18 April 2012, Post magazine
Awarding damages of £528,000, exclusive of costs, against a leading insurance broker, a judge in the Royal Courts of Jersey has criticised the automated quote engine sales process as being more in the interests of the broker and the insurer than in the interests of the policyholder.
This decision sends out a warning to the industry that if, by automated selling processes, a broker fails to exercise reasonable care and skill then a finding of negligence and award of damages is to be expected.
It confirms the view that the courts have no interest in the cost to a broker of delivering a service commensurate with its common law duty of care.
Brokers must reconsider their role and responsibilities under the sobriquet "the cost of doing business" in their regulatory compliance deliberations. Perhaps Brokers need to charge more for their services.
The Café de Lecq -v- R.A. Rossborough (Insurance Brokers) JRC053 concerned a fire caused by a deep fat fryer that destroyed the restaurant. Axa refused to pay out because the fryer was as old model and it didn’t comply with the warranties in the policy concerning automatic cut outs for fire prevention. (www.postonline.co.uk/2165881)
The Royal Court found that Rossborough knew little about the policyholder's background and experience of buying insurance at the time they arranged the cover. Rossborough pleaded that person they dealt with was an experienced insurance buyer who should have understood the policy requirements but the court found otherwise.This suggests a failure of the Demands and Needs process, which is also supported by the judge's further observation on the broker's business practice of using an Axa-provided quote engine that included default settings that would not throw up a warning for the need for more specific advice.
Law firm Bedell Cristin reported the case in detail: "It emerged, during the witness testimony, that Axa had installed software on Rossborough's computer system which enabled the broker to generate a quote without referring back to the insurer - a ‘quote engine’ as it was described. The broker merely had to populate the software with certain details obtained from the client about the level of cover required in order to generate a quote and to print off the insurance documents.
“Unfortunately, the system contained default settings which, for example, in this case, included the statement that the café premises were of standard construction which factual assertion became a bone of contention at trial. If questions were not asked of the client, the information automatically generated by the system was capable of being completely wrong and it required diligence and understanding on the part of the client to spot the mistakes and inform the broker of the corrections required otherwise the cover was put at risk.
“By way of further example, the fact that the level of business interruption cover for the cafe was fixed at just 12 months' duration was found to be almost certainly the result of a default setting. The Royal Court made an increased award of damages in respect of business interruption cover on the basis that the period should have been two years."
This case brought to the attention of the court that: "the process for selling ‘package’ policies is driven by considerations of speed and economy which may have advantages for all concerned, it may also entail significant risks for the client as was found to be the case here."
The Royal Court also commented that the automated system “is designed to minimise the time and effort that the broker has to spend on the matter and to transfer responsibility for getting things right to the client, thereby draining the broker's role of much of its raison d'être."
The judge went on to say: "(the automated process) is liable to foster a situation in which the broker becomes more closely allied with the insurer whose policy documentation he is generating than is healthy, to the detriment of the client whose interest he is supposed to be looking after.”
This has significant implication for brokers. Being pragmatic, the industry is not going to turn back the clock and forsake its technology-driven sales processes, so what is the antidote to the broker's risk?
Brokers might say that the cost of being sued from time to time is a cost of doing business. On the other hand it is an opportunity for brokers to re-think the value they add in properly advising clients and charge properly for their services, with good reason to do so.
Roger Flaxman is Managing Director of Flaxman Partners Ltd