Relying on the competence of predecessors

Beazley Underwriting and another v Travelers Companies Inc [2010]

The scenario is this:
"Broker 1 negligently arranges an insured's policy of insurance, and that error is repeated at renewal by Broker 2. Can Broker 2 escape liability and blame Broker 1 in the event of a loss, or at least obtain a contribution from Broker 1?" The short answer is no.

In Standard Life Assurance v Oak Dedicated [2008] it was held that the policy of the client, Standard Life, was deficient in certain cover provisions and that the broker, Aon, was negligent for providing unsuitable insurance. But Aon was not the original broker of the policy; it had simply renewed cover that had been established by a prior broker (Special Risk Services) which was acquired by the Minet Group, which was further acquired by Aon. Part of the acquisition terms of the Minet Group by Aon was for a deed of indemnity against loss, liability, claims or costs which arose out of an event that occurred prior to the Minet acquisition. Therefore, upon being found liable for negligence, Aon sought an indemnity from Travelers (the previous owner of the Minet Group). Travelers settled with Aon and then claimed against its insurers for the amounts paid to Aon.

"Undeservedly you will atone for the sins of your fathers" - Horace

However, in Beazley Underwriting and another v Travelers Companies Inc [2010] the court found that the unsuitability of the insurance policy provided to Standard Life was solely the negligent act of Aon who had renewed the policy following the acquisition of Minet. It did not matter that Minet (or Special Risk Services) had made the original error in terms of suitability of cover, as, upon renewal, Aon owed a duty of care to Standard Life to obtain suitable insurance cover.

The judge in Beazley –v- Travelers did not consider what competent brokers do in practice – he simply imposed a duty on brokers which did not take into account evidence of what a component broker does or should do.

Even if expert evidence had been considered, it is likely that the same conclusion would have been reached. The FSA makes very clear the distinction applied to advised and non advised sales, and describes at length the extent of the documentation required to establish a retainer based on an execution only transaction.

"Here's what I've got now, see what you can do..."
If the sale is made without advice, the firm that sold the product should be able to demonstrate through their records that the customer selected the product without any specific recommendation. If it is unable to demonstrate that agreement, then the fact that the insurance was previously arranged by a reputable broker, or was required at short notice, or was sought solely to obtain a cheaper premium ("here's what I've got now, see what you can do") will not absolve the current broker when a problem arises.

Edwin Coe LLP work with CCS and kindly contributed this article for your information.