Bridging the Gap

Small businesses may have coverage gaps in areas such as employment practices and cyber risk, and brokers need to ask the right questions and advise on availability of coverage, industry professionals say. Meanwhile, Canadian courts have consistently held that brokers have a legal duty to advise business clients on foreseeable risks.

“A lot of small businesses can be pretty complex when it comes to their exposures,” reports Crystal Rogers, general insurance broker and Autoplan supervisor at Port Moody Insurance Services, part of the InsureBC group of brokerages, based near Vancouver.

Two liability risks to small firms that are often not addressed are claims from employees and claims from stakeholders (such as debt and equity holders), suggests Andrew Clark, chief executive officer of Toronto-based brokerage ALIGNED Insurance Inc. Clark says brokers should ask small business clients about their ownership structure and sources of revenue.

“What we tend to find is small businesses are doing a lot of different things in a lot of different ways,” reports Clark. “It may be through separate legal entities; it may be through incorporated companies. It may not. Just to understand the legal framework first and foremost is kind of our starting point, and then from there, understanding the various revenue streams.”

Asking such questions “tend to impact upon questions that they may have or scenarios that may not have been thought of and then, obviously, you can translate those into the coverage,” he adds.

“Small enterprises present unique exposures,” warns Nazir Haji, senior vice president of business development at AEGIS London, the British subsidiary of Associated Electric & Gas Insurance Services Limited, which acts as the Lloyd’s underwriting agent for AEGIS Syndicate 1225.

“While the content amounts are usually small, business interruption, equipment breakdown and errors and omissions are significant exposures that need to be evaluated,” Haji says of small businesses. “In addition, liability coverage that is unique to the exposure must be thoroughly evaluated for the limits required.”

Brokers serving small business clients should ask what happens if the insured has to operate from somewhere else, and whether or not it has contingency plans, Haji advises.

A broker who fails to ask the right questions could be sued for negligence if a claim is denied due to a coverage gap. The Court of Appeal for Ontario explained the brokers’ legal duty of care in a decision released almost 40 years ago.

That ruling – cited as Fine’s Flowers Ltd. et al. v. General Accident Assurance Co. – continues to be cited today when claimants sue brokers for negligence and/or breach of contract after claims are denied due to coverage gaps.

The Fine’s Flowers ruling was cited this past June, by the Provincial Court of Saskatchewan, in Zheng v. John Galon Insurance Services Ltd.

Jianlong Zheng’s Regina residence was damaged by fire. Zheng was unsuccessful in a lawsuit against both his broker and Saskatchewan Government Insurance (SGI) after his homeowner claim was denied. Court records indicate that Zheng had renters. However, Zheng had indicated on his application form that he was not seeking coverage for rental income.

The Fine’s Flowers ruling was also cited in 2013 in Bronfman v. BFL Canada Risk and Insurance Services Inc.

Fine’s Flowers sets out the “general nature of the duty of an insurance broker,” wrote Justice Elizabeth Stewart of the Ontario Superior Court of Justice, in 2013, in Bronfman.

CLIENTS RARELY READ POLICIES

The Toronto home of Paul and Judy Bronfman was broken into in 2008. A safe containing jewellery and cash was stolen. Court records indicate the Bronfmans’ homeowner policy, written by American International Group Inc., had a limit for contents of more than $2 million. However it also had sub-limits of $10,000 for jewellery, $5,000 for furs, $5,000 for stamps and coin collections and $1,500 for cash, among others. Due to those sub-limits, much of the loss from the theft was not covered.

BFL Canada Risk and Insurance Services Inc. – which had placed commercial insurance for Paul Bronfman’s company – also started placing his home insurance in 2004. After AIG denied his claim due to lack of coverage, Bronfman sued BFL for breach of contract and negligence, claiming he “ought to have been clearly warned about these policy limits for jewellery and advised that additional coverage for this valuable property was available,” Justice Stewart wrote.

