What is Broker E&O?

Recently I was asked to verify if a company had adequate insurance for an upcoming project. I called the company's broker, who informed me that the policy renewed automatically annually. Since I was concerned about adequacy, I asked the broker when was the last time they had met with the client to determine if they had enough insurance. The answer I received was: "We meet with some clients, but this is not one of them." In insurance parlance, this means that this particular client wasn't considered important enough to spend time with.

Have you ever had a claim denied or your loss payment reduced, because you didn't have the right insurance coverage? I'm talking about basic, across the counter insurance that you thought was included in your policy. Did you wonder if there was something else that you could have done to get your claim paid?

The answer might very well have been your own broker's Errors and Omissions insurance. Any insurance broker reading this column might very well shudder at these words; knowing that they insinuate that they may have breached their duty to their client. In fact the Supreme Court of Canada in two separate decisions; had quite a lot to say on the subject of insurance broker or agent responsibilities to their clients.

The first is an almost forty-year-old case, known as Fine's Flowers v. General Accident Assurance Company and the second, a more recent decision, is Fletcher v. Manitoba Public Insurance. Both are considered good law today, and have been referred to frequently in coverage disputes between brokers and their clients.

Fine's Flowers concerned a client who had requested full coverage for their greenhouse operation. One very cold night, the heating pumps stopped working and all of the plants froze. A claim was presented to the insurer and was denied due to the "wear and tear" exclusion. Fine's Flowers learned that their claim would have been covered if they had a different policy which, given the nature of their business, they would have purchased. They sued their broker for failing to inform them of the availability of this other, more appropriate coverage. They won.

Fletcher involved an auto accident. The at-fault driver had insufficient liability limits to compensate the seriously injured Fletcher family, who then claimed underinsured motorist benefits from their own insurer. The Manitoba public Autopac denied the claim claiming that Fletcher declined the UIM coverage when he purchased the policy. Fletcher sued, arguing that the selling agent had not informed him of the availability of this coverage. The SCC looked at the application and determined that the agent's N/A did not conclusively prove that the coverage was declined. Fletcher won.

Both cases can be summed up in a few words: "Before you can make an informed decision about the insurance you need, you must first be informed." Of course, the SCC said it better, but in several pages. It was their opinion that it is the broker, not the client, who is the most knowledgeable about insurance coverage. It is therefore the broker's responsibility to communicate all possible coverage options to their client and if the client refuses, to confirm the refusal in writing.

I'm certain that some readers who buy auto, personal, or commercial insurance are scratching their heads and thinking that they never actually speak to their broker and for those who do, it certainly doesn't happen once a year. Insurance brokers might argue that they have several hundred clients and to explain optional insurance coverage to each client annually in exchange for the few hundred dollars they earn per policy, would be an undue hardship.

The question is on whom? If the Supreme Court of Canada did not consider broker compensation to be relevant in their consideration of what duty is owed to a client, should this then be a concern for the client?

Susan Saksida, CIP is an insurance consultant who has held senior positions within the insurance companies and brokers. She is currently conducting research into the root cause of consumer misunderstanding of the insurance industry. If you have an auto accident related story please email this to insurancecompliancematters@rogers.com .