DEFENDING POTENTIAL LIABILITY CLAIMS AGAINST INSURANCE BROKERS - Stephanie Charlton
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DEFENDING POTENTIAL LIABILITY CLAIMS
AGAINST INSURANCE BROKERS
Stephanie Charlton Domenic Venturo Q.C.
Cox & Palmer SVR Lawyers
Fredericton Calgary
1PRESENTATION OUTLINE
¢ General duties owed by insurance brokers to clients
seeking coverage
¢ Broker claims in the era of Covid-19 in Canada and
other jurisdictions
¢ What to expect in Canada
¢ Causation in the context of business interruption
¢ Best Practices – minimizing risks regarding Covid-
19 claims
2BROKERS BE WARNED
¢ Coverage litigation “floodgates” have opened in the U.S.
¢ However, relatively few Covid-19 related actions against
brokers in the U.S., and none in Canada
¢ As was the case in the Scalera case that went to the Supreme
Court of Canada, “creative” Plaintiff counsel in the U.S. are
already attempting to recharacterize Covid-19 with a view to
triggering coverage under property policies.
Rockhurst University et. al. v. Factory Mutual Insurance Co., U.S.
District’s Court for the Western District of Missouri
¢ Notwithstanding the large volume of U.S. and Canadian cases
rejecting coverage claims for Covid-related business
interruption losses, insurance agents and brokers are at risk…
3BROKERS BE WARNED
“When Insurers Deny Claims, Brokers Are Next in Line for Allegations of
Wrongdoing” - Insurance Journal, May 19, 2020
“Agents Warned of ‘Creative’ Attorneys and Covid-19 Lawsuits” -
Insurance Journal, September 21, 2020
“Brokers face heightened risk of COVID-related litigation” - Insurance
Business Magazine, October 23, 2020
“Why brokers may face E&O exposure due to COVID-19” - Canadian
Underwriter, January 20, 2021
“Why brokers are going to get sued over pandemic business
interruption claims” - Canadian Underwriter, January 20, 2021
4GENERAL DUTIES OWED BY INSURANCE
BROKERS TO CLIENTS SEEKING COVERAGE
It is well-established in Canadian jurisprudence that the duties
owed by an agent or broker vary, depending on the
circumstances.
One must consider the following:
¢ the nature of the relationship between the client and the agent
or broker; and,
¢ more precisely, the instructions provided to the agent or
broker, i.e. requests for “adequate” coverage vs. specific
requests.
5BROKER CLAIMS IN THE ERA OF COVID-19
Brokers may face two types of claims:
1. Claims presented now in relation to a failure to procure
business interruption/pandemic coverage pre-Covid, or to
advise of the gap in such coverage
2. Future claims, related to failure to procure business
interruption/pandemic coverage post-Covid, or more likely
(as pandemic coverage will likely be largely unavailable), to
advise of the gap in such coverage
Need to consider: the nature of such claims, and how to
minimize the likelihood of future claims
6OTHER JURISDICTIONS
Broker claims are starting to make their way to the Courts in the
U.S.
¢ Pennsylvania case: Wilson v Hartford Casualty Co et al,
U.S. District Court, Eastern District of Pennsylvania
September 30, 2020
¢ Lawyer and her firm sought a declaration of coverage against
her insurer and broker for business interruption losses to her
practice resulting from Covid-19 related governmental closure
orders prohibiting non-life-sustaining business.
¢ Insurer and broker brought Motions to dismiss the claim on
the basis of jurisdiction and that the Plaintiffs had framed their
claim in such a manner that it failed to disclose a cause of
action.
7OTHER JURISDICTIONS
¢ The law in Pennsylvania is such that a Court must enforce a
policy exclusion where the exclusion is “conspicuously
displayed, clear and unambiguous”.
¢ The Court was of the view that the Virus Exclusion in the
Policy met these standards.
¢ The Court also held that the Plaintiffs failed to establish that
their claims fell within any of the Policy exemptions to the
Virus Exclusions and dismissed the claim against both the
insurer and the broker.
¢ The Plaintiffs did not plead any independent tort or breach of
contractual duty against the broker with the result that the
Court did not have to consider these issues.
8OTHER JURISDICTIONS
Vandelay Hospitality Group LP v The Cincinnati
Insurance Company et al,
U.S. District Court, Northern District of Texas, August
18, 2020
Casa Colina, Inc, et al v Hartford Fire Ins Co, et.
al.,
U.S. District Court, Central District of California,
December 15, 2020
9WHAT MAY WE EXPECT IN CANADA?
Fine’s Flowers Ltd et al v General Accident Assurance Co et
al (1977), 81 DLR (3d) 139 (Ont CA).
