Unlimited Liability

The CIP Society Ethics Series

During a heavy windstorm, an improperly constructed sign was destroyed. A portion of it struck and seriously injured a pedestrian. The accident caused significant spinal injuries, leaving him without the use of his legs. As a result, he was unable to support himself or his young family.

The sign was owned by a developer, installed by an independent contractor and located on property owned by a third entity. The injured pedestrian sued in an action alleging negligent construction, supervision/inspection/maintenance and occupiers’ liability against the three parties. The claimant’s lawyer pleaded relief seeking $33 million in damages including future care costs, future lost income and loss of companionship, among other claims.

The developer was adequately insured, but the independent contractor and property owner had each only purchased $5 million of commercial general liability (CGL) coverage, based on advice from their respective brokers. The case was eventually settled for $16 million, with $6 million assessed against the independent contractor, $2 million against the property owner, and $8 million against the developer.

At the time of this accident, there had been public press coverage of automobile and general liability claims, and medical malpractice judgments and settlements in Canada that exceeded $10 million.

In this case, the independent contractor was not adequately insured for the settlement value. If the property owner had been advised by its brokers that there had never been a liability claim in Canada exceeding $5 million, the owner might not have been adequately insured, either. Other than the developer, these clients did not receive the necessary advice on exposure and risk management from their respective insurance brokers.

As policy limits change, as new and different claims are taken to court, and as new risks arise, clients expect their brokers to provide advice that ensures they have necessary coverage. What is a broker’s responsibility in advising clients regarding the adequacy of policy limits? How can brokers ensure they are meeting their ethical commitment to protecting their clients?

Bradley J. Wells, LLB
Coverage Counsel
Snowden LLP

Brokers are held to a high professional standard by Canadian courts. This is sometimes described as a stringent duty to provide correct information and advice to their clients. The duty includes providing ongoing advice on which coverage is needed to protect against foreseeable losses.

A Registered Insurance Brokers of Ontario (RIBO) licensing course instructor once advised students that they should never tell a client how much liability insurance is enough. Even if directly asked, brokers should never give a maximum liability limit as “sufficient”.

Instead, a broker should advise the client on which limits are available and the associated premium. A broker should assist, not instruct, the client to determine sufficient limits.

In this scenario, it seems the independent contractor’s broker gave bad advice on liability limits and did not adequately discharge its obligation owed to the client. However, one would need to look back at the broker’s file to see the advice that was requested, the advice that was given and whether or not this advice was followed.

A careful professional will always make a written record of risk management questions received from clients and the answers or advice given.

When considering which limit to purchase, a client will be tempted to think in terms of the average or common losses and choose a less costly limit. However, a broker providing advice on limits should invite the client to consider the “worst-case” scenario that could result in catastrophic injury or damage.

As occurred in this scenario, the verdict (and settlement) value of an unexpected catastrophe resulting in partial paralysis (or worse) will easily exceed a $1-million or even $5-million limit.

A prudent broker should advise the client about the highest liability limits available in the marketplace, with candid disclosure of where other markets might be approached if additional limits are needed. Once the pricing and limits options are laid out, the broker can inform the client of the serious property and casualty (or other relevant line) exposures from a claims settlement perspective.

At this point, the broker can step back and let the client decide for himself or herself what policy is desirable and affordable. This way the broker has educated the client, satisfying the professional duty owed, and the client can make an educated business decision.

Scott Meadwell
Commercial Lines Producer
Meadwell Mowat & Fennell Insurance

In this scenario, the most concerning issue is that the broker advised the client that no court case had ever exceeded a claim of $5 million. Brokers should never assume they know all legal decisions and settlements. Most financial payouts result from out-of-court settlements, and it is impossible to know these cases when many of them include non-disclosure terms.

While brokers should never discuss maximum possible payouts to a client, they can discuss the risks associated with limits and allow the client to make an informed and comfortable decision.

Each broker must determine the comfort level of each client with regard to liability limits. Most clients will weigh the risk against the possibility of going “insurance poor” if the broker tries to place insurance against claims of all sizes. It is a good practice to inform the client that there is always a possibility of being underinsured. Regardless which policy limits the clients choose, the broker should tell clients that higher limits are available if, and when they choose to explore them.

In this scenario, it is impossible to comment on whether or not a prudent broker would consider these clients underinsured prior to the loss without knowing much more about the companies involved. It is easy to say that a client is underinsured after a loss, but prior to the loss, not many brokers would consider a property owner underinsured with $5-million limits.

The term “underinsured” has a very different meaning post-loss then it does prior to the loss.

In the absence of a crystal ball or bottomless pockets for insurance, the best advice is to communicate with each client and revisit the limits of coverage annually. This way, the client is represented in the best manner possible, and that is the goal as professional insurance brokers.

Diane Brickner, CIP
President & Chief Executive Officer
Peace Hills General Insurance

Insurance brokers have a tremendous amount of information readily available to them, such as trade articles or online information that will assist them in having an informed discussion with their client about how much coverage is enough. They can certainly advise a range of coverage, but it is up to the client to choose the limits.

A broker who advises a client that there has never been a liability claim in Canada exceeding $5 million should have his or her license revoked. That broker should probably find another career outside the insurance industry. It is a huge disservice to a client to suggest a specific amount of liability coverage is adequate.

A broker cannot know what a judge will determine in court, nor can he or she profess to be experienced in such areas as professional risk management or fiduciary responsibilities. A broker’s responsibility is to understand the business of their clients and learn the risks they may face with as much knowledge and insight as they can obtain. A broker’s role is to work with the client to determine the best coverage possible within the client’s budget.

THE LAST WORD

From an ethical perspective, the best approach is to ensure that clients understand their extreme risk profile, not based on known precedence but, rather, on the best possible risk profiling and assessment of all the available options.

Once the client is fully informed, the broker can strongly recommend the client have as much liability coverage as they can afford.

From a client relationship perspective, best practices suggest that brokers maintain regular, frequent and appropriate communication with their clients to ensure they are aware of changes in their client’s risk profile and that their clients are appropriately covered. Brokers should always retain thorough notes.

As a client’s business grows or changes, a broker must ensure that he or she is providing their clients with information customized to the evolution of the client’s business. Not only is this the broker’s professional duty, but it is also the added value brokers should be bringing to their clients, as a trusted advisor.

The CIP Society represents more than 17,000 graduates of the Insurance Institute of Canada’s Fellow Chartered Insurance Professional (FCIP) and Chartered Insurance Professional (CIP) Programs. The CIP Society, through articles such as this, is working to bring ethical issues to the forefront and provide learning opportunities that enhance the professional ethics of all insurance professionals.