Insurance brokers receive applications for insurance and, through dealings with insurers, facilitate the underwriting of an appropriate insurance policy having regard for the prospective insured’s requirements. They act as the interface between members of the public and insurance underwriters, both public and private.
As a result of their intermediary role, brokers are often blamed when an insured is denied coverage by the insurer for a particular claim. In such instances, the insured will start a legal action against the insurer for the broker’s alleged errors in obtaining the inadequate insurance policy, raising several key questions:
• What duties are owed by the broker to the insured and the insurer?
• What is the applicable standard of care of the insurance broker?
• Is the insurance broker the agent of the insured or the insurer?
• When is an insurer responsible for the acts and omissions of a broker?
Duties of a Broker
The courts have provided some answers to these and other questions of concern. In Fine’s Flowers v. General Accident Assurance Co. of Canada, the Ontario Court of Appeal decided that, because the prospective insured had asked the broker to obtain general insurance coverage for his business, the broker had a legal duty to inform itself about the prospective insured’s business in order to assess the foreseeable risks and to provide insurance against them. If the required insurance coverage was not available, the broker had a duty to inform the prospective insured of that fact so it would be clear what risks were not insured. The Court also stated that, where a prospective insured requests a specific type of coverage, the broker has a more limited duty to use a reasonable degree of skill and care to obtain that coverage; if unable to obtain the requested coverage, the broker must promptly convey that information to the prospective insured.
Claims against brokers and agents typically allege breach of contract, negligence and, sometimes, breach of fiduciary duty. The existence of legal duties owed to either or both of the insured and the insurer can differ from one case to another. The duties imposed can be onerous. The Supreme Court of Canada in Fletcher v. Manitoba Public Insurance Company,. said pointedly: “Selling insurance is not . . . like selling groceries, and the law should not treat them alike.” The broker is a professional who is held to a commensurately higher duty of care.
Is Broker an Agent for Prospective Insured or the Insurer?
Where a court determines that an insurance broker was acting as the insurer’s agent in its dealings with a prospective insured, the insurer may be vicariously liable for the broker’s negligence. The question of who the insurance broker is agent for—the prospective insured or the insurer—has occupied the courts on a number of occasions. In cases where the prospective insured gives erroneous information to the broker who, in turn, relays this information to the insurer, insurers have successfully argued that the broker was an agent for the prospective insured. Because the insurer issued the insurance policy based on the inaccurate information relayed by the broker, the coverage may be lawfully denied.
Liability for Broker’s Negligence
In other cases, where the insurer holds the broker out as its agent (and the prospective insured understands the broker to be the insurer’s agent), the insurer may be liable for the broker’s negligence. In such instances, if the broker fails to obtain proper insurance, or causes the insurer to mistakenly issue an insurance policy, the insurer may recover the amounts it pays out under the insurance policy from the broker on the basis that the broker breached its duties to the insurer. To complicate matters, some courts have held that brokers can be agents for both the insured and the insurer at the same time while performing certain tasks during the insurance application process. Each case turns on its facts.
The evolving case law suggests that unqualified reliance on a “rule of thumb” that the broker is an agent for the prospective insured during the insurance application process is no longer warranted. The facts and circumstances surrounding each insurance transaction must be carefully reviewed in order to determine the nature and existence of legal duties owed by the broker and the insurer.
Read other articles from the Spring 2011 Letter of the Law:
• Possession Is Not Nine Tenths of the Law by Michael Hewitt
• Non-Competition Clauses and an Employee’s Duty to Mitigation by Barb Cornish and Debra Rusnak
• New Temporary Foreign Worker Regulations by Melanie Samuels
• Proposed Limitation Act Changes by Steven Lesiuk
• Simple Socializing May Have Complex Perils by Scott Brearley
• Editor’s Note by David Perry
• US@SU Celebrating A Quarter Century of Accomplishments