Has the Insurance Act 2015 made brokers a better E&O risk?

We answer the question by looking at 3 recent court decisions and other factors impacting the risk since the introduction of the Insurance Act 2015 (the Act).

Since the Insurance Act was introduced in August 2016, there have been significant developments in the sector as:

1. Private equity investment has driven a busy cycle of consolidation, resulting in a smaller pool of larger brokers who have an increased ability to invest in training, risk management and regulatory compliance
2. Increased and tighter regulation, with a greater focus on consumer protection

This has raised standards amongst brokers generally and the Act has increased the burden on insurers to explain, evidence and justify any coverage decisions that are taken to reduce their liability to pay claims. 

This article will discuss 3 cases which illustrate the impact of the Act on brokers’ E&O risk. For more details, please watch this recording of an episode of our Box webinar series.

Case 1 - George on High Ltd v Alan Boswell Insurance Brokers Ltd & New India Assurance Company Ltd (2023)

In this case, the first claimant, George on High Limited owned the freehold of a hotel. The second claimant, George on Rye Limited owned and operated the hotel business and restaurant, whilst paying rent to George on High for use of the premises. The broker, Alan Boswell, placed property and business interruption (BI) cover with Insurer New India.

After a catastrophic fire in 2019, George on High claimed for losses caused by damage to the building and George on Rye claimed for BI losses. New India agreed to meet the claim by George on High (the policyholder) but refused the BI claim from George on Rye, stating that this company was not named as an insured under the policy. 

New India argued that underwriters weren't informed that George on High and George on Rye were different entities where the policy schedule named the insured as “The George on High Ltd t/a The George in Rye”. George on Rye sued their broker Alan Boswell, alleging they failed to make it clear to New India that there were two separate legal entities, with different interests, that were to be insured. Alan Boswell joined New India to the proceedings to meet the BI claim.

As the case progressed, it became important that New India had outsourced its claims function under a TPA arrangement. The TPA was aware, as a result of dealing with other claims (which it had agreed to pay), that George on Rye was the hotel operator that ran the restaurant business, employed staff and and also paid the policy premium. The TPA had authorised payment of claims under the liability policy in respect of personal injury claims brought against George on Rye by employees and guests of the hotel.

This presented the key question: Was the TPA’s knowledge imputed to New India at the underwriting stage?

The court determined that, under Section 5 of the Act, this information was either known by the TPA, which was an agent of New India, who ought reasonably to have passed on the relevant information to New India, or, it was information that was held by New India, via its agent, the TPA, and was therefore “readily available” to underwriters.

The judge went further to explain that the meaning of s5 of the Act is likely to go beyond information held by a TPA and is intended to include information contained within reports obtained by the insurer from, for example, a surveyor or even a medical expert.

This is a decision that in the past would likely have gone against the broker, but it provides clear evidence of how the Act has levelled the playing field, to make brokers less of a target.  

Case 2 - Hamsard One Thousand and Forty-Three Ltd v AE Insurance Brokers Ltd (2024) 

(Note, this decision concerns a pre-Insurance Act policy arrange in 2014, however, the decision remains important as the relevant provisions of the Marine Insurance Act 1906)

Hamsard instructed AE to secure a property owners policy for their industrial property (the property). After the tenant went into administration and the administrators damaged the property, Hamsard made a claim to their insurer for reinstatement costs which exceeded £1.5 million.

The insurer, however, avoided the policy on grounds including (as relevant to this discussion) that Hamsard failed to disclose the association of Hamsard’s directors with prior failed companies. Hamsard sued its broker on the basis that it failed to take them through each question on the proposal form to ensure the questions were answered correctly, before ultimately taking out a policy that was not suitable for their needs.

The broker denied the claim on the basis it was founded on the lies of one of Hamsard’s directors, there was no breach of duty, and there was no causative link between any breach and losses suffered. 

Was the broker in breach of their duty for failing to disclose the association of Hamsard’s directors with prior failed companies?

It was common ground that the broker was aware that one of Hamsard’s directors had been director of three insolvent companies, including the tenant of the property. Hamsard’s position was that this information should have been disclosed in response to the catch-all question at the end of the proposal form which asked:

“Are there any material facts that the insurer should be made aware of?” 

The broker asserted that the Insurer had waived its right to information pertaining to the directors’ connection to insolvent companies by the existence of a statement in the Statement of Fact, that the policy was arranged based on various assumptions including: 

“You, the Proposer or any named persons on this policy have not … been declared bankrupt or are subject to bankruptcy proceedings, any voluntary or mandatory insolvency…"

The broker argued that this statement amounted to an assumption about the position of Hamsard and its directors personally. None of them had been declared bankrupt nor involved in any insolvency proceedings, the assumption was, therefore, true for them. The broker argued that having restricted the ambit of the question, it was under no duty to provide further information to the insurer that one of the directors of Hamsard had also been a director of other insolvent companies.

The judge formed the view that the question asked on the proposal form was clear, and the reply given to the question was correct, based on S.3(5)(e) of the Insurance Act 2015: 

“In the absence of enquiry … [the Insured is not required] … to disclose a circumstance if it is something as to which the insurer waives information.”

As a result, the insurer had waived its right to disclosure of further material information and there was no duty upon Hamsard or the broker to provide such information.

