Insurance: when is binding contract concluded and brokers’ duties
A recent case suggests that a binding insurance contract may come into being when a firm quotation is accepted by the insured and the firm order is noted by the underwriter (FON).
The claimants instructed producing brokers to renew their group PI insurance cover. The producing brokers instructed placing brokers who placed the business by way of a primary layer and an excess layer. Claims were notified to the primary and excess layers arising out of valuations carried out by an employee of one of the claimants.
The excess layer insurers declined to indemnify the insureds on the basis that valuations were not included within the cover. The insureds brought claims against the producing brokers who in turn brought proceedings against the placing brokers. The producing brokers applied to join the excess layer insurers as parties to the proceedings and, in support of their application, argued that as a matter of construction of the policy the claims were covered or, alternatively, that the policy should be rectified to reflect the fact that it was intended that this type of claim would be covered. Against the placing brokers, the producing brokers argued that they were in breach of the contractual duty of care they owed to them and – more controversially - that the placing brokers owed a direct duty of care to the insureds. The placing brokers applied to strike out the claims against them.
In the context of the producing brokers’ argument that the policy should be rectified to reflect the parties’ intentions, the judge considered the timing of the conclusion of binding insurance contracts. For rectification to be granted there must be a common intention in regard to the particular provisions of the written agreement in question and this common intention must continue up until time of the execution of the contract. The producing brokers argued that a binding contract had come into existence at the time the underwriters put FONs down and that there was no subsequent intention to create a legally binding variation on the terms of that contract by the issue of the slip. The judge accepted expert evidence that a binding contract came into existence when the underwriters noted the firm order, but did not accept the submission that the slip had not varied the terms of the contract. Even if a binding contract had come into existence once the underwriters had put FONs down, in view of the radical difference between the terms of the FON contract and the slip, the slip must constitute a fresh contract.
On the claim against the placing brokers, the court declined to strike out the claim. The judge found that there was an arguable case that the placing brokers had (a) breached the contractual duties that they owed to the producing brokers and (b) were in breach of duties owed in tort to the insureds. The producing brokers argued that the placing brokers had assumed responsibility to the insureds for exercising reasonable care in placement of the insurance. The argument was phrased in this way presumably because established authority suggests (despite judicial comments and decisions in preliminary hearings to the contrary) that a placing broker probably does not owe a direct duty of care in tort to the insured. Rather, any duties are owed to the producing broker, who in turn owes duties to the insured. The general position can, however, be altered where there is a special relationship between the placing broker and the insured, and the most likely way of showing this is via a specific (i.e. beyond the norm) assumption of responsibility by the placing broker to the insured. On the specific facts of this case, the evidence suggested that the placing brokers had addressed representations (such as an oral presentation, a fee proposal and a renewal report) directly to the insured rather than specifically to the producing broker, which might arguably constitute an assumption of responsibility.
Comment
The case suggests that a binding contract of insurance may be concluded before the slip is scratched by the underwriter. It is well established that when a broker presents a slip on behalf of his client, this is an offer which is accepted when the underwriter initials the slip. At that point there is a binding contract of insurance between the insured and insurer. The Commercial Court in this case accepted expert evidence to the effect that a binding insurance contract comes into existence at an earlier stage – when the underwriter’s firm quotation (the offer) is accepted by the insured, and this acceptance is communicated to the underwriter. Once the underwriter indicates on the quotation that he has been informed of the acceptance by noting “FON”, a binding contract comes into existence. If the subsequent slip and policy documentation are different from the quotation, then there is a “fresh contract” from that concluded when the quotation was agreed.
On the issue of what duties a placing broker may owe directly to an insured, the case is a reminder that it may be possible to argue that the broker has assumed a direct duty of care to the insured. It remains, however, the position that clear evidence of such an assumption of responsibility would be needed for such an argument to succeed.
Further reading: Dunlop Haywards Ltd and Another v Erinaceous Insurance Services Ltd [2008] EWHC 520 (Comm)