BFL argued that the Bronfmans were aware of the coverage limits on losses of jewellery. An expert witness in the trial, James Bonnay, testified that “few clients ever read their insurance policies or, if they do, rarely actually understand their complex provisions.” Bonnay told the court that “the broker’s role and obligation is to explain the extent of coverage to clients and to point out any relevant gaps.”

Bonnay has been involved in the disciplinary arm of the Registered Insurance Brokers of Ontario, Justice Stewart noted.

Justice Stewart ruled against BFL, finding that the BFL broker had a “lack of appreciation of the likelihood that the Bronfmans owned valuable jewellery worth well in excess of $20,000,” and failed “to ascertain the true extent of their possessions and to provide them with advice as to how much special coverage they needed.”

Justice Stewart noted that in Fine’s Flowers, the Court of Appeal for Ontario “held that an insurance agent’s duty when asked to obtain a specific type of coverage is to use a reasonable degree of skill and care in doing so and to inform the principal promptly if such coverage is not available.”

In Bronfman, the defendant broker appeared to “take the position” that the insureds were “required to read their policies and the letters which accompanied them,” Justice Stewart noted.

Commenting on Fine’s Flowers, Justice Stewart added: “If the principal was given no specific instructions, but relies on the agent to see that he is protected, then the agent, if he agrees to act on such terms, must inform himself of the principal’s business in order to assess the foreseeable risks and to insure his client against them.”

In ruling in favour of Fine’s Flowers, the Court of Appeal for Ontario upheld a lower court ruling, released in 1974, against brokerage firm Ault, Kinney, Campbell and Gallichan Limited.

That broker had placed insurance for a retail store and garden centre in Ottawa operated by Harry Fine. That garden centre included greenhouses.

The heating system, in some of those greenhouses, failed in January 1968. Some of Fine’s horticultural crops were destroyed.

Fine’s Flowers made a claim under a boiler and machinery policy written by General Accident. That policy covered accidents to “objects.” The heating system failed as a result of a failure in water supply pumps, but the boiler and machinery policy excluded wear and tear. Further, the pumps and motors in the greenhouse were not defined as objects in the policy.

REQUISITE SKILL

Fine’s Flowers’ lawsuit against insurer General Accident was dismissed, but the court found that Ault, Kinney, Campbell and Gallichan breached its duty of care.

The Fine’s Flowers case was one “in which the client gives no such specific instructions, but rather relies upon his agent to see that he is protected and, if the agent agrees to do business with him on those terms, then he cannot afterwards, when an uninsured loss arises, shrug off the responsibility he has assumed,” Justice Bertha Wilson of the Court of Appeal for Ontario wrote on behalf of the majority. “If this requires him to inform himself about his client’s business in order to assess the foreseeable risks and insure his client against them, then this he must do. It goes without saying that an agent who does not have the requisite skills to understand the nature of his client’s business and assess the risks that should be insured against should not be offering this kind of service.”

Justice Wilson – who was appointed to the Supreme Court of Canada in 1982 – cited Fine’s Flowers in 1990 on behalf of Canada’s highest court.

Fine’s Flowers is the “leading Canadian case concerning the duty of care owed by private insurance agents and brokers,” Justice Wilson wrote on behalf of five judges hearing an appeal from Manitoba Public Insurance (MPI).

MORE THAN SALES

“It is clear that within the insurance industry, as also within the courts, private insurance agents and brokers are viewed as more than mere salespeople,” Justice Wilson wrote, in 1990, in the Supreme Court of Canada’s unanimous ruling in Fletcher v. MPI. “It is entirely appropriate to hold private insurance agents and brokers to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client,” she noted.

Thomas and Cheryl Fletcher were insured by MPI. They had been driving in Ontario when they were in a collision. The driver of the other vehicle was found responsible and damages were assessed at almost $1.4 million.

But the at-fault driver only had $500,000 in insurance and the Fletchers’ MPI policy did not include underinsured motorist coverage (UMC). They sued MPI in Ontario, alleging breach of contract, misrepresentation, negligence and breach of duty. MPI argued it had sent a one-page flyer to the Fletchers mentioning the availability of UMC, but the Fletchers said they thought they had the maximum available coverage.

