Insurance brokers' duties: avoiding the risk of unnecessary litigation

The case in question is BN Amro Bank N.V v Royal & Sun Alliance Insurance Plc & 14 Ors.

The facts

This case concerns a claim by ABN Amro "the Bank" for an indemnity of c. £33m under a marine cargo insurance policy to which the first fourteen defendants “the Underwriters” subscribed. The policy was placed by the 15th defendant, Edge Brokers (London) Limited ‘the Broker’.

The policy contained a Transaction Premium Clause (TPC). This is an unusual clause to find in a marine cargo policy as it widened cover, making it inclusive of risks that were not dependent on physical loss and damage. As a result, the Bank was insured for amounts “that the Insured would otherwise have received and/or earned in the absence of a Default by a customer.”

In 2016, the Bank suffered loss because two customers fraudulently defaulted on a finance deal and consequently become insolvent. The Bank and the Broker maintained that the effect of the TPC was that the Bank could claim an indemnity for the shortfall under the policy. The Underwriters disputed this. They argued that cover for risks arising from defaulting customers would typically be placed with underwriters specialising in trade credit insurance and not cargo insurance. Thus, the TPC should be construed as only being applicable where physical loss and damage was caused to cargo, and not as effectively providing trade credit insurance.

The Bank was successful in the majority of its claim but it failed against two of the insurers. The aspects of the judgment relevant to brokers' duties is considered below.

The claim against the Broker

Four of the Underwriters (RSA, Navigators, Ark and Advent) argued that the Bank (through the Broker) had misrepresented the position during the 2016 renewal of the policy when they stated that the terms were “as expiry” - the same as those in the policy for the previous policy period (2015/16) such that the Bank could not rely on the TPC.

At renewal in 2016, the Broker had proceeded on the basis that a July 2015 endorsement was binding on all insurers who had subscribed to the 2015/16 policy, and that the 2016 policy was therefore a renewal on those expiring terms.

The court found that there had been no "as expiry" misrepresentation in relation to RSA but that there had been such misrepresentation in relation to Navigators, Ark and Advent. However, on the facts, only Advent and Ark had been induced to enter into the contract by the misrepresentation.

The position in relation to Navigators was different. They had carried out a review of the 2016 policy and read it with care and this should have enabled them to ask any questions about the TPC, which was a lengthy and unfamiliar clause. They had chosen not to do so.

The court held that, with the exception of two insurers (Ark and Advent), all of the other Underwriters were liable to indemnify the Bank under the 2016 policy.

Placing in the right market

The court also found that the Broker was required to tell the Bank, at the outset, that the credit risk market was the appropriate market in which to place the cover which the Bank was seeking, and (since the specific broker who had placed the risk did not have the relevant expertise in that area) specialist brokers should become involved.

If the Bank then decided to approach cargo insurers, the Broker needed to discuss with the Underwriters the nature of the cover which was being sought in the TPC (that it was credit risk cover). This was necessary to avoid the potential for future dispute in circumstances where:

• The new cover sought was of considerable importance to the client.
• The cover had no precedent in the marine cargo market.
• There was an established and different market in which such risks would usually be placed.
• The insurers were being asked to write a risk that would materially increase the potential for losses.
• The TPC was long and tightly drafted and its full import would not necessarily be grasped by an insurer on a first reading.

Careful drafting of a clause, in circumstances where that clause was unusual and unprecedented in the market in which the cover was being placed, could not reasonably be relied on by the Broker as providing protection against the unnecessary risk of litigation. A Broker could also not escape responsibility on the basis that a particular clause had been carefully drafted by a lawyer.

What was the loss?

The Broker was liable to the Bank in respect of the indemnity the Bank would have received from Ark and Advent under the 2016 insurance policy but for the misrepresentation and inducement estoppel. It also considered that the Broker’s liability extended to any costs liability of the bank to Ark and Advent, as well as any irrecoverable costs incurred by the Bank in the action against those two insurers. In addition, the Broker was also liable in principle for the Bank's irrecoverable costs of the proceedings against the Underwriters in respect of whom the claim succeeded.

Avoiding the risk of litigation

The court concluded that the Broker breached its duty to the Bank, irrespective of whether the TPC provided the cover that the Bank was seeking because the ambiguity had exposed the Bank to the risk of litigation.

This decision reinforces the importance of brokers taking particular care on renewal where these mistakes often occur, to ensure that cover is placed with certainty and avoids the risk of future litigation with insurers.

Any questions?

If you would like to discuss this case further or any other issue concerning risk management for insurance brokers, please get in touch. You can watch our The Box webinar dealing with risk management for coverholders and MGAs here and you can sign up for The Box, our new webinar series for brokers, intermediaries and their insurers here.