Case 3 - Scotbeef Ltd v D&S Storage Ltd & Lonham Group (2024)

Scotbeef Limited, a manufacturer of beef-based food products, contracted with D&S Storage, a supplier of storage and transport services. A substantial quantity of meat became spoiled whilst in D&S’ Care. Scotbeef sued D&S for damages for breach of contract.  

D&S argued that the Food Storage & Distribution Federation (the FSDF) contract terms applied which capped D&S’ liability for defective meat to £250 per tonne (the FSDF cap). During the dispute D&S became insolvent and entered liquidation. Scotbeef then added D&S’ insurers, the Lonham Group, as second defendant via a claim brought under the 2010 Third Parties (Rights against Insurers) Act.

The insurer denied liability on the basis that D&S’ failure to incorporate the FSDF terms was a breach of the Duty of Assured clause in the policy, which was a condition precedent to liability. As the insurer was not liable to indemnify D&S, it could not be liable to Scotbeef.

Scotbeef disagreed with the insurer’s position and the parties asked the court to determine as a preliminary issue, the meaning and effect of the Duty of Assured clause which read:

1. “It is a condition precedent to the liability of Underwriters:-
   (1) that the Assured makes a full declaration of all current trading conditions at inception of the policy period;
2. (2) that during the currency of this policy the Assured continuously trades under the conditions declared and approved by Underwriters in writing;
3. (3) that the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated in all contracts entered into by the Assured. 

[There were then various examples of what constitutes “reasonable and practicable steps” to incorporate acceptable terms].

The policy then went on to say

… If a claim arises in respect of a contract into which the Assured have failed to incorporate the above mentioned conditions the Assured's right to be indemnified under this policy in respect of such a claim shall not be prejudiced providing that the Assured has taken all reasonable and practicable steps to incorporate the above conditions into contracts; … [Our emphasis in bold]”

Two pages later in the policy and in conflict with the above clause, the policy stated:

 “The effect of a breach of a condition precedent is that the Underwriters are entitled to avoid the claim in its entirety".

The court decided that:

• The subclauses had to be read together and not separately – this was clear later on when the clause referred to “the above mentioned conditions” as a collective.
• Sub clause 1 was a representation made about trading conditions that existed when the policy incepted; the policy then sought to convert that representation into a warranty which is prohibited by the Act.
• Subclause 3 was onerous because it required the assured to take “all” reasonable steps to incorporate the FSDF cap – the Court considered that the insured could still be in breach even if the FSDF cap had been incorporated but the insured had not taken all reasonable steps to secure that outcome.  
• Subclause 3 was ambiguous and didn't pass the transparency requirements of the Insurance Act. On the one hand, the clause says that the assured must take the steps outlined. However, immediately below, it says the assured’s right to be indemnified shall not be prejudiced, if the assured took reasonable and practicable steps to incorporate the FSDF terms. However yet again, two pages later, the policy states that the effect of a breach of condition precedent is that the insurer is entitled to avoid the claim in its entirety. The ambiguity was construed against the insurer.
• The transparency requirements of the Act were not met generally as there was no evidence that the insurer had drawn attention to the disadvantageous sub-clauses, and where it had sought to contract out of the protections afforded by the Act.  

In conclusion, the court took the view that the subclauses had to be read together and subclause 2 could not be read as a standalone condition precedent.

It was quickly established that D&S had breached the duty to give fair presentation by failing to disclose that it had contracted on terms that were not FSDF compliant. However, as the insurer didn't plead (i) that the misrepresentation was either deliberate or reckless, or (ii) if neither deliberate or reckless, that it would have contracted on different terms, the insurer had to demonstrate that it would not have entered into the contract on any terms at all.

The court concluded that while there were certain terms that it would have been important to the insurer to incorporate into the contract, the court wasn't satisfied that, based on evidence given by the underwriter, the insurer would have refused to enter the contract on any terms. The result was that Scotbeef was able to pursue its claim against the insurer.

Conclusions 

The 3 cases represent good decisions for policyholders and brokers. The very clear message is that no insurers can no longer rely on the doctrine of utmost good faith as an absolute or automatic “get out” to refuse to pay a claim. Insurers must justify and evidence any decision to avoid or limit cover. The Act has, therefore, brought more fairness. 

The duty of fair presentation is clear, and brokers must take care to advise clients as to the consequences of failing to comply. If brokers do this then, when the insurer does have a defence to payment of a claim, the broker shouldn't be an automatic target for a claim.

That said, the broker’s role is to facilitate the transfer of risk from the policyholder to the insurer. Even in the three cases above, the brokers were far from perfect, because the policyholders may say the broker exposed them to an unnecessary risk of litigation with their insurer and exposed their client to an element of irrecoverable costs. Whilst the focus in George on High was on the insurer’s knowledge under s5 of the Act; the Act also sets out, as section 4, what falls within an insured’s knowledge. This includes information which an insured “ought to know” which may be held by third parties – which may include the broker’s own claims team. If New India was deemed to know information held by a third party TPA, then a broker will no doubt be seized with knowledge held by its own claims team. The message here is to ensure that the knowledge requirements of the Act are properly understood by the broker and the client so that appropriate enquiries can be made before the policy incepts.

Therefore, while some risks remain, these three decisions and other factors such as market consolidation and increased and tighter regulation, should mean that brokers are now a much better risk for insurers.

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