An Ontario trial judge ruled against MPI. That verdict was overturned by the Court of Appeal for Ontario, but restored by the Supreme Court of Canada.

“Subtle differences in the forms of coverage available are frequently difficult for the average person to understand,” the Supreme Court of Canada noted in Fletcher v. MPI. “Agents and brokers are trained to understand these differences and to provide individualized insurance advice. It is both reasonable and appropriate to impose upon them a duty not only to convey information, but also to provide counsel and advice.”

An insurance broker or agent “needs to understand the scope and details of their client’s business as clearly as possible,” suggests Steve Marchese, an Ottawa-based agent for State Farm in Canada, commenting in general, not on the Fletcher or Fine’s Flowers rulings.

“It is important to ask a lot of pertinent questions, and read their website if they have one,” Marchese says of small business. “A part-time business owner might not be as familiar with the different risks facing them as someone who is full-time or owns a larger business with lots of tenure. One nail salon might only do nails while another is doing waxing, facials and tanning.”

EMPLOYMENT PRACTICES

Clark suggests that the “most frequent” conversation that ALIGNED brokers have with small business clients is on the risks that are not covered by either a property or commercial general liability policy.

“How are you protecting the management team if things go sideways and things go bad?” asks Clark. “There is a lot of risk embedded in starting a business, and as we know, a lot of new businesses tend to fail within the first couple of years,” he notes.

When a firm goes under, one risk includes “outstanding statutory liabilities like unpaid taxes and unpaid wages, as well as litigation from creditors and shareholders against the management team,” Clark reports.

“Once you have clarity on the organizational structure and the legal structure you can start to get into the conversations about how to de-risk the management side of things, and that is an important conversation that sometimes is missed in the small business space.”

Another exposure for small firms is employment practices liability, Clark suggests.

Rogers agrees, suggesting that small business managers “tend to trust their employees more.”

If a dispute with employees reaches the litigation stage, Rogers suggests, there could be legal defence and settlement costs.

“A lot of small business owners don’t seem to think of it that way,” Rogers reports. “They trust that their employees are not going to steal from them, or they would never have a dispute arise when, in fact, it does probably happen more often than not.”

Small firms also face the risk of human rights complaints, adds Clark. Those “typically” arise from allegations based on a prohibited ground of discrimination or “allegations of lack of protection or discrimination” based on factors such as gender, sexual orientation or religious beliefs, he reports.

Another risk is contingent business interruption, Haji suggests. A broker advising a small business client should ask whether the insured is relying on suppliers, and if so, “what if those suppliers are affected by fire or storm?”

DATA BREACHES

Small businesses “actually have significant risks for things that they don’t think about,” warns Rogers. “A lot of cyber stuff is happening nowadays due to employee error and the systems that they use are not as sophisticated as those of big, big companies that actually have money to hire risk management departments,” she explains.

Brokers should consider offering small businesses a separate cyber extension endorsement, Haji advises.

One firm that was sued in Canada in connection with a data breach was Home Depot, whose payment card system was hacked in 2014. A settlement in a class action lawsuit was approved by an Ontario court, in a decision released August 29.

Even though there was no evidence that a class member absorbed a fraudulent charge, and even though the court found the case against the retailer was “proven to be very weak,” the court valued the settlement at about $400,000.

An expert witness for the plaintiffs “outlined three heads of damage to consumers from a payment card breach,” Justice Paul Perell of the Ontario Superior Court of Justice wrote. The first is “the risk of a fraudulent charge on one’s credit card.” The second is “the risk of identity theft” and the third is “the inconvenience of checking one’s credit card statements.”

But Justice Perell found there was “little risk of fraudulent charges because of sophisticated safeguards developed by credit card companies,” and because “when there are frauds, the losses are almost always absorbed by the credit card company or the retailer.”

An expert witness for Home Depot – Telus Corporation security solutions director René Hamel – “testified that despite utmost diligence and efforts to prevent data breaches, companies remain vulnerable because hackers continually develop new malicious code and the game of cat and mouse continues,” Justice Perell added.

