COVID-19 Toolkit – Managing challenges for insurance brokers arising from COVID-19
Arguably a perfect storm is shaping up for brokers in 2020 as to potential future errors and omissions (E&O) claims. Brokers should therefore be extra vigilant to ensure they maintain high standards of professional care that are consistent with their legal duties and obligations.
To that end, we set out below some practical tips brokers can use to reduce the likelihood of suffering an E&O claim arising from COVID-19.
A ‘perfect storm’
The swift and severe economic disruption caused by COVID-19 is being acutely felt by nearly all businesses. Brokers placing new and existing business are therefore likely to be beset with a number of challenges which, if not managed effectively, could increase the likelihood of future E&O claims. These challenges include:
- clients changing the nature of their businesses to adapt to the current environment;
- a pressure to cut premium costs, even if it means moving insurers and replacing wording;
- insurers amending their wordings and introducing exclusions to limit their exposure to the expected fall out from COVID-19;
- pressure being placed on brokers to resolve claims expeditiously; and
- uncertainty in relation to expected cash flow and financial viability of the client.
The law generally holds brokers to a high standard of professional care, and the challenges brought about by COVID-19 are likely to reinforce that as clients face unique and critical challenges, and require expert guidance and advice. Broadly speaking, the law requires brokers to take reasonable steps to:
- understand the nature and extent of the client’s instructions for insurance cover;
- advise the client about the insurance cover available to meet the client’s instructions; and
- arrange the insurance as instructed.
In determining what these steps might require, regard may be had to relevant surrounding circumstances including:
- the level of commercial sophistication of the client;
- whether the relevant advice has been provided to the client in previous years, and in particular, to the responsible person for the client; and
- whether the broker has a reason to suspect that information provided by the insured is inaccurate.
Importantly, where the broker is unable to obtain cover that the client has requested, he/she must report in what respects such cover was not available and then seek alternative instructions.
Further, after the risk has been placed, there is a generally a continuing duty to ensure that the policy remains suitable for the client’s purposes. Thus, if the broker becomes aware of information that has a material and deleterious affect on the insurance cover already placed, he/she has an obligation to draw it to the attention of the client and obtain instructions.
In light of this, here are some steps brokers can take to reduce the likelihood of an E&O claim being brought against them arising from the challenges presented by COVID-19.
Write it down
The importance of documenting conversations, advice given and instructions from clients in a contemporaneous file note, and filing them appropriately, cannot be overstated. That is so even when employees are working remotely on account of COVID-19.
This point can be demonstrated by a case decided only earlier this year in which a broker was ordered by the Federal Court of Australia to pay a former client AUD250,000 plus interest and costs. PCCG v Instar turned significantly on whether the risk of copyright infringement was discussed between the broker and client at any time between 2009 and 2015. Despite competing evidence, the Court held that it was not. A contemporaneous file note of such a conversation could possibly have resulted in a different outcome and saved the broker a significant liability.
High risk areas, where it is of the utmost importance to take contemporaneous file notes, include advice given and instructions taken in respect of on changing cover or wording, renewing cover, settling claims, and information provided about the business to insurers as part of the placement or renewal process.
Businesses are doing what they can and must to adapt to the new laws mandating social distancing and the closure of certain operations. In many cases, this may change the nature of the business and its insurance requirements. A good example of this is a business adapting to sell most of its goods or services online, when this was previously rare or comparatively minimal. Similarly, businesses may now be requiring all or most of their workforce to work remotely.
Brokers should ensure that they are obtaining current information about their clients’ businesses and ensuring that the cover placed continues to be effective and appropriate for the client.
Explain policy terms (including new terms)
The financial pressures resulting from COVID-19 may result in reduced cover being placed to save premium, cover being placed with new insurers, or simply new exclusions being incorporated into a standard policy wording or by endorsement. In these cases, clients should be given clear and detailed explanations about the impact on the scope of cover of these developments.
The quality of explanation is also important. A shopping list of ‘uninsured exposures’ in a renewal report, without explanation, may not suffice to meet the broker’s duty of care. As always, those explanations should be recorded in writing.
COVID-19 has resulted in many cases in increased financial pressures on clients, including on account of actual or potential disruption to normal operations, supply chain and revenue streams. In these circumstances, brokers should take extra care to ensure that they properly understand their client’s business and the risks facing it, including by asking relevant questions to obtain information from the insured. Where that information could be material to the underwriter’s decision to accept the risk and on what terms, it should naturally be disclosed.
Terms of engagement
Having a clear set of written terms of engagement that are expressly agreed by the client can be important in setting out the precise scope of broking services to be provided, and also for including other terms that the broker may wish to rely, including limitation of liability clauses.
For new clients, clear terms of engagement should be issued. Where a client is a longstanding client, it is important to review and update the terms of engagement as necessary to ensure they continue to be accurate and to minimise the risk of a dispute that the engagement terms were superseded or replaced.
What to do when it goes wrong
While prevention is better than cure, there may be instances when a client is not covered for a loss and it looks to recover against the broker. In those circumstances, it is important, and the broker’s professional indemnity insurance will often require, that the broker does not admit liability for the claim. Generally speaking, corresponding in writing with the client about a potential E&O claim without first obtaining legal advice can present risks.
Accordingly, in the event of a claim or the prospect of a claim against the broker, the broker should take steps to immediately notify its professional indemnity insurer. If appropriate, legal advice and representation should be obtained for the purpose of properly understanding and defending any potential exposure.
It is important to note that the Australian Financial Complaints Authority now has jurisdiction to make binding compensation orders against a general insurance broker for up to AUD250,000 plus interest in most cases. Accordingly, complaints are able to be brought by claimants for reasonably sized sums relatively seamlessly, and without the risk associated with a potential adverse cost order.