The duties of an insurance broker

Transcription

1 JP van Niekerk The duties of an insurance broker Should the broker include VAT in the sum insured? Should the broker include VAT in the sum insured and should it procure an increase in the sum insured immediately upon being instructed to do so? There has been a steady stream of decisions over the past few years concerning the duties of insurance brokers towards their clients. The decision in Luxor Paints (Pty) Ltd v Heritage Insurance Brokers (WLD 26 April 2006 (case no 04/18159) unreported) adds usefully and practically to the list of these duties. The facts in Luxor Paints v Heritage Insurance Brokers The insured suffered a loss in excess of R28 million when its paint factory was destroyed by fire on 29 July The insurer paid out some R22,6 million for the damage the insured suffered as a result of the loss of or damage to its stock, plant, machinery, office content, and electronic equipment, and also as a result of business interruption. The insured then sought to recover from its broker the difference between the amount it had received from the insurer and its actual loss. Its action was based on alleged breaches by the broker of its contractual duty to ensure that the insured was fully covered for the loss it had sustained. Relevant background facts included the previous dealings between the insured (or its predecessors, or the persons involved with it or them) and the brokers (or the persons representing it at various times). The insured required insurance to cover it against loss by, amongst other perils, fire. The brokers arranged insurance that covered the insured s stock, plant, machinery, office content, electronic equipment, and motor vehicles. It also arranged cover against loss arising from any interruption of the insured s business activities. The insurance it arranged was renewable annually on 1 August. Prior to this date, a meeting would take place between the insured and the brokers to discuss the insurance for the next period of cover. For each type of asset to be insured, the insured would provide the brokers with an amount representing the book or replacement value based on the insured s management accounts or financial statements. To the brokers knowledge, these amounts excluded value added tax (VAT). In the case of motor vehicles, the brokers relied on figures that included VAT. For previous renewal periods, the brokers had calculated the business interruption cover by adding VAT to the insured s income statement taken from its management accounts. Between renewal dates, the insured would on occasion instruct the brokers to insure property it had acquired and would either supply them with an invoice that included VAT, or provide ISSN

2 them with a figure that either excluded or included VAT. Occasionally the brokers would also be asked to increase the cover for the insured s stock. On 11 July 2003, the insured met with the brokers to discuss cover for the renewal period from 1 August 2003 to 31 July The insured provided the broker with figures showing that there had been a material increase in the book value of the insured s stock from R10 million (on 25 November 2002, when the figure was last increased) to almost R12 million at the end of June The brokers arranged insurance to cover the stock for this increased figure but only with effect from 1 August The upshot was that, at the time of the fire on 29 July 2003, the insured was under-insured on its stock which was insured for only R10 million. It was further under-insured because of the fact that the existing insurance cover excluded VAT. By agreement, the only issues between the parties to be determined by the court involved the contractual dispute whether the brokers were under a duty to ensure that the sums insured in respect of the insured s stock, plant, machinery, office content, and electronic equipment immediately before the fire on 29 July 2003 included VAT; whether the brokers were under a duty to procure an increase in the sum insured in respect of the insured s stock to R12 million plus VAT immediately when instructed to do so on 11 July 2003, some three weeks prior to the fire; and whether the brokers had breached either or both those duties. For its part the insured argued that it was an express, implied, or tacit term of the instruction (mandate) given to its brokers pursuant to the oral brokerage agreement between them that the brokers would ensure, first, that the sums insured in respect of all property would include an amount equal to its book or replacement value, as the case may be, plus an amount equal to the VAT that the insured would have to pay in terms of section 8(8) of the Value Added Tax Act 89 of 1991 on any indemnity payments it received in respect of loss of or damage to such property; and, secondly, that the increased cover it requested was effected immediately. The insured contended further that the brokers had breached their agreement in that they had failed to ensure, in the first instance, that the all the sums insured included the fourteen per cent VAT component. As a result it underrecovered on its stock and other losses. The brokers had further breached the agreement, so the insured pleaded, in that they had failed to ensure, secondly, that the increased stock cover requested on 11 July was effected immediately as they only procured such cover with effect from 1 August 2003 The brokers, in turn, conceded that an insurance broker has a duty to inform its insured that sums insured should include VAT. In the present case, they submitted, they had discharged their duty to the insured and the latter knew that if it wanted a full indemnity, all sums insured, including that on the stock, had to be inclusive of VAT. In short, they pleaded that because the assets stated by the insured were not VAT exclusive, insurance was effected on the basis that the amount included VAT. As far as the stock loss claim was concerned, the brokers, while admitting the meeting of 11 July and the fact that they were provided with the increased stock-value figures, argued that in respect of the increased value of the stock the insurance cover would take effect only on 1 August 2003, which was the renewal date of the insured s policy. They contended that they were told on 11 July to increase the sum insured on the stock from R10 million to R12 million, but only from 1 August, the renewal date. The decision of the court The court (per Schwartzman J) first briefly considered the issue central to its decision the duties of an insurance broker to an insured. 62 ISSN

