B.C. Court reaffirms validity of amending fundamental contract terms by way of endorsement

A British Columbia Supreme Court decision in January 2010 has reaffirmed the validity of amending the fundamental terms of a marine insurance contract by an endorsement, according to an article published by Borden Ladner Gervais LLP.
In the article, Beware of Insurance Policy Endorsements, authors Graham Walker and Dinoysios Rossi note the B.C. Supreme Court ultimately upheld the validity of a clause in a hull and machinery policy that increased the insured’s deductible to $250,000 by an endorsement, because of its poor claims history.    
In More Marine Ltd. v. Axa Pacific Insurance Company, the insured, More Marine, operated a fleet of vessels insured under a hull and machinery policy by two insurers, Axa and Continental Casualty Company.
More Marine’s commercial broker, Aon Reed Stenhouse, negotiated the endorsement. It amended More Marine’s insurance policy in 2006 to include a $250,000 annual aggregate deductible and include total and constructive total losses within that deductible.
An annual aggregate deductible clause requires the insured to absorb all losses during the term of the policy, up to a stipulated accumulated amount. The clause is often used to keep premiums low where an insured’s claims history is poor.
One of More Marine’s vessels sank in 2007, and More Marine claimed for constructive total loss. More Marine argued the annual aggregate deductible clause did not apply to constructive total loss claims, but the court rejected this argument.
The court also found Aon had not communicated the negotiations around the endorsement to its client in late 2004 and early 2005.
More Marine claimed damages from its broker for negligence, breach of contract and breach of fiduciary duty in permitting the endorsement.
Nevertheless, the court also concluded the insured must have been aware of the annual aggregate deductible and of its application to constructive total loss claims well before its vessel sank, since the value of the deductible had been under negotiation for some time prior to 2004-05.
Also, “the court held that although the insured had no opportunity to discuss the effect of the annual aggregate deductible clause with its broker, the insurers were not prepared to agree to any other terms, and there was no evidence that any other insurer would have done so, having regard to the insured’s poor claims history,” Walker and Rossi note. “The court held that although the broker should have communicated more with the insured, there was no evidence that the insured had suffered any loss as a result of its not doing so.
“This decision highlights the importance of insureds being alive to changes in their coverage that can result from claims. It also explains the duties owed by insurance brokers to their insureds.”