Insurer solvency - Where does broker liability end?

A major insurance company has not gone bust in this country since the Independent in 2001, yet the recent financial problems suffered by AIG show that even the big insurers are not immune to the effects of the credit crunch.

Consider the potential liability of a broker if an insurer goes bust and a client loses its premium, or suffers the financial consequences of an unpaid claim. This will be of particular relevance where the client is a corporate policyholder and so has limited recourse to the Financial Services Compensation Scheme for unpaid claims under the policy.

If a broker places a policy with an insurer that is known to be in financial difficulty then the client could sue their broker if the insurer fails and the client's claim is not covered or they lose their premium. In Osmond v Moss, the broker advised Osmond to place motor insurance with an insurer that was known to be in financial difficulties; he had an accident, was fined for driving uninsured and was then sued by the driver with whom he had collided. Osmond sued his broker and recovered his premium, the fine, the costs of the criminal proceedings and the costs of repairing the other motorist's car.

That is clear so far as placement and renewal are concerned but is the duty wider than that? Does the broker owe duties post-placement to his client to monitor the solvency of an insurer with which he has placed a risk and then advise his client accordingly?

Convention

There is no clear English legal authority on the point but it seems that, where the broker has a continuing obligation to process claims through the insurer, the broker is then also obliged to advise their client if they become aware that an insurer is, or may become, unable to pay a claim.

In the Australian case of Lewis v Tressider & Associates, the brokers ignored clear information and warnings that the insurer (Old Charter) with whom they placed fishing boat insurance for Mrs Lewis was a "sham" and insolvent. Lewis's boat was destroyed by fire and Old Charter was not trading to pay the claim. The court concluded: "So long as the relationship of broker and client exists, there is a continued duty of care." This suggests that a broker must inform the insured of information indicating that the insurer may not remain financially sound, even if the broker is personally satisfied that no problem exists.

The message for brokers wanting to minimise the risk of saddling themselves with potential liability is to make it clear in the client retainer that the broker does not guarantee insurer solvency, will not monitor the solvency of insurers on an ongoing basis and does not accept liability for any losses that might be suffered by the client if the insurer does go bust.

Garon Anthony, senior associate, Lucy Tolond, solicitor Insurance and reinsurance group, Pinsent Masons.