3 Insurance brokers, the judge pointed out, are not mere collectors of premiums. They are professionals who are paid (commission of) up to twenty per cent of the premium paid by the insured to the insurer. They are also entitled to negotiate an additional fee with clients. As professionals, they are assumed to be skilled in insurance matters. Thus, they are required to exercise reasonable care and skill that extends to eliciting and conveying material information both from and to the insured. More specifically, the judge added, quoting from an English textbook on insurance broking, a broker is liable if, while acting within the scope of his instructions, he notices, or should have noticed, a risk or information that is not confidential and is clearly of potential significance to the insured and fails to draw it to the latter s attention. A broker s slavish following of instructions will not necessarily amount to a discharge of his professional duties. Intolerable burdens should not in this regard be imposed on brokers, but inexperienced clients may expect them to take a broader view of their instructions than would be the case with experienced clients. And while the broker is not required to act without further instructions, he should at least draw the client s attention to the risk or information and await any such further instructions the client has thus been enabled to give. Coming, then, to the VAT issue, the judge referred to section 8(8) of the Value Added Tax Act in terms of which VAT is payable by an insured on an indemnity payment received under a short-term insurance contract. More specifically, the subsection states that, subject to two provisos, where a vendor (insured) receives an indemnity payment under a contract of insurance, that payment is, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, deemed to be a consideration received for a supply of services on the day that payment is received by the vendor in the course or furtherance of his enterprise. When it comes to VAT and sums insured, the generally accepted position in the local insurance industry (it is set out in the KPMG VAT Short Term Insurance Manual, to which the court referred) is that, unless specifically endorsed to the contrary, all policies issued by local insurers are, generally, considered to be inclusive of VAT. In consequence, if a policy does not mention VAT, the sum insured stated in it will be the maximum limit of liability inclusive of VAT payable by the insurer. The insured s policy did not contain any contrary endorsement. Some of its assets (such as motor vehicles) were insured for amounts that included VAT, while others, in particular its stock, were insured for amounts that excluded VAT. The brokers position was that while they did bear the duty that the insured contended for (a duty to inform it that sums insured should include VAT), they had discharged that duty. They had expressly advised the insured that all sums insured had to be inclusive of VAT. In their view the insured here knew that if it wanted a full indemnity, all sums insured had to include VAT. The values supplied by the insured therefore had to include VAT, or it had to stipulate expressly that they excluded VAT, in which case the brokers would add the VAT and inform the insured of the sums insured inclusive of VAT. There is a clear trend of imposing an ever-increasing range of duties on insurance brokers The question before the court was whether the insured had proved a breach by the brokers of their duty to inform the insured of the need to insure on a VAT-inclusive basis. The judge then analysed the evidence of various meetings and communications between the parties, their predecessors and several consecutive representatives of each at length and in considerable detail. The insured s view was that had it been told of the need to include VAT in the valuations ISSN

