Full steam ahead

Insurance brokers are problem solvers. Their business is to deal with other peoples' problems by arranging insurance and, increasingly, by providing risk management advice. Unfortunately, this does not mean that their own lives are problem-free and brokers also need to take out insurance and manage their own risks, guarding against the possibility of being sued.

Brokers are the agent of the client, not the insurer, and must have the express agreement of clients before working for an insurer. This point is often blurred when, for example, brokers receive their commission from insurers rather than direct from clients.

Brokers owe two categories of legal duty to their clients. Firstly, they have a common law duty to use reasonable care and skill in carrying out their client's instructions. Secondly, they must not allow a conflict to arise between their own interests or those of a third party and client.

Brokers must use reasonable care and skill to obtain the insurance required by clients. They must seek to obtain the widest cover available at the lowest price possible, meaning they must investigate the whole market, not just favourite or familiar insurers. If it is not possible to insure the risk, brokers are obliged to inform their clients.

The insurance that brokers procure must meet their clients' needs. A broker that negligently fails to obtain sufficient cover, either in scope or duration, may be held liable. For example, in Youell v Bland Welch and Co - the Superhulls Cover Case (No 2) (1990), the broker obtained reinsurance for 48 months for a marine construction risk that had no time limit.

Similarly, the broker must carry out reasonable investigations to ensure the insurer providing the cover is suitable. Brokers should give due consideration to insurers that do not normally write the type of cover needed or those in financial difficulties.

Once the risk has been placed, brokers must check the policy complies with the cover requested. Brokers may also be obliged to take reasonable steps to inform and advise the insured of the cover terms, depending on the policy wording. They may then be obliged to explain the consequences of any breach.

Balance of loss

In Bollom v Byas Mosley (1999), the claimant brought proceedings against its insurance broker to recover damages for the balance of loss following a fire at its premises. The underwriters had repudiated the policy because a yard alarm had not been set at the time of the fire. They argued this had been a 'condition precedent' of the policy. They had, however, agreed a payment of £5m - less than the £8m loss caused by the fire.

The claimant sought the balance from its broker, Byas Mosley, arguing that the broker had been negligent because it had failed to draw attention to this 'condition precedent'. The claimant believed they would have recovered the full £8m had it not been for this negligence.

The Commercial Court held that Byas Mosley ought to have been aware of the existence of the clause and drawn the claimant's attention to the consequences of failing to set it. Accordingly, it was found liable.

Brokers' fiduciary duty can also cause difficulties because brokers generally receive their commission from the insurer rather than the client. This often raises questions as to whether the broker is truly the client's agent as a matter of law. This exception to the general rule has been permitted, however, on the basis that the payment is of the usual amount experienced in the market.

Brokers often receive binding authorities from insurers, enabling them to accept risks on behalf of the insurers. Prospective clients may not know this. Furthermore, brokers often promote insurers' products and even prepare policy wordings for them. Brokers need to ensure that such activities do not lead to a potential conflict of interest and inform clients of these relationships. They should also disclose the details of any commission they have received.

The fact that brokers have contractual relationships with their clients does not preclude third parties bringing claims against them. Brokers may be held liable to insurers, especially in respect of administering binding authorities. In Pryke v GHC (1991), a broker was held liable to the underwriters for writing a risk outside the terms of the authority.

The broker had failed to ask the agents to cancel the policy when asked to do so by the insurer and were, therefore, sued for failing to limit the insurer's exposure under the policy.

Brokers must beware. Cases such as Aneco Reinsurance Underwriting v Johnson & Higgins (2001) have demonstrated that brokers are not immune to negligence claims or the extent of the damages in the event of such negligence. Appropriate professional indemnity cover and risk management is, therefore, essential.