¢ Procurer: The onus is on the agent/broker to carry out the
instructions according to the common usage of the words in
the industry, unless the evidence indicates otherwise. [Fine’s
at paragraph 24]
¢ Advisor: In cases where the client gives no such specific
instructions but, rather, relies upon his agent to see that there
is sufficient and, if the agent agrees to do business on those
terms, then the agent cannot afterwards, when an uninsured
loss arises, shrug off the responsibility that has been
assumed.
10WHAT MAY WE EXPECT IN CANADA?
¢ In such cases, the agent/broker is required to inform
themselves about the client's business in order to assess the
foreseeable risks and insure against them.
¢ This is not too high a standard to impose upon an agent who
knows that his client is relying upon him to see that he is
protected against all foreseeable, insurable risks. [Fine’s at
paragraphs 44 and 45]
¢ The solution lies in the intelligent insurance agent who
inspects the risks when he insures them, knows what his
insurer is providing, discovers the areas that may give rise to
dispute and either arranges for the coverage or makes certain
the purchaser is aware of the exclusion.
11WHAT MAY WE EXPECT IN CANADA?
¢ The broker in Fine's Flowers would have discharged his duties
if he had informed the plaintiff that certain types of losses
were not covered by the policy he had arranged and had
advised the plaintiff to purchase additional coverage for the
pumps if he really wanted "full coverage".
12“TAKEAWAY” FROM FINE’S FLOWERS
¢ Agents and brokers owe a positive duty to warn their clients.
¢ The standard for determining an agent/broker's liability in
negligence may be summarized as follows:
¢ It is the duty of an agent/broker to either procure the
requested coverage or draw to the attention of his client his
failure or inability to do so and the consequent gap in
coverage. Where the agent/broker does neither, he will be
liable in negligence. [Fine’s at paragraph 21]
¢ The extent of the duty owed by an insurance agent, both in
placing insurance and in indicating to the insured which risks
are covered and which are not, as set out in this case, is a
fairly stringent one for the agent.
13WHAT MAY WE EXPECT IN CANADA (CON’T)?
Fletcher v Manitoba Public Insurance Corporation,
[1990] 3 SCR 191.
¢ It is entirely appropriate to hold private insurance agents and
brokers to a stringent duty to provide both information and
advice to their customers. They are, after all, licensed
professionals who specialize in helping clients with risk
assessment and in tailoring insurance policies to fit the
particular needs of their customers. Their service is highly
personalized, concentrating on the specific circumstances of
each client. [Fletcher at paragraph 61]
14WHAT MAY WE EXPECT IN CANADA (CON’T)?
¢ Beyond recommending appropriate coverages, agents /
brokers may even be required to recommend appropriate
policy limits.
15WHAT MAY WE EXPECT IN CANADA (CON’T)?
Duraguard Fence Ltd v Badry, 2019 ABQB 783
¢ Claim by company operated by businessman with little insurance
sophistication against experienced broker for insufficient
Employee Dishonesty Policy limits (which insured was aware of).
¢ Company had suffered two prior losses (one of which was not
reported) both of which exceeded Employee Dishonesty Policy
limits.
¢ Company suffers an employee theft well in excess of Employee
Dishonesty Policy limits.
¢ When claim was reported (which, at the time, was $95K above
Policy limits), broker advised insured that they were covered.
¢ Note:- The Court relied on this last fact as evidence that the
broker was not familiar with the Policy and, in particular, the
Employee Dishonesty Policy Limits.
16DURAGUARD TAKEWAYS:
¢ In essence, the broker’s duty is to assess the client’s risks,
give advice and recommendations on appropriate coverages
for each of the relevant risks and, after taking instructions,
implement those coverages [Duraguard, paragraph 44].
¢ Consider previous losses and whether policy limits are
sufficient.
¢ Do not "slavishly" rely on pre-set policy "packages" with
inappropriate Employee Dishonesty Policy limits.
¢ Do your homework: carry out your own industry research as to
what coverages and limits are available.
¢ Don't make representations about coverage to a client
following a loss.
17CAUSATION
Possible Defences:
¢ The coverage at issue was not available at all.
¢ The coverage at issue was available for premium which the
client could not afford, could not have paid or would have
been unwilling to pay at the time.
See: Dalamd v Butterworth, [2018] EWHC 2558, where,
although the brokers were found to have breached their duty by
failing to advise on the availability of rental income insurance,
the claim failed because it was concluded that the client would
never have been willing to pay for such insurance.
