The truth and nothing but the truth

Q. What is a broker's duty to provide advice to the client, how should it be communicated and what, if any, duties are there to check that the advice has been understood and acted upon?

A. The fundamental principle is that a broker must take reasonable steps to ensure a client properly understands the advice, such as the terms and meaning of the policy and what is required of them. In giving this advice the standard is that of a "reasonably competent broker".

Under the Financial Service Authority's demands and needs requirements, the broker is also now under a duty to better understand the client's business and to be able to demonstrate this. A recent case involved an engineering business where the broker renewed cover without carrying out any update enquiry. It subsequently transpired that machinery had been sent to South Africa where it failed to meet the buyer's specification. There was no cover in place and no evidence that the broker had enquired where the machinery was being exported to. Unsurprisingly, the claim against the brokers succeeded.

With all this in mind it may be prudent to make an electronic or hard copy file note, especially if the broker suspects that the client may not have understood the advice. If this is the case it should be put in writing as soon as practicable. At the very least a contemporaneous file note should be made and the broker would be well advised to follow up the advice to ensure that the client understands.

Testing times

Ultimately, the effect of demands and needs statements on the responsibilities of brokers is yet to be tested specifically in a court of law, but the intention behind them is clear. The FSA wants brokers to take special care to ensure they are selling appropriate insurance to meet the needs of the client even if the client does not really know their needs. Often the client will rely upon the broker to know what cover is needed because the broker is the insurance expert - whereas the client is not.

In a recent broker errors and omissions case the broker carried out the instructions of the client to under-declare values of property to save money. The broker explained this should not be done both for reasons of underinsurance and material disclosure but the client insisted. The broker put its advice in writing and carried out the instructions. Eventually a claim occurred, insurers denied liability and the client sued the broker. The case was settled out of court but this was on the basis of counsel's opinion in saying what the broker did on the written instructions of his client, despite his subsequent written advice to the client, would render the broker liable in law. The broker's professional indemnity insurers paid in full.

The message of this tale is that it is becoming increasingly clear brokers may have to decline to act for a client on some occasions rather than rely upon the age old practice of 'getting it in writing'.

Where brokers must take extra care to protect themselves in the future is where the relationship between the client and the broker is mainly carried out and influenced by computer-driven quote, sales and delivery dynamics. Computers are not yet able to make value judgments about client needs and so the broker will never know if the client has understood. There is no real distinction between a client who buys from a broker using a computer to take the strain of the transaction from a client who buys across the desk. They are both entitled to expect the broker to have regard for their demands and needs, whatever delivery system they adopt to sell the product.

Finally, it is worth looking at what a broker's duty is when faced with a business client that refuses or fails to take out or renew employers' liability cover. Is any duty owed to uncompensated employees?

Difficult situations

In such circumstances the broker must explain - preferably in writing - to the client's senior management that a criminal offence is being committed and if the situation is not rectified urgently then the facts will have to be brought to the attention of the prosecuting authority, the Health and Safety Executive. Hopefully, this will have the desired effect even though it may have adverse consequences on the broker/client relationship. In this way the broker is doing all that he can to ensure that EL cover is in place and will avoid any sustainable claims being brought by the employees against the broker.

Brokers will always find it difficult to give bad news to a client. Insurance broker claims are littered with examples of brokers failing to face up to awkward situations in order not to cause upset. There are ways of telling a client what he has to know without being impolite or even putting the relationship at risk. When done well it can actually strengthen the respect the client has for the broker; it is a skill worth learning.

- Hugh Price is a partner at Hugh James, Solicitors, and Roger Flaxman, the managing director of Flaxman Partners.