Why take the chance why not just do it?

When is a broker obliged to clarify terms with the underwriter?

Andrew Horne and Nick Frith, Minter Ellison Rudd Watts

The English High Court repeated the question “Why take the chance, why not just do it?” when assessing whether an insurance broker, Edge, was obliged to clarify unusual policy terms with underwriters in order to protect its client (Bank) from a coverage dispute. The judgment runs to over 1,000 paragraphs and the evidence and submissions were extensive, even though they were largely conducted via Zoom because of COVID-19.

The short answer to the second question is that, in certain circumstances, a broker is obliged to raise unusual proposed terms proactively with underwriters to avoid the risk of a later dispute as to whether cover exists as the broker (and client) expected. If that duty is breached, the broker may be liable not only for the loss suffered due to the unavailability of indemnity (if the underwriters succeed), but also for the client’s costs of suing the underwriters (sometimes even where the underwriters lose).

The focus of this article is upon brokers’ duties where underwriters dispute cover. The facts

Edge placed a marine cargo policy for the Bank which was underwritten by 14 underwriters. It contained an unusual “Transaction Premium Clause” (TPC) which the Bank asserted provided cover for losses suffered as a result of a customer’s payment default on cargo transactions in the absence of physical loss or damage to cargo. The Bank suffered significant losses totalling some £5 million. The underwriters declined cover under the policy. The main issue was whether the policy provided the cover sought and/or whether the underwriters had other coverage defences. There were disputes over the proper interpretation of the policy, claims for rectification and/ or estoppel, misrepresentation and non-disclosure by the Bank.

The Bank sued Edge to the extent that its claims against the underwriters failed and for its costs of having to sue the underwriters. Its primary claim was that Edge ought to have taken further steps to ensure that the cover it sought was clear, unambiguous and did not subject the Bank to an unnecessary risk of coverage disputes with underwriters.

Fortunately for Edge, the Bank was largely successful against the underwriters. The Bank succeeded against 12 of the 14 underwriters on its policy interpretation argument, that the TPC provided the cover it sought, on which none of the 12 underwriters’ defences succeeded. Against the remaining two underwriters, Ark and Advent, the Bank was unsuccessful on the basis that certain of Edge’s statements during the underwriting process gave rise to an estoppel, the result of which was that the Bank could not rely upon the TPC against those two. Brokers’ duties restated

The scope of brokers’ duties was not in dispute: … Edge owed duties of reasonable skill and care to the Bank: to procure the insurance cover required by the Bank; and to procure cover that clearly and indisputably met the Bank’s requirements, and so did not expose it to an unnecessary risk of litigation.

The extent of cover, if any, provided by the TPC was clearly in dispute as the Bank had been required to sue its underwriters in pursuit of indemnity. Indeed, two of the underwriters succeeded in their defences. Edge’s defences and the Court’s findings

Edge’s primary grounds of defence, and the Court’s findings in respect of them, were as follows.

Any claim ought to lie against the Bank’s lawyers and not Edge, as they were relied upon to secure the relevant cover by preparing draft clauses for inclusion in the policy wording.

The Court disposed of this argument shortly. Edge had admitted that it was under a contractual duty to arrange cover that “clearly and indisputably” met the Bank’s requirements.

While principles of reliance were potentially relevant in tortious claims against brokers, here the Court was dealing with an admitted contractual obligation for which Edge was well paid. In those circumstances, the Bank’s alleged lack of reliance on Edge did not assist.

Edge had no duty to highlight and explain the Bank’s subjective understanding of the policy terms to underwriters – it was their responsibility to read and understand the slip and the cover sought – and the broker’s duty was limited to answering questions honestly.

In the fact-specific circumstances of this case, Edge was found to have been under a duty to raise the TPC with underwriters and seek confirmation that the underwriters knew and understood what cover they were being asked to provide. The facts leading to this conclusion were unusual: • The cover sought by the Bank under the TPC (effectively trade credit risk) was of particular importance to it, yet it had no precedent in the marine market, it was usually placed in the established trade credit market. • Underwriters were being asked to accept significant additional risk under a clause that was long and tightly drafted, making it difficult to understand on a first read. • The fact that Edge was approaching the “wrong market” for cover under the TPC meant that it was under a particular duty to discuss with underwriters the cover that was being sought.

Despite the above, Edge did not involve its specialist trade credit risk brokers to advise the Bank that TPC cover was not available in the marine market, to allow it to make an informed decision as to whether to pursue that market or go to the traditional trade credit risk market.

The TPC’s careful drafting and apparent clarity did not assist Edge: … the careful drafting of a clause, in circumstances where that clause is unusual and indeed unprecedented in the market in which the cover was being placed, could not reasonably be relied upon by the broker as providing protection against the unnecessary risk of litigation. This is because the door can, and does in a case such as the present, remain open for the very arguments that the underwriters have advanced in the present case.

In the above context the Court repeatedly asked the rhetorical question put by the Bank’s broking expert witness when discussing whether a broker was obliged to proactively raise policy terms with the underwriter: “why take the chance, why not just do it?”

If the TPC did provide the cover that the Bank sought then Edge could not be liable at all (including for the Bank’s litigation costs) because the underwriters’ arguments were “spurious”.

A broker will not be liable for the consequences of an underwriter raising “spurious” coverage defences. However, the Court in this case found that underwriters had not done this. This was so even though the Court agreed with Edge that the underwriters’ “arguments pay little or no regard to the actual wording of the TPC. However, to the extent that they were based upon the factual matrix and context and the commercial consequences of the Bank’s construction, they did in my view have sufficient strength as not to warrant being described as spurious.” The Court found that:

Edge breached its duties to the Bank, regardless of whether the TPC provided the cover that was sought, because it exposed the Bank to an unnecessary risk of litigation.

Edge was liable for the Bank’s loss based on its inability to recover from Ark and Advent. While the Court reinforced the principle that causation and loss in broker negligence cases are generally to be addressed on a “loss of a chance” basis, Edge was liable for 100 per cent of what Ark and Advent would have paid because they would have been liable but for the estoppel given Edge’s statements, and the relevant slip was oversubscribed so would have been filled if Ark and Advent had refused to insure based on Edge’s statements. Quantum was left over for a later hearing.

The Court considered, but reserved for later determination, that Edge was liable for the Bank’s costs liability to Ark and Advent (which both succeeded) and for its irrecoverable costs of suing them.

The Court did not make a finding on the Bank’s claim for its irrecoverable costs in suing the remaining 12 underwriters, primarily because the claim had not been quantified. However, while Edge argued it should only be liable for the Bank’s costs of dealing with the policy interpretation issue (and not for other grounds of defence), the Court said that it was “…not at all clear why Edge should not pay for all consequences of the Bank having become embroiled in litigation, even though the underwriters’ defences were ultimately not confined to issues of construction but where those issues remained of prime importance.” Lessons for brokers

This case reinforces the need for brokers to pay careful attention to the nature of their clients’ risks and the clarity of the cover being sought to underwriters. While the findings are fact-specific, the case is a reminder that it is important for brokers to consider not only whether the cover they are seeking is clear but also whether it will be clear to underwriters if it is out of the ordinary for the underwriters they are approaching. If so, brokers should consider whether they need to explain the cover sought and obtain the underwriter’s express confirmation that it is understood. Doing otherwise could leave the broker exposed to claims if the underwriter later declines cover.