Insurance brokers, agents and the expansive duty of care

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Insurance agents and brokers may want to revisit/confirm their practice, especially with policy renewals.

Douglas R. Mah, J. in Duraguard Fence Ltd v Badry, 2019 ABQB 783, found that a failure by an insurance broker to provide adequate coverage was a breach of a duty of care, but NOT a breach of fiduciary duty. The court relied on Fine’s Flowers Ltd v General Accident Assurance Co of Canada Ltd, 17 OR (2d) 529, 1977 CanLII 1182 (ONCA), and G.K.N. Keller Canada Ltd. v Hartford Fire Insurance Co. (1983), 1 C.C.L.I. 34 (Ont. H.C.) for the definition of the duty of care applicable to insurance brokers. There was no breach of a fiduciary duty since the Plaintiff ultimately wielded the final decision-making power. The Plaintiff was granted judgment for $243,500 against the Defendants, jointly and severally.

A.         Background

The Plaintiff, Duraguard Fence Ltd., which is in the business of supplying and installing chain-link fences, brought a claim against the Defendants, Douglas Farnell, and Howard, Douglas and Farnell Insurance Services Ltd. for failure to place adequate insurance coverage for employee dishonesty or defalcation at the Plaintiff company. The theft was discovered in 2007, but it had been going on for some five or six years at the time of discovery, and amounted to approximately $589,000.

B.         Discussion

The Plaintiff’s allegation was that the Defendants either breached their duty of care OR their fiduciary duty by failing to assess the Plaintiff’s insurance needs and secure proper insurance regarding employee dishonesty, resulting in the Plaintiff’s failure to recover insurance proceeds following the claim for an employee’s defalcation.

The offending former employee was charged in a different case and ordered among other things, to pay restitution in the amount of $250,000.  The claim in the action concerned uninsured losses in the amount of $245,000, the difference between what the Plaintiff alleges that it would have been paid if properly insured, that is, $250,000, less what was actually paid out by the insurer, namely its limit of $5,000.

In defence, the Defendants said that the standard of care to the Plaintiff had been met, that the claimed loss was, in any event, not reasonably foreseeable, and that the Plaintiff was the author of its own misfortune in failing to implement proper financial controls.

While the finding in this case is fact pattern specific, it continues the streak of decisions that hold insurance agents and brokers to a stringent duty: to not only provide information to their clients, but also to assess/determine the client’s insurance needs and gaps, and advise accordingly. While this stringent duty stops short of being a fiduciary duty, it certainly pushes the envelope for finding a duty of care, and insurance agents and brokers may want to revisit their practice, especially with regards to policy renewals. Interestingly, the duty of care appears to be extensive enough to overlook any overt failures by the Plaintiff.

Among other things, Mah, J. found for instance that:

1.         The Plaintiff relied on the Defendants for the Defendants’ experience of 43 years in the insurance brokerage business;

2.         The Plaintiff did not seek cheap options and always accepted the recommendations by the Defendants;

3.         Discussions concerning the Plaintiff’s insurance requirements focused on its physical assets and the Plaintiff does not seem to have told the Defendants about a previous incident regarding an employee who uttered two forged company cheques for $4,000 each;

4.         The Defendants switched the Plaintiff’s coverage from one insurance company to another, which resulted in the reduction in all categories of crime coverage, including employee dishonesty, from $10,000 to $5,000, because the new insurance company did not offer a commercial package that featured limits of $10,000 for crime coverage;

5.         The Defendants opined that the $5,000 limit for crime coverage was sufficient given the nature of the Plaintiff’s business, and it looks like there was no discussion about the reduction in limits with the Plaintiff. However, the Defendants delivered a physical binder containing the current year’s policies to the Plaintiff with an “executive summary” of the coverages;

6.         The Defendants assured the Plaintiff there was coverage for the loss, although as it turned out, the Defendants did not know whether the $5,000 limit for employee dishonesty was an aggregate limit or a per occurrence limit. They learned from the new insurer that the insurer was treating all of the employee’s unlawful transactions, which stretched back five or six years, as one event. The new insurance company issued a cheque to the Plaintiff for $5,000 for the loss;

7.         The Defendants indicated that it was their usual practice was to encourage the customer to review the documents. The Plaintiff might have reviewed the executive summary when provided but did not read the actual policies and there is no evidence that the Plaintiff took particular note of the reduction in crime coverage; and

8.         The Court agreed that, in part, the Plaintiff might have created or allowed the environment that permitted the fraud to be carried out by being too trusting or by neglecting to put in place appropriate financial controls. However, this case only concerns the underlying loss, as part of the background facts giving rise to the dispute is the loss from under-insurance.

The Plaintiff had pled the breach of fiduciary duty in the alternative, but the Court held that the relationship between the parties fell short of creating a fiduciary duty on the part of the Defendants as the Plaintiff ultimately wielded the final decision-making power.

For more information, please contact Omolara Oladipo, or another member of the Insurance group.