Broker found not to be negligent in advising on business interruption and material damage cover for his client

12/09/14

Mr Justice Blair today handed down judgment in Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 (Comm), in which Neil Calver QC and Michael Bolding acted for the defendant insurance broker. The case concerned a claim for damages for negligence and breach of contract brought by Eurokey, a waste management company, against its former insurance broker, Giles. Eurokey’s main premises in Leicestershire were destroyed by a fire in 2010. When Eurokey made a claim under its insurance policy for losses arising from the fire, the insurers threatened avoidance and negotiated a settlement with Eurokey on the basis that the latter was significantly underinsured for material damage and business interruption. Eurokey alleged that the underinsurance arose from Giles’ negligence, including Giles’ alleged failure adequately to explain how the sum insured for business interruption should have been calculated. The claim was worth over £16 million, which included the difference between the settlement sum and what Eurokey says it would have received from its insurers if it had been properly advised, in addition to consequential loss of profits.  

Mr Justice Blair dismissed the claim in its entirety. He held that Giles had acted upon the instructions given by Eurokey regarding its insurance needs and that Giles had been entitled to do so because it had given a proper explanation of the basis of the insurance and had no reason to doubt the figures which had been provided to it by Eurokey. The judgment contains an interesting and significant discussion about the nature of business interruption cover and the duties of an insurance broker when arranging such cover on behalf of his client. In particular, Mr Justice Blair held that:

• A broker is not expected himself to calculate the business interruption sum insured or choose a maximum indemnity period, which are both matters for the client.
• The client must be given an adequate explanation of how to calculate the sum insured and choose a maximum indemnity period, and must take reasonable steps to ensure that the client fully understands the meaning of 'insurable gross profit'.
• A broker must take reasonable steps to ascertain the nature of the client’s business and its insurance needs, but is not required or expected to conduct a detailed investigation into the client’s business. A broker’s duties are, however, not diminished because his firm may offer an enhanced service at additional cost.
• The nature and scope of a broker’s obligation to assess a commercial client’s business interruption insurance needs will depend upon the particular circumstances of the case, including the client’s sophistication and the number of times the broker has met the client in the past.
• Although a client may not need annual repetition of advice previously given and understood, this assumes that the responsible personnel remain the same and that the giving of the advice can be properly demonstrated by documentation or other means. 
• If a client who appears to be well informed about his business provides a broker with information, the broker is not expected to verify that information unless he has reason to believe that it is not accurate.
• Having satisfied these obligations, where a broker is given express instructions as to the cover to be obtained, he must exercise reasonable care to adhere to those instructions.

The judgment is here.