Insurance Intermediaries: Fulfilling the Role of an Insurance Expert

When insurance brokers engage in a commercial relationship with customers, the law imposes certain duties on brokers that require them to adequately perform the services they offer.  

Brokers are experts in their field

Insurance brokers undergo more professional training than in years past. Because of this specialized training, and the heavy reliance customers place on the advice of a broker, the law now views insurance intermediaries as professionals or experts in placing insurance. As such, a higher duty of care is being imposed on brokers by the courts. As an expert, the insurance broker has a duty to determine the customer’s needs and place appropriate coverage.  
The overall duty imposed on insurance intermediaries was described by the Supreme Court of Canada as a “stringent duty to provide both information and advice to their customers” and that it reasonable and appropriate to impose a duty not only to convey information but also to provide counsel and advice.¹ Generally, in order to satisfy the duty of care owed to the insured, an insurance intermediary is required to:

• inform him/herself about the client and/or the client’s business;
• assess the foreseeable risks; and
• obtain the appropriate coverage or inform the client that the coverage is not available.

Basis for liability

The legal basis for which insurance intermediaries may be held liable has widened over the years. The fastest growing and widest area of insurance intermediary liability is negligence. It is hoped that armed with knowledge, brokers and agents may minimize their potential exposure and avoid finding themselves on the defending end of a negligence claim.

At the outset, it is important to understand that it is no longer sufficient for professionals to blindly rely on “industry practice.” The assertion that “all the brokers do it this way” is not a defence. The test is whether the broker has provided the customer with reasonable advice expected of a reasonable and informed broker or agent, considering all of the circumstances.  

The duties which apply to insurance brokers stem from case law arising from duties of insurance intermediaries generally, (i.e. agents and brokers). As an insurance intermediary, one must ask, what steps do I take in similar situations? Would my practice have passed the court’s scrutiny? If not, what steps do I need to take to ensure my brokerage firm meets the duty and standard of care expected?

Duty to provide appropriate insurance and advice: What are the customer’s insurance needs?

Any discussion on broker or agent liability must begin with the foundation case of Fine’s Flowers Ltd. v. General Accident Assurance Co.,² wherein the Ontario Court of Appeal identified two types of situations where agents or brokers are asked to provide coverage and described the corresponding duty owed in each situation.

Where the agent or broker is asked to provide specific coverage

The duty on the agent or broker is to use a reasonable degree of skill and care in obtaining the coverage. If the coverage is unavailable or the broker is unable to obtain it, the agent or broker must inform the customer so that he or she does not rely on the agent or broker for successful completion of the transaction.

Where the agent or broker is asked to provide “full coverage”

The duty on the agent or broker is more onerous in that the agent or broker must make sure the customer is aware of all insurance coverage available so that he or she can be protected against all foreseeable risks. The agent or broker must inform him or herself on the client’s business in order to determine all foreseeable risks. An agent or broker who does not have the skills to understand the customer’s business should not offer to provide full coverage insurance.

Negligence cases today continue to rely on the duty described in Fine Flowers and have continued to expand.  Where the customer adequately describes the nature of his or her business to the agent, the onus is then on the agent to review the insurance needs of the customer and provide the full coverage requested. Should an uninsured loss occur, the liability will be found unless the insurance intermediary has pointed out the gaps in coverage to the customer and advised him or her how to protect against those gaps.³

The broker must take steps to ensure the coverage is appropriate and adequate. A situation that frequently arises is the request for a comparative quote. Where a customer seeks particular coverage and the broker agrees to provide it, the broker will be under a duty to procure the insurance requested.  If the broker is unable to do so, the client must be advised the coverage is not available and the alternative options must be explained.⁴

Although the duty is high, a broker will not have to explain each and every clause in an insurance policy to the customer in order to fulfill their duty of care. Where the meaning of the clause is clear, the broker will not have to explain the clause.⁵

Duty to make inquiries: Be inquisitive!

Sometimes the broker will be required to obtain information from other sources to ensure proper coverage is placed for the customer. Casual questioning is not always sufficient. If a piece of information is missing, take the initiative to seek out adequate and accurate answers. The agent must make sufficient inquiries, perhaps in some cases from an independent source or by inspection, to satisfy him/herself that answers given are indeed correct. This may appear to be a very onerous duty on a broker, but it is a judicially recognized duty,6 especially if the broker has some knowledge that invokes this duty to question further or obtain additional independent information.⁷  

The duty to know your customer’s business: Be a busybody!

