Underinsurance – Broker Liability

In the 2014 case of Bar et spectacles Jules et Jim inc. v. Maison Jean-Yves Lemay Assurance inc., the Quebec Superior Court ordered a broker and his insurance firm to pay damages for negligence when renewing insurance for a building. This decision, under appeal, explores the “duty to advise” of damage insurance brokers.

LEGAL FRAMEWORK

In Quebec, the activities of damage insurance brokers are governed by the Quebec Civil Code (CCQ), the Act Respecting Insurance (ARI) and the Act Respecting the Distribution of Financial Products and Services and its regulations (ARDFPS). The ARDFPS deals with most obligations of the damage insurance broker towards clients, including the duty to inform, the duty to personally gather information from a client, the duty to advise and the duty to follow up on client files.

The relevant provisions to the present issue read as follows:

2138 CCQ: “A mandatary is bound to fulfill the mandate he has accepted, and he shall act with prudence and diligence in performing it. […]“

28 ARDFPS: “Insurance representatives must, before making an insurance contract, describe the proposed product to the client in relation to the needs identified and specify the nature of the coverage offered.

Insurance representatives must also indicate clearly to the client any particular exclusion of coverage, if any, having regard to the needs identified and provide the client with the required explanations regarding such exclusions.“

39 ARDFPS: “Damage insurance agents and brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs.“

One of the most important roles of the damage insurance broker is to ensure that the products purchased by clients fit their needs throughout the mandate, and that the insurance product will provide adequate and sufficient insurance in case of a loss.

There are very few decisions in Quebec relating to underinsurance. This recent court decision is, therefore, of particular interest.

BAR ET SPECTACLES JULES ET JIM INC. V. MAISON JEAN-YVES LEMAY ASSURANCES INC

The insured owns a building in which it runs a show bar on the ground floor and rents out apartments on the upper floors. It had insured its building through the same insurance broker firm since 2006.

On June 1, 2010, the insurance policy expired. The amount of insurance on the building was $424,000.

Two business days before the expiration of the insurance policy, the broker in charge of the insured’s file met with the insured to discuss the renewal.

During the meeting, the broker mentioned that the amount of insurance might not be enough in the event of a loss. The broker and the insured agreed the building should be appraised and that the broker would hire a chartered appraiser to do so. The cost of the appraisal was to be shared by the firm and the insured.

In the interim, the insurance policy for the building was renewed for the same amount of insurance ($424,000).

It took almost a month before the chartered appraiser’s services were retained to appraise the building. The broker received the appraisal report a month and a half after the policy was renewed on June 1, 2010. The appraiser recommended that the building’s reconstruction value be increased to $565,000.

The broker read the report briefly on July 20, 2010, then left on vacation two days later without contacting the insured or asking the insurer to increase the amount of insurance on the building.

On July 23, 2010, the building was destroyed by fire without the amount of coverage being increased. The cost of demolishing and reconstructing the building amounted to $1,003,708.

The insured sued the broker and the firm for $224,701, representing the difference between the amount suggested by the appraiser and the amount of insurance, as well as damages for loss of income. The insured also claimed from the broker, the firm and the appraiser $233,865, representing the difference between the replacement value the appraiser should have suggested and the value he, in fact, suggested, plus the demolition costs.

The insured alleged the broker’s negligence in the follow-up on its file, as well as the failure to adequately inform and to advise on suitable insurance coverage for its needs at the time of the renewal.

JUDGMENT

In a detailed judgment, the court recalled the obligations and duties of insurance brokers, including the duty to act with prudence and diligence and the broker’s duty to advise his client.

The court commented as follows:

[Translation] “[53] Section 39 of the Act [AFDFPS] creates a special obligation for brokers. When a policy comes up for renewal, the broker cannot merely allow the policy to be automatically renewed, despite the possibly regular and automatic increase in the amount of coverage suggested by the insurer. The broker has an obligation under the law to offer his client a product that covers a potential loss for an appropriate amount of insurance, and the insurance product offered must be adapted to the client’s needs. When he sends the policy proposed by the insurer, his role as an adviser must continue.

[54] A broker cannot merely allow things to evolve according to the circumstances and the value of the property since the last policy was issued. […].” [emphasis added]

The court noted the following acts of negligence by the broker:

• a lack of prudence and diligence in managing the insured’s file (lateness in taking steps to renew the insurance policy, the delay in hiring the appraiser, the failure to follow up with the appraiser and poor management when he received the appraiser’s report);

• the failure to inform the insured of the presence of a clause having the practical effect of incorporating the demolition costs into the replacement value of the building and the need to increase the amount of insurance as a result;

• the failure to tell the appraiser that he should mention that demolition costs were excluded in his appraisal report or indicate an amount for such purpose; and

• the failure to adequately inform the insured of the potential additional costs resulting from the reconstruction of the building in compliance with new building standards and municipal by-laws.

The court also found the appraiser to be negligent in his appraisal of the building’s replacement value, which the appraiser admitted at trial.

However, only the broker was held liable. The court ruled that the broker had committed the decisive error that caused the insured’s loss, not the appraiser, whose faults in connection with his appraisal report, [translation] “were not directly related to the initial fault.”

Thus, the court held that, were it not for the faults committed by the broker, the insured would have asked for full insurance coverage for its building and the insurer would have agreed to increase the amount of insurance accordingly.

The court ordered the broker and his firm to pay the insured $348,032.

The judgment was appealed on December 8, 2014.

OBSERVATIONS

The principles developed in Fletcher v. Manitoba Public Insurance Co., issued by the Supreme Court of Canada in 1990, a decision emanating from a common law province, are applicable in Quebec and were taken and adapted by the Quebec courts, notably in the 1991 ruling, Baril v. L’industrielle, compagnie d’assurance sur la vie.

In Fletcher, the Supreme Court of Canada ruled that the duty to inform is impos
ed upon insurers and intermediaries, while the duty to advise is imposed upon insurance brokers who must especially advise clients as to insurance coverage suitable for their needs and the extent of the coverage provided for in the insurance policy.

In Baril, even though the dispute focused on the failure to inform the insured of the possibility of obtaining temporary coverage by an insurance agent and not an insurance broker, the court quotes remarks in Fletcher:

“In my view, 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 need of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client. Subtle differences in the forms of coverage available are frequently difficult for the average person to understand.”

As was seen in Bar et spectacles Jules et Jim, the distinction between the duty to inform and the duty to advise takes on its full dimension, especially when it becomes necessary to review the value of property to establish the parameters of new insurance coverage required upon a renewal.

Thus, the duty to advise places a heavier responsibility upon the insurance broker who, as a “licensed professional,” must ensure he gives sound advice to his clients and directs them towards the right resources and information to help them obtain suitable insurance coverage.

When it is time for renewal of the insurance coverage and/or when the insurance broker becomes aware of changes, notably with regard to the value of the goods covered by the insurance, he must react diligently by ensuring his client will have insurance coverage suitable to his needs at all times.