4 of all property to be insured, it would have done so. It had no intention to be underinsured by fourteen per cent on any asset for which it sought insurance cover. The judge found that there was nothing in the evidence to suggest otherwise. However, the insured could not recall being told of this requirement. The brokers, on their part, suggested that all their clients had been informed of it by way of a newsletter and in a slide presentation (the VAT requirement was mentioned in a one liner during a wide-ranging presentation lasting several hours) at the time it sought to be appointed as the insured s intermediary. On the probabilities, the judge held that the brokers had not alerted the insured to the need to add VAT to the value of its stock and other assets to be insured. When in doubt, a broker has to elicit the necessary information from its client. Here the brokers knew that the figures for the assets to be insured came from the insured s accounts and that there they excluded VAT. They did not know whether the insured had added VAT. They owed the insured a duty to ask the insured whether its figures included or excluded VAT. They did not ask, and had no right to assume that VAT was included. In all probability, had the insured been alerted to the matter, it would have increased the stock value to include VAT. Thus, the judge held, the brokers had breached their duty to the insured and they were causally responsible for the resulting loss the insured had suffered. The judge then turned to the issue of the effective date of coverage and to the question whether, as the insured contended, the brokers were under a duty to obtain increased insurance cover immediately upon being instructed to do so by the insured and not only when the relevant cover was renewed some three weeks later. The parties held different views on the matter. The brokers suggested that there was no rigid rule as to when an increase in a sum insured should become effective. Ordinarily, the client would want increased cover immediately. If the increase was requested at a renewal meeting, as here, the client would be asked if it wanted the sum insured to be increased immediately or with effect from the renewal date. Among the reasons for requesting the increase to be immediate were facts such as that the insured s business was a rapidly increasing one and that notified increases in asset value might be historical. The brokers conceded that these circumstances existed here and that insured s position was such as to make an immediate increase appropriate. The insured, again, thought that a broker s duty was to obtain immediate increased cover, and that that was so whether or not its instruction had been given at a renewal meeting. At least its position was that it wanted the increased cover on the stock discussed at the meeting on 11 July to be put in place immediately as it was never its intention knowingly to under-insure the stock. Again the judge embarked on a detailed analysis of the evidence of the various meetings and communications between the parties over a period of some four years. He held that the insured had proved the existence of a term in its instructions to the brokers that the increased insurance cover would be obtained immediately upon the instruction to do so being given to them. At the very least, in compliance with their general duty to exercise all reasonable care and skill, the brokers were required, if they had any doubt on the matter, to ask whether the increase in cover should be immediate or be delayed to the date of renewal. Had they asked, they would in all probability have been told that the increase was to be immediate. But by not asking, they breached their duty towards the insured to ensure that the sums insured for the stock was increased from R10 million to R12 million plus VAT with immediate effect. As a result, the insured suffered damage by being under-insured on its stock at the date of the fire by twelve per cent plus the VAT element. 64 ISSN

5 Some comments Luxor Paints v Heritage Insurance Brokers confirms the noticeable trend of imposing an ever-increasing range of duties on insurance brokers. And, it may be suggested, they have little to complain about. After all, they hold themselves out as trained and experienced professionals who are as such entitled to a professional remuneration for their services, while their clients, even if commercial concerns, are usually largely ignorant of the intricacies of insurance practice and procedure and hence all the more reliant of the advice and expertise of their brokers. Two points should be remembered, though. In the first instance, whether a particular duty exists and if so, whether it has been breached, depend on the circumstances of every case. Hence the fact that by far the largest part of the judgment in this matter concerned an evaluation of evidence. Secondly, the particular duties are in most, if not all, cases but instances of larger, more encompassing duties owed by brokers to their clients. Thus, the duty, in appropriate cases, to include VAT in the sum insured when obtaining insurance cover for a client, or the duty, likewise in appropriate cases, to obtain increased cover immediately, may be thought to be nothing but instances of the broker s duty to act with reasonable skill and care in the performance of its mandate towards that client. Still, the identification of the particular duties is useful in illustrating in a practical way the scope of the more general duties owed by an insurance broker. JP van Niekerk: University of South Africa, Pretoria ( [email protected]) ISSN