The courts require a broker or agent to take the time to know and understand the customer’s needs and expect them to ask the appropriate questions or conduct the appropriate investigations to obtain the necessary information to properly assess the risks of the customer. This duty is especially relevant to the broker of CGL policies. The broker must know the client’s business. Failure to update insurance needs based upon changes in a company may give rise to liability.⁸ Knowing one’s customer may also come into play when placing personal lines of insurance, especially when the agent had knowledge of the insured’s personal circumstances from previous dealings.⁹

Duties regarding renewal, cancellation and updating: Have a system!  

The view of many brokers is that it is the customer’s sole responsibility to be aware of the expiry date of their policy; any information provided to the customer in regards to upcoming renewals is done as a “courtesy.” However, in recent years there has been a significant change in how courts view the duty of a broker with regard to renewals of insurance policies. Where there has been a history of the broker arranging renewals, some courts now consider a duty to arise to notify the customer of an impending expiry, a proposed non-renewal or a cancellation. Liability may arise when the broker’s conduct amounts to an undertaking, which is reasonably relied upon by the customer. However, although the customer’s reliance may be reasonable, that fact alone does not totally displace the obligation of the customer to protect his or her own position. While a broker may be found to be negligent for failing to inform a customer of an impending renewal or cancellation, the customer is often found to be contributorily negligent for failing to
be more alert to his or her own policy.

Cancellation: Explain the consequences!

In order to avoid liability, brokers should explain to a customer the consequences of the decision not to renew or to cancel an insurance policy. This is particularly important where there is going to be a gap in time between coverage or where the customer may have difficulty getting new insurance as a result of having a period of no coverage.  Liability may be found for failing to fully explain to a client the consequences of cancelling an insurance policy before its replacement takes effect.¹⁰

Possible defences

Even if the broker is negligent, the insured must show a causal link between the broker’s negligence and the inadequacy of the coverage. Where the broker’s default is the failure to advise about the unavailability of coverage or about gaps in the available coverage, the customer must show that he or she would have reacted differently had the broker properly informed them of this fact, possibly by seeking other insurance or modifying business practices to minimize the uncovered risk. As referenced earlier, there may be cases where a customer may be contributorily negligent for the loss.  

Conclusion

The liability of brokers is widening. The best defence is to avoid a claim in the first place. Liability is being imposed from circumstances arising from the initial contact by a customer to the circumstances arising at the time of cancellation of a policy. In future, customers may demand more and more of brokers, requiring updated advice and recommendations regarding the limits of liability.

Monika M.L. Zauhar is a partner and Amanda J. Evans is a senior associate with the law firm of Cox & Palmer. Cox & Palmer is a member firm of the Risk Management Counsel of Canada.

1. Fletcher v. Manitoba Public Insurance Co., [1990] 3 S.C.R. 191, at paragraph 57
2. Fine’s Flowers, (1977), 81 D.L.R. (3d) 139
3. G.K.N. Keller Canada Ltd. v. Hartford Fire Insurance Co. (1983), 1 C.C.L.I. 34 (Ont. H.C.) (confirmed on appeal at (1984), 4 C.C.L.I. xxxvii (Ont. C.A.))
4. 232 Kennedy Street Ltd. v. King Insurance Brokers (2002) Ltd., 2007 MBQB 291.
5. Marine Ltd. v. Axa Pacific Insurance Co., 2010 BCSC 88
6. Sotiropoulus v. Bernard Freedman Insurance Ltd. (1982), 44 N.B.R. (3d) 319 (Q.B.) and Strougal v. Coast Capital Insurance Services Ltd., 2008 BCSC 17
7. Rosenblat v. Reliable Life Insurance Co. 2003, MVCA 6 and Fleet v. Federated Life Insurance Co. of Canada, 2009 NSCA 76
8. Johnson v. W. G. Barton Ltd. (1986), 21 C.C.L.I. 73 (B.C.S.C.)
9. King v. Sullivan Insurance, [1993] P.E.I. No. 73.
10. Brisee v. Royal Life Insurance Co. of Canada (1994), 26 C.C.L.I. (2d) 89 (N.B.Q.B.) and Engel v. Janzen (1990), 41 C.C.L.I. 284 (B.C.C.A.).