Brokers and agents liability cases have increased since the appeal decision in Fine s Flowers Ltd. v. General Accident Assurance Co. of Canada.

Transcription

1 Bulletin No. 12 February 1996 ENCON Group Inc. Telephone Facsimile Toll Free Loss Control Bulletin Insurance Agents and Brokers Errors and Omissions Insurance This publication has been prepared for general information use. It should not be relied upon as legal advice or legal opinion with respect to any specific factual circumstances. The Legacy of Fine s Flowers Part I by Neo J. Tuytel Partner, Clark Wilson LLP This Bulletin provides a detailed examination of the law in this contentious liability area, with suggestions to help brokers and agents avoid errors and omissions problems. Brokers and agents liability cases have increased since the appeal decision in Fine s Flowers Ltd. v. General Accident Assurance Co. of Canada. The trend has been to broaden the categories of liability and to make it increasingly difficult to defend these claims against brokers, agents and even insurers. Theories of Liability Contract The first issue is whether there is a contract of insurance. This is usually settled by determining whether the broker had authority to bind coverage. The second issue is whether there was a contract whereby the broker agreed to obtain coverage, usually resolved by determining whether there was consideration for any agreement between the insured and broker. The Ontario and Saskatchewan Courts of Appeal (Cosyns v. Smith and Piggott Construction (1969) Ltd. v. SGIO) have established that a promise by the applicant to pay the premium is sufficient to uphold an oral contract to obtain coverage. In the Piggott case, the insurers were held liable under such an oral contract. The final issue is whether the broker s failure to provide coverage constitutes a breach of contract. This is often resolved by answering Lord Swinfen- Eady s question (Hood v. West End Motor Car Packing Co. - Eng. C.A.): Was it a contract by which the (agents) only agreed to take all reasonable steps to procure an effective insurance? If so, the negligence standard of reasonable care applies. Or was it a contract by which they undertook to procure an effective insurance? If so, liability is determined according to a contractual standard, whereby the agent will be held to have virtually guaranteed that insurance would be placed. Tort (Negligence) Brokers have two or three general duties. The first is to obey their instructions and carry out the transaction; the second is to use proper skill in doing so. An additional duty, in most cases, is to properly advise insureds. Equity (Breach of Fiduciary Duty) This theory was first introduced in Fine s Flowers, but has not yet resulted in any major changes to the law Clark Wilson LLP CB-LCB-12-E February 1996

2 Insurance Agents and Brokers The Legacy of Fine s Flowers Part I Breach of Warranty of Authority A client can recover from a broker who warrants that he has authority to bind coverage. However, it is little different from breach of the kind or oral contract found in Cosyns or Piggott. Estoppel Representations as to the existence of coverage by both brokers and agents have resulted in liability by effectively creating coverage where none had existed. This may be seen as a branch of negligent misrepresentation. Vicarious Liability Just as brokerages will be held liable for the negligence of their employees, insurers will be held liable for the acts or omissions of brokers, which are undertaken within the scope of their actual or apparent authority. Contractual and Negligence Liability Similarities It is generally accepted that both the standard of care and the measure of damages are usually the same whether in contract or negligence (Norlympia Seafoods Ltd. v. Dale and Co. Ltd. B.C.S.C.). However, it is suggested that there are really two distinct standards of care, one in negligence and one in fiduciary duty, and that the one that applies will depend upon the extent of obligation that a broker assumes on behalf of a client. The first situation in which this issue arises is where the broker fails to place the coverage requested. The applicable standard will then depend on the answer to Lord Swinfen-Eady s question in the Hood case. The second situation is where the insured claims that the coverage is inadequate. A close reading of the Fine s Flowers case indicates that the negligence standard will only apply where the client has given specific instructions. In these cases, the broker must cover all foreseeable and normal insurable risks. Where the instructions are general, the fiduciary standard applies, that is, the broker must cover all insurable risks, even if they are extraordinary. Further, as the burden of proof, in contract cases, is on the broker or insurer to demonstrate that adequate coverage was not available, the broker may be held to have undertaken to obtain full coverage, even if it was not clearly available in the marketplace. In other words, the broker may be taken to have guaranteed that the insurance would cover virtually all risks. In terms of damages, the claim will almost invariably be for the loss of an anticipated benefit under a contract of insurance (Norlympia). Finally, the defence of contributory negligence is available in both contract and negligence (Wyeth v. Henry McWilliams and Wallace Ltd. Ont. D.C.). Differences First, insurers, unlike brokers, do not generally owe insureds an independent duty of care (G.K.N. Keller Canada Ltd. v. Hartford Fire Insurance Co. Ont. C.A.). Second, the traditional distinction that there is no general liability in negligence, as opposed to contract, for failing to act, has given way to a general duty to warn (Fletcher v. MPIC S.C.C.). Finally, the onus of proving the availability of coverage is on the insured in negligence cases; but on the broker in contract cases (Fine s Flowers and Markal Investments Ltd. v. Morley Shafron Agencies Ltd. B.C.C.A.). As a result, who has the burden of proof will depend on whether the court is prepared to find a contractual undertaking to provide coverage. This can be difficult to predict and leaves the courts with a virtual discretion.

