A significant contraction in capacity in certain commercial lines, together with hardening rates, may be stirring up a toxic cocktail of risks for commercial insurance brokers.
Following record global insurance losses, Lloyd’s insurers have been under regulatory scrutiny, causing a number of long-standing players to pull out of particular lines, such as hull and cargo, with some Syndicates closing completely.
Many insurance brokers are unprepared for the challenges of broking in such a complicated and rapidly changing market. Continuity of insurance cover generally helps mitigate against broking E&O claims emerging from both the placing and claims processes.
Claims against insurance brokers mainly arise from their core duty to obtain a policy that is suitable for their client’s needs. This involves understanding the client’s business, ensuring that a fair presentation of the risk is made to insurers and that the client is aware of any onerous terms in their policy.
Changing insurers and/or decreasing policy cover and limits give rise to some significant risks for brokers. In a hard market, existing insurers are more inclined to take tougher policy points, while new insurers are likely to scrutinise whether there was a fair presentation of the risk, or whether a claim falls to an earlier policy or notification. The scope of cover offered at renewal may also be much more restrictive than under a client’s existing policy. For example the new cover may exclude certain types of claim altogether or even impose a Retroactive Date Inception exclusion.
Reduced capacity in certain classes of business is also an issue, with some insurers having to reduce their book or pull out of particular types of risks and sectors altogether, so that they do not exceed their underwriting capacity.
Other insurers may reach their capacity limits during their financial year, leaving policyholders with renewals late in the financial year having to explore new markets. In doing so, their broker may be forced to look at new or overseas capacity with insurers of questionable financial status, or doubtful long-term commitment to the insurance market. If a broker is forced to seek insurance with untested insurers, the risks of doing so must be made very clear to their clients.
Changing insurer will also involve a fresh evaluation of the risk often using the insurer’s bespoke proposal form or statements of fact, which may be unfamiliar to the broker. The broker must take care to review such documents carefully, in order to advise their client and to ensure a fair presentation of the risk to the new insurers. Failing to do so could give rise to later arguments of non-disclosure or misrepresentation which, in turn, result in a claim against the broker.
The new policy may also have lower policy limits or move from an Any One Claim basis, to an aggregate policy limit. Any such material change in the level and scope of cover will need to be clearly explained to the client. Where a lower policy limit is obtained the broker may need to inform the client of the consequences of underinsurance and the possible application of average in the event of a claim. The terms of any excess cover that may need to be obtained will also need to be suitable and explained to the policyholder.
New insurers will also have their own policy wordings, or impose specific terms, which may be more onerous and therefore need to be explained by the broker to their client, including the consequences of failing to comply with those terms.
A new insurer may also impose “subjectivities”, for example requiring a risk survey within a specific time limit and the broker must ensure the client is aware of the need for compliance.
Claims against insurance brokers arising from the claims process can also be expected to increase where continuity in cover is lost and arguments as to claims notification arise. For example, a broker may be responsible for simply notifying the wrong policy. A change in market also increases the risk of claims falling between two policies - notification conditions must be considered carefully to ensure that outgoing insurers are provided with all the information they need to consider notifications prior to expiry.
The prevailing market conditions bring insurance brokers’ duties and obligations into sharp focus, both in terms of placement and notification of claims. To protect themselves from the risk of claims, brokers need to be considering their commercial clients’ renewals well in advance, so as to ensure their clients are not faced by last minute placing problems, or lack of available insurance cover altogether.
This article was first published in Insurance Age, 27 November 2019.