The settlement cost included counsel fee, approved by the court, of $120,000, to the law firms that represented the plaintiffs. Court records indicate the firms requested counsel fee of about $460,000.

“Anyone who accepts any bank cards could be hacked,” warns Haji.

Notifying customers of data breaches could become mandatory next year.

In 2015, Canada’s Personal Information and Protection of Electronic Documents Act (PIPEDA) was amended to provide for mandatory breach notification. The amendment to PIPEDA was brought in with the Digital Privacy Act, Bill S-4.

Bill S-4 would require firms to notify people if their personal information has been lost “and there is a potential to expose us to harm,” said Joan Crockatt, then the Conservative MP for Calgary Centre, in the Commons in October 2014.

“The time frame companies would be given to do this under this bill would be as soon as was feasible. For example, if a company’s computer system was hacked and the clients’ credit card information was stolen, the company might need a week to put a fence around it and figure out how many people had been affected,” Crockatt added.

The mandatory breach notification regulations “are not yet in force,” Vance Lockton, senior analyst for stakeholder relations at the Office of the Privacy Commissioner of Canada, said April 30 during a presentation at Insurance Telematics Canada in Toronto.

“The most recent timeline that we are hearing is that it will probably be in force somewhere around the fall of 2017,” Lockton reports.

UNIQUE RISKS

“As we continue to hear about data breach events and privacy events and the legislation continues to evolve, and the responsibility of organizations increases, the conversation around cyber risk with every client is important, whether they are big or small,” Clark contends.

Another possible coverage gap is directors’ and officers’ liability, Clark suggests.

“It sounds like a big business question,” he says. “It is a big business question and a middle-sized business question, but it is a small business question as well.”

Certain types of operations have unique risks, Clark adds.

“There are a lot of contractors who come into contact with asbestos or similar materials,” Clark says. “Say they are doing a renovation on a home and they run into these materials. If only the traditional (commercial general liability) policy is purchased and not a fullsome contractor’s policy that includes pollution and contaminants, that can be an issue for smaller contractors.”

Brokers should ask personal lines customers whether or not there is any commercial use of their vehicles or other assets, suggests Clark.

“Clients do not necessarily think of themselves as personal lines clients or commercial lines clients,” he reports. “They just think of themselves as clients. It’s not always intuitive for them to appreciate that there are significant differences (between coverage for personal use and coverage for commercial use) and potential risk in not sharing that information.”

Marchese echoes Clark’s advice. He suggests that an agent or broker should ask a personal lines customer whether or not he or she owns a business, whether or not he or she ever drives the car for compensation and whether or not there is any child care business being conducted in the home.

Day care and babysitting can open a large liability exposure, Rogers warns.

“One of the questions we always ask on any new business application is if they have any sort of day care or if they are babysitting children and things like that,” she reports.

Some insurers cover business use on home insurance policies in certain circumstances, Rogers suggests.

“It depends what kind of business it is,” she notes. For example, for a small home office, if “there are no customers, clients or couriers coming on to the premises, [some insurers] will say, ‘Yeah, that’s fine. There is no exposures for the property.’ But those might require a professional liability [policy] or something like that for the type of work that they are doing.”

SLIPS AND FALLS

Brokers and agents need to educate personal lines customers on the limits in their policies for home and personal use, Marchese suggests.

“For example, a music teacher in the home might not realize that there will be a very low business contents limit on their instruments and a supplemental business policy will be needed,” he points out.

“Home office exposures are usually under-estimated, particularly when customers are coming to the premises to pick up the products,” warns Haji. “Slips and falls causing bodily injury are quite common, so it is prudent that these exposures are managed.”

When renewing personal lines policies or binding new policies, brokers need to check the client’s occupation, Rogers suggests.

“The reason to do that is to make sure they do not have a business or that they work for themselves or that they have work being done in the home,” she advises. “A lot of personal lines policies won’t cover any risks to do with the business itself. So one of our procedures (is) to make sure (that) if they are in business for themselves, that they are getting the proper coverage so there are no blurred lines if there is a claim.”