18CAUSATION
Burden of proof:
¢ When an insured sues in contract, the onus is on the
agent/broker to establish on a balance of probabilities that
they could not have obtained the coverage in question.
¢ When an insured sues in tort, the onus is on the insured to
establish on a balance of probabilities that the coverage in
question was available.
Markal Investments Ltd v Morley Shafron Agencies
Ltd, [1990] BCJ No 429.
19CAUSATION IN THE CONTEXT OF BUSINESS
INTERRUPTION
¢ Notwithstanding the failure on the part of a broker to place
business interruption coverage, the broker can avoid liability if
it is established on a balance of probabilities that a reasonable
insurer would have relied an exclusion clause.
Fraser v BN Furman (Productions) Ltd v Miller Smith &
Partners, [1967] 2 Lloyd's Rep 1.
¢ So, these causation cases mean brokers have no risk when
insurers deny coverage for Covid-19 related business
interruption losses, right? Right?
¢ Not so fast!
20CAUSATION IN THE CONTEXT OF BUSINESS
INTERRUPTION
Does the duty to advise a client as to gaps in
coverage extend to advising a client that they are
not covered for a particular risk, such as, for
example, business interruption losses stemming
from a pandemic?
Fine’s Flowers seems to say “YES”:
21CAUSATION IN THE CONTEXT OF BUSINESS
INTERRUPTION
… Had the [exclusion for “wear and tear”] been drawn to the attention of the plaintiff, a
decision could have been made whether to discontinue all insurance, or
pay whatever was necessary to obtain the desired coverage, or to make other
arrangements for the supply of heat to the greenhouses. By reason of the
failure of the defendant agent to discharge his duty to the plaintiff, the plaintiff was
denied an opportunity to protect his business against this vital exposure. This failure
by the defendant agent amounted to negligence on his part. [at paragraph 24]
This paragraph has not been judicially considered, but we
expect that it will be relied upon the context of Covid-19
insurance claims.
22CAUSATION REVISITED
Sophisticated insured?
Corporation: Norlympia Seafoods Ltd v Dale & Co,
1983 CarswellBC 762 (SC).
Professional: Green v Donald T Ritchie Insurance
Agencies, [1983] O.J. No 519 (HCJ).
Olanick v R Cholkan & Co, 1980
CarswellOnt 1492 (H Ct J).
23CAUSATION REVISITED
Informed insured
Siemens v Unrau, 1991 CarswellBC 718 (CA).
Average Joe(sephine): Strougal v Coast Capital
Insurance, 2008 CarswellBC 116 (SC).
24BEST PRACTICES –
MINIMIZING RISKS REGARDING COVID-19 CLAIMS
¢ Advise clients of option, if any, of business
interruption/pandemic coverage
¢ Advise clients in writing and in plain language when
they are not covered for certain losses, such as
business interruption/pandemic coverage
¢ Better yet, to the extent that insurers provide you
with plain language versions of what is or is not
covered, pass on
25BEST PRACTICES –
MINIMIZING RISKS REGARDING COVID-19 CLAIMS
¢ Keep records of all conversations with clients throughout the
course of the policy but, in particular, when the policy is
issued, prior to each renewal and after a loss.
¢ If possible, confirm those conversations in writing [i.e. email]
¢ In cases involving commercial clients, report claims to every
insurer who issued a policy to the client: CGL, property,
umbrella, etc.
26BEST PRACTICES –
MINIMIZING RISKS REGARDING COVID-19 CLAIMS
¢ Do not make representations that the claim is covered –
representations, such as, “Gee! I thought it was covered!” are
not protected by any privilege and will be used against you.
¢ Advise the client that you will report the claim to the insurer
and report back with the insurer’s decision.
¢ Check-in regarding pandemic coverage and assess risks.
27
•BEST PRACTICES –
MINIMIZING RISKS REGARDING COVID-19 CLAIMS
Do not provide any post – loss recorded or written
statements to the insurer or the insured regarding
coverage and/or your role in arranging the policy in
issue
Dallinga v. Sun Alliance Insurance Co.,
1993 CarswellAlta 8 (Q.B.)
28QUESTIONS?
Stephanie Charlton Domenic Venturo Q.C.
Cox & Palmer SVR Lawyers
Fredericton Calgary
scharlton@coxandpalmer.com d.venturo@svrlawyers.com
Special thanks to Andrew Ryan and Aaron French of Sandberg Phoenix LLP,
St. Louis, Missouri for their assistance in providing us with US case
authorities and further materials.
29QUESTIONS
Stephanie Charlton Domenic Venturo Q.C. Debra Woodske
Cox & Palmer SVR Lawyers CBM Lawyers
Fredericton Calgary Edmonton
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