An insurance broker may be liable to their customer for failure to obain adequate insurance coverage

An inspection services company (“CIA”) was successful in its action against Dan Lawrie Insurance Brokers (“DLIB”) where the Court found that DLIB had failed to obtain adequate insurance coverage for CIA’s custom equipment while on the job site.

CIA Inspection Inc. v. Dan Lawrie Insurance Brokers, [2010] O.J. No. 3313, August 4, 2010, Ontario Superior Court of Justice, A.C.R. Whitten J.

CIA is an Ontario corporation which operates a global business inspecting oil refinery coke drums. In November 2003, an operator accidentally caused one of CIA’s custom sensors to fall 150 feet to the bottom of a coke drum at a refinery in Venezuela. The sensor was valued at over $300,000. CIA made a claim through DLIB to its insurer, Lloyd’s of London (“Lloyd’s”) which was denied because Lloyd’s took the position that the policy was restricted to cargo coverage and excluded risks while on the job site. CIA then commenced an action against DLIB on the basis that CIA thought that it had the necessary coverage and should have had this coverage. Any blame for the gap in coverage was the fault of DLIB.

The Court noted that the decision in Fine’s Flowers Ltd. et al v. General Accident Assurance Company of Canada et al (1977), 17 O.R. (2d) 529 (C.A.) remains the leading case as to the duties of insurance brokers. Two possible scenarios were discussed with respect to this duty:

(1) where the client did not give specific instructions but sought to have full protection, the Court held that this required the agent to inform himself about the client’s business in order to assess the foreseeable risks and to ensure his client against them; and

(2) where a client approaches an agent with a particular request, the agent’s duty is to exercise a reasonable degree of skill and care to obtain the policies in the terms bargained for and to service policies as the circumstances might require.

It was also noted that the Court in Fine’s Flowers specifically held that an agent has a duty to advise his principal if he is unable to obtain the policies bargained for so that his principal may take such further steps to protect himself as he deems desirable.

The Court indicated that the negligence alleged in the case at bar, the failure to communicate a gap in coverage, meant that the plaintiff would have to establish that (1) the requested policy would have covered the loss that occurred, and (2) if CIA had known it was not covered for such a loss it would have sought other coverage or modified its business to reduce exposure to the uninsured risk.

CIA had previously dealt with Aon Reed Stenhouse Inc. (“Aon”) and placed insurance with the St. Paul Fire and Marine Insurance Company (“St. Paul”). However, in 2001, CIA was advised by Aon that St. Paul would not be offering renewal of its policies. CIA then began shopping around at various brokerages for replacement coverage. The Court found that CIA was a relatively sophisticated consumer of insurance products and ultimately elected to place a policy with Lloyd’s through DLIB. DLIB placed the insurance with Lloyd’s through an intermediary, Surplus Lines Inc. DLIB became dissatisfied with the lack of documentation and communication from Surplus Lines Inc. and ultimately decided that they could not even confirm that any liability insurance was in effect nor was there any coverage for the two sensors. DLIB then took steps to contact Lloyd’s directly. CIA was informed of the issue concerning the potential lack of coverage and advised to conduct itself accordingly.

By February 2002, it was determined that some coverage had been placed with Lloyd’s but the exact scope of coverage was not clarified by DLIB. The Court noted that six different DLIB personnel were ultimately involved in the file but there was no evidence of a coordinated response. There was no documentation that it was ever brought home to CIA that it did not have property coverage for the sensors on the job site and that the coverage only extended to time that the sensors were in transit. The Court found that the actions of DLIB were not acceptable and represented a breach of the standard of care required of an insurance broker. The Court further found that CIA had previously purchased insurance which would have covered this loss and that such insurance remained available. Therefore, DLIB had been negligent and was liable to CIA for its losses. The Court found that CIA was contributorily negligent with respect to the losses in that it did not pursue clarification from DLIB when alerted to the problems with respect to coverage. The problems had been identified one and a half years prior to the loss and CIA had taken no steps to further clarify what coverage it had. In the result, the Court apportioned liability 1/3 to CIA and 2/3 to DLIB.

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