Christchurch QC Tom Weston says the level of insurance brokers have against exposure to their clients is ‘entirely unrealistic’ and is something they need to review.
The legal veteran brought the issue to the attention of brokers attending this year’s Insurance Brokers Association of New Zealand (IBANZ
) Forum held in Auckland last week.
He said: “My experience is that many brokers have an entirely unrealistic level of insurance, they have very low amounts, which seems deeply ironic that you’re in a risk business but you don’t really look after your own risk particularly well.
“The risk is you might have a very disgruntled client who’s determined to take you out in any event and in that case inadequate personal insurance can be a disaster of course.”
Weston went on to highlight brokers’ particular vulnerabilities, starting with breaching the contract they have with their client if they act negligently or act below the standard of a reasonable broker.
They may also be subject to the Consumer Guarantees Act.
He said the relationship with brokers and the insurance company could be subject to the Fair Trading Act which could see them being found liable if they have acted in a misleading or deceptive way.
With many brokers using corporate structures to carry out their broking services, Weston said it would be wrong to take that as extra security.
“There may be instances if you’re a small show the court may take the view that your corporate structure is just a front for you personally and you may be found personally liable,” he said.
“That has happened in relation to the leaky house litigation where builders have been found personally liable even though they have provided their services through corporate structures.”
Weston also said it was important to make sure the amount of insurance cover brokers have was proportionate to the sort of business they’re doing.
“There’s no point organising business on $10 million cover if you’re only insured for $1m, there’s a disconnect between the two.
“You need to think, for example, if something goes wrong, if there’s a material non-disclosure, that client’s potentially out of pocket for $10m and they may well be looking at you or your company for that.”
Brokers can protect themselves by limiting their liability to their client in their contract with them, for instance, by capping the amount of any fees or commissions received in relation to the business.
But, he said: “You cannot contract out of the Fair Trading Act. So if you act in a deceptive or misleading way, you can’t have some nifty clause built into your contract or retainer with your client saying ‘I hereby contract out of that’ – you’re stuck with that liability.”
Weston also stressed the importance of keeping up to date with developments in insurance law and being fully au fait with policy wordings, exclusions and terms and conveying those properly to the client.
And while there is lots of talk of going digital and paperless, Weston said having those‘bits of paper’ was still vital.
He referred to incidences in Christchurch where margin clauses had found their way into documents where cover had been provided on the basis that policies would follow, particularly in rollovers.
“The policy should precede the cover, like any good contract, you have the clear terms out there in advance so everyone knows what they are.
“And your job, I suggest to you as broker, is to make sure those bits of paper are there. That’s your job that you should do for the customer and the later it takes for the bits of paper to turn up, the greater at risk you are as the broker.”
Brokers who play a role in claims handling may find this hugely valuable in relationship building with the client, he said, as they can act as informal mediators to bridge gaps.
He knew of a case where the quality of the broker’s relationship with their client was so good the client was prepared to overlook the broker’s efforts falling short.
“Have your relationships strong with your client and 95% of your work commercial and legal is done.
“A great personal relationship is your best insurance.”