Auto Reforms and Broker Liability

Ontario’s introduction of its new standard auto insurance policy in September 2010, and new statutory accidents benefits now available as a result, give consumers more options to customize their coverage. At the same time, the reforms ostensibly insulate insurers against increasing accident benefit costs, particularly related to minor injury motor vehicle claims. Other jurisdictions have implemented statutory reforms limiting general damages awardable in minor injury claims; nevertheless, most provinces are watching Ontario’s reforms with interest, to see whether those reforms achieve the intended effect of keeping auto insurance affordable while curbing the excesses of the accident benefit costs.

While there is no question the new reforms allow customers more choice and the opportunity to tailor their coverage to their unique insurance needs, the unintended effect of the reforms may be increased exposure to broker liability and the greater likelihood of professional negligence claims.

A Broker’s Duty of Care

Fine’s Flower’s Ltd. v. General Accident Assurance Co. of Canada established in 1977 that a broker will be held to the standard of care of the “intelligent insurance agent who inspects the risks when he insures them, knows what his insurer is providing, discovers the areas that may give rise to the dispute and either arranges for the coverage or makes certain that the purchaser is aware of the exclusion.” Fletcher v. Manitoba Public Insurance Co., the leading case on broker liability in the auto insurance context, amplified on the Fine’s Flowers principles in 1990. Fletcher definitively established that brokers owe a stringent duty both to avoid and advise of gaps in coverage. The Supreme Court of Canada was clear: “…private insurance agents owe a duty to their customers to provide not only the information about available coverage, but also advice about which forms of coverage they require in order to meet their needs.” The positive onus is on the broker to understand fully the risks of each individual customer, to determine what coverage that customer needs and to provide counsel and advice. This obligation is no different when assessing and determining optional standard benefits.

Broker Practices

The advent of auto insurance reforms and the possibility of further auto insurance reforms in other jurisdictions do not change the legal definition of a broker’s standard of care. But the reforms may require changes in brokering practices to protect against the possibility of professional negligence claims. For example, brokers will likely need to spend significantly more time information gathering at the application and renewal stage of the placement process to understand fully each customer’s auto insurance needs. They will also need to spend additional time both explaining the optional coverages available and providing advice around coverages that would be of benefit.

A broker cannot presume customers will have an understanding of the optional coverages, despite the public awareness campaign and mandatory mailings of the Financial Services Commission of Ontario (FSCO) and the Insurance Bureau of Canada (IBC), which explained the changes in the standard auto insurance. Nor can a broker rely solely on having sent the mandatory mailings to fulfill his or her obligation to explain the optional coverages and the differences in the standard auto insurance. As the court noted in Fletcher: “Subtle differences in the forms of coverage available are frequently difficult for the average person to understand. Agents and brokers are trained to understand these differences and to provide individualized insurance advice. It is both reasonable and appropriate to impose on them a duty not only to convey information but also to provide counsel and advice.”

Limiting Liability

So what can brokers do to limit their exposure to liability and professional negligence claims? Many practical means of limiting exposure amount to no more than adhering to best practices that should be followed no matter what type of insurance is being placed. Know your customer and understand their risks and insurance needs. Know your product. Keep the customer informed at all times. Document everything. These types of best practices not only help to avoid professional negligence claims but, if performed consistently, allow defence counsel to present the strongest possible defence against a potentially unmeritorious claim.

Specific to the auto insurance reforms, legal counsel are recommending some practical tips brokers can implement to mitigate against possible professional negligence claims. They include:

•Mail out the FSCO and IBC mailings on every account, but do not rely on that mailing to fulfill your duty to advise every customer about the optional benefits available. Be sure to explain the optional benefits with each customer at application or renewal. Also, have each customer confirm in writing both that the optional benefits have been explained and that the coverages placed were those the customer selected.
•Follow a detailed written process of information gathering to ensure each customer’s insurance needs and risks are fully explored and understood, so that appropriate coverage advice can be given.
•Fully inform yourself about the optional benefits and when they might be of benefit to consumers.
•When explaining the standard optional benefits, use examples to illustrate when certain coverages might be beneficial.
•Maintain customer contact and regularly reassess the adequacy of a customer’s auto insurance coverage.
•Keep notes of every customer contact, including any telephone messages left. Professional liability claims in general – and those against brokers specifically – have significantly increased over the past 20 years. Based on this trend alone, we can expect the introduction of the auto insurance reforms might result in more claims being made against brokers – especially around the explanation, advice and recommendations related to the standard optional coverages. Very few legal avenues can prevent an unmeritorious professional negligence claim from being commenced in the first place, but following best practices when brokering auto insurance within the new auto insurance reform regime is the best way of mitigating this new exposure to liability. It will also provide the best possible evidence with which to successfully defend those claims.