3 Which theory applies may also determine whether the underwriter s reinsurance coverage will respond. Concurrent Liability Although there is some lingering uncertainty, the better view is that liability is concurrently available in both contract and negligence (Norlympia and Gilmore Farm Supply Inc. v. Waterloo Mutual Insurance Co. Ont. S.C.). Who the Broker/Agent Acts for Types of Agency at Law In addition to actual authority given by the insurer, there may be an apparent, implied or ostensible agency (sometimes called agency by estoppel ). An actual agency is created by agreement, usually in the form of a written agency contract. Apparent agency may be created without any direct contract between the insurer and the client. It is only necessary for the insured to let the agency hold itself out as having actual authority (La Ferme de la Vallee St. Jean Ltee v. Fairweathers N.B.C.A.). Many relationships between agents and insurers will therefore have the potential to create a contractual liability on the part of the insurer, as if the agency agreement was a general, as opposed to a limited one. Categories of Agents and Brokers There are four categories: (i) general or managing agents, (ii) recording agents, (iii) soliciting agents, and (iv) brokers. Only soliciting agents or brokers will be unlikely to have apparent authority. Agents for More Than One Party Agents may also act for more than one party in respect of a given transaction (Gilmore). The general rule is that an agent who completes the policy application is acting for his client for that purpose (Kelly v. Wawanesa Mutual lnsurance Co. N.S.C.A.). In this situation, an agent will not generally have apparent authority to bind coverage. However, as the agent may be acting for the insurer in another capacity, any information he receives about the risk, but does not actually disclose, may be imputed to the insurer, such that coverage cannot be voided for misrepresentation or non-disclosure. Liability by Whom and to Whom Agents to Insureds This is the most common scenario and involves all the theories of liability, except vicarious liability. Insurers to Insureds a) Contract The first issue is whether there was a prima facie contract of insurance. The second is whether the insurer is entitled to void the contract. This usually involves misrepresentation or non-disclosure and will depend for whom the agent was acting. Given the general rule in Kelly v. Wawanesa, it may still be difficult for insureds to blame their agents for misrepresentations in policy applications. However, because of the possibility of dual agency, information known to the agent, but not disclosed to the insurer, may nevertheless be imputed, depriving the insurer of its right to void the policy. Finally, so long as the agent has actual or apparent authority, his acts and understanding of the policy may govern its terms, to the extent they are uncertain (Guardian Insurance Co. of Canada v. Victoria Fire Sales Ltd. S.C.C. and Firestone Canada Inc. v. American Home Assurance Co. Ont. S.C.). As for the second issue, namely, voiding coverage, the cases generally involve one or more of these

4 fact patterns: (i) incorrect answers given by the applicant; (ii) untrue statements in the application made by the agent; and (iii) information provided by the applicant, but not disclosed by the agent. Results have varied widely. b) Negligence Although there is no general duty owed by an insurer to an applicant, this is not the case where the insurer negligently processes a policy application (Stewart v. Lanark Mutual Insurance Co. Ont. D.C.; Jessett v. Conacher Alta. Q.B. and McLeod v. Lunenburg Insurance Agencies N.S.S.C.). c) Estoppel Insurers, as well as agents, can be estopped from denying coverage. d) Vicarious Liability The general rule in Kelly v. Wawanesa also suggests that, although insurers may be held vicariously liable where inadequate coverage is issued, they will not be held liable where no policy was issued at all (Reardon v. King s Mutual Insurance Co. N.S.S.C.). Agents to Insurers a) Indemnification Agents may be obligated to indemnify insurers for claims brought by clients. They may also be liable for breach of an independent duty of care. Most indemnity claims arise out of claims by clients and most of these involve third-party proceedings. A common type of claim is where the agent failed to disclose knowledge, which was imputed by law to the insurer (North Waterloo Farmer s Mutual Insurance Co. v. Wylie Ont. S.C.). b) Breach of Independent Duty A good example of breaching an independent duty of care to an insurer is exceeding binding authority when placing coverage. Another is failing to cancel coverage when instructed to do so (Northwestern Mutual Insurance Co. v. J.T. O Bryan & Co. B.C.S.C.). Insurers to Agents The general rule in Kelly v. Wawanesa also dictates that insurers will generally share liability with their agents when the claim relates to processing the policy, as opposed to completing the application itself (McLeod and Stewart). Others Agents and insurers have also been held to owe a duty of care to beneficiaries under coverage placed as part of a financing transaction. One example is a duty to a mortgagee seeking the benefit of a mortgage clause, if the mortgage makes an independent request for coverage (Amherst Credit Union Ltd. v. Quebec Assurance and Casualty Co. of Canada N.S.C.A.; FBDB v. American Home Assurance Co. Ont. S.C. and Bank of Nova Scotia v. Khalek N.S.S.C.). There is even the prospect that an indirect beneficiary (such as an injured third party) may be owed a duty of care. This is an area of further expansion for the law. Instructions and Representations Specific Instructions Specific instructions create a form of strict liability for the specific coverage sought. Otherwise, they impose only a negligence standard of care. Nevertheless, agents are often held liable for not following specific instructions. General Instructions or Blank Cheque The Fine s Flowers case makes it clear that the courts will infer the terms of a contract in the absence of any

5 general, let alone specific instructions. If they do so, the onus shifts to the agent to prove that coverage was not available (Markal). Even though no instructions at all may be given, an agent will be required to understand the nature of his client s business and assess the risks that should be insured against. This can result in liability for failing to obtain even extraordinary coverage. There are numerous examples of this kind of case. By contrast, the B.C. Supreme Court in L.B. Martin Construction Ltd. v. Gaglardi, only imposed an obligation on the agent to place reasonably available, as opposed to special coverage. In light of Fine s Flowers, and all the other cases, this is no longer strong authority. Representations Agents also encounter claims problems because they over-represent the existence of coverage. ENCON Group Inc. Telephone Facsimile Toll Free