to grasp.
Eurokey v Giles decision resonates with Australian courts which still require brokers to be proactive
The decision in Eurokey is consistent with the underlying principle in the current Australian authorities, namely: brokers must adopt a proactive approach towards ensuring that their client understands the importance of having business interruption cover and how that cover functions. In particular, brokers must take care to advise the client of the fact that almost all business interruption cover wordings contain underinsurance clauses which effectively reduce the extent of client's indemnity by an amount proportionate to the extent of the underinsurance.
If nothing else, the decision in Eurokey (and the current Australian authorities) aptly demonstrates the onerous degree of proactivity that courts require of brokers; the broker is effectively required to facilitate an understanding in the client's mind, which enables the client to conceptualise the consequences of the cover and the policy provisions.
Brokers can take steps to limit their exposure to clients' claims
It is also submitted that brokers should, on at least an annual basis (i.e. at the time for policy renewal), send a standard form letter to their client which:
- sets out in clear, plain language a summary of the importance of business interruption insurance and a clear statement to the effect that clients must review their cover levels on an (at least) annual basis
- urges the client to contact their broker if they have any queries whatsoever regarding the extent of the client's level of cover
- attaches a copy of the renewal invoice (i.e. if the client pays the invoice, then the broker has good evidence that the client received the letter)
This approach represents a useful starting point in insulating a broker from claims by clients who may be seeking to spread the burden of their uninsured loss, if they possibly can.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.