The decision provides a cautionary reminder on best practices. Brokers and insurers can learn three lessons from the case:
- Consistently provide insureds with complete copies of their policies at both inception and renewal.
- Insurance summary and renewal documents should highlight the need to review policy wordings, provide examples of material changes of risk, explain the broker’s duty to advise on any material changes and particular changes in occupancy and any potential vacancy, and discuss available coverage for vacancy
- Brokers should return to the practice of keeping careful notes (digital or handwritten) on all significant communications with insureds. These notes should cover specific communications that took place, and the risks and gaps in coverage, and available coverage to avoid those gaps.
Alvaro, the background
The insured was a commercial landlord whose property was destroyed in a June 2013 fire. The insurer denied coverage because the property was vacant, and the policy included a vacancy exclusion. The insured knew the property was vacant because it had evicted the tenants and was making renovations. The broker had been servicing the insured for 20 years and had forwarded a copy of the policy to the insured in 2007, but it was not its practice to forward another copy on renewal. The renewal letters did not advise of the vacancy exclusion or provide examples of material change of risk. A vacancy endorsement could have been obtained for $295. The judge rejected the commercial landlord’s evidence that it told the broker it would be evicting the tenants and making renovations prior to the fire. But the trial judge also found the broker did not fulfill its duty of care and held it liable. Several weaknesses in the broker’s case were pointed out:
- The broker did not have contemporaneous notes related to the discussions. No written notes were in evidence
- The broker was not in the practice of providing a copy of the policy on renewal and was not certain when the plaintiffs last received a copy
- The renewal letters did not highlight the vacancy exclusion or the requirement to advise the broker of any material changes
- The renewal letters did not provide examples of what a material change might be
Insurance brokers have a duty to provide clients with information and advice. In this case, the broker knew it was a rental property and so there was risk of periodic vacancies. There was no evidence the broker brought this specific risk to the insured’s attention or gave advice on how to avoid this coverage gap. And, the plaintiffs weren’t found to have any contributory negligence. The judge held the broker couldn’t rely on the plaintiff’s failure to read the policy when the renewal documents did not tell them to do so. “A customer is entitled to rely on the expertise of an insurance broker to provide that advice without the customer raising the question,” said the judge’s decision notes. Brokers that rely on standardized renewal packages must ensure the materials explain important information in clear terms. This includes the issue of vacancy and risk of losing coverage entirely if there is no vacancy endorsement. Two appeals followed the decision. One from the commercial landlord related to the assessment of damages and a cross-appeal from the broker on the issue of contributory negligence. The landlord’s appeal on damages was allowed; they were awarded replacement value rather than actual cash value. But the Court of Appeal dismissed the broker’s cross appeal, noting it was open to the trial judge to assess and weigh the evidence of the broker and the insured, and the “relative sophistication or lack of sophistication of each party.” Harmon C. Hayden, Harmon Hayden Law, is vice chair of international of the insurance and reinsurance and professional liability committees of the International Association of Defense Counsel. This article is excerpted from one that appeared in the April issue of Canadian Underwriter.