When an insurance claim unexpectedly goes awry, often, the broker will be the claimant’s primary target.
To avoid the crosshairs, brokers therefore need to be clear on what the law requires of them and remain fastidious in their duties.
The responsibility of the broker
First and foremost, it is the responsibility of the broker to obtain appropriate cover for the client. This was made clear in the case of Lenaerts versus JSN Motors, in 2001. The Court said that the broker must take reasonable steps to ensure that the client is properly covered, and the broker has to request the necessary documentation from the client to perform a needs analysis. Without undertaking a proper needs analysis, any recommendation as to cover would only be a guess.
Adding to this, in the Stander versus Raubenheimer case, in 1996, the Court found that the broker was under a duty to elicit all material information from the insured and to convey this to the insurer. The broker knew that the contents of the plaintiff’s house would not be covered if they were damaged or destroyed in a house with a thatched roof but failed to ascertain from the insured whether his house had a thatched roof. The decision was, therefore, that the broker breached its contractual obligation to ensure that the plaintiff’s goods were covered.
In addition to obtaining appropriate cover, the broker’s obligation of ensuring the client is adequately covered was confirmed in the Mutual and Federal Company Limited versus Ingram NO & Others, in 2009. While it is not the duty of a broker to ensure that the client upholds all of their obligations under the policy, it certainly is expected of the broker to go through the policy with their client, explaining all the material terms (See Lapperman Diamond Cutting Works versus MIB Group - 2004).
Furthermore, in determining the reasonable standard of care that a broker is expected to display, the Court will have regard to the general level of skill and diligence possessed and exercised at the time by insurance brokers who are similarly situated (See Durr versus ABSA Bank Ltd and Another – 1997).
Would cover have been advisable?
Therefore, in cases where a broker has failed to secure cover or appropriate cover, the question may shift to whether a reasonable broker, in their position, would likely have considered and secured cover for the specific risk under consideration. Undoubtedly, this may not be as straight forward as it appears. One only has to ponder the ongoing COVID-19 pandemic and whether anyone could have reasonably anticipated such an event as a risk, and even if they had, whether cover would have been advisable?
This question of reasonability was explored in the Octofin (Pty) Ltd versus Hugenote College case, in 2019. In 2008, a unique historical building named Cummings Hall in Wellington, a town in the Western Cape, was partially destroyed by fire. Cummings Hall was underinsured at the time of the fire. The insured recovered substantially less than expected and sued Octofin, its short term insurance broker, alleging that it instructed Octofin to insure its buildings for the replacement value as determined by Octofin. Octofin denied this.
Initially the High Court found the broker liable. It argued that it was the broker’s duty to ensure that the insured was properly covered for the value of the buildings. On appeal, however, the Court considered that Octofin had provided the insured with a summary of advice wherein it was noted that the buildings were still somewhat underinsured (20 – 45%) and that this would be corrected at the next renewal of the policy.
The claim could not succeed for two reasons. Firstly, the claimant was at all times aware that it was underinsured. This was confirmed by a witness, who testified on the claimant’s behalf. Secondly, insuring the buildings at their actual replacement value cost would have involved an increase in premiums in excess of 300%. In 2003, the claimant intentionally did not insure at the value recommended by Octofin due to budget constraints at the time. Octofin was, therefore, successful in its appeal.
Reasonable care and skill
In the matter of PFC Food versus Three Peaks Management, in 2012, however, the court found in favour of the claimant. In this case, the broker obtained cover for Neo Café, including Business Interruption (BI) cover, which was limited to R600 000. When a fire broke out causing a BI claim, it was established that the Café was underinsured for BI and insurers applied average. As a result, the Café received substantially less than anticipated and suffered a loss. The broker’s defense was that it relied on the figures provided by the Café and it was not necessary for them to obtain financial statements or to explain to the client how a BI claim worked.
The Court found that it was incumbent upon the broker to explain to its client how a BI loss is calculated; to obtain sufficient information from the client to be able to advise it as to satisfy itself that the café was adequately insured; and to warn the café that average could be applied and that it could be under insured if the BI cover was not increased.
None of these were explained by the broker to the café. Accordingly, the broker’s failure to have done so, means that the broker did not act with reasonable care and skill.
Ultimately, each case will be judged on its own merits to determine whether the broker acted with reasonable care and skill - this test is objective. However, so long as the advice given will pass muster and there is evidence to back it up, a broker should be able to stay firmly out of the firing line.
Jonathan Kaiser
Senior Claims Specialist
SHA
&
Len Faul
Manager
Broker Protect