Broker liable for failing to make blanket notification

Alexander Forbes Europe Limited v SBJ Limited

On 20 December 2002, the Commercial Court handed down Judgment in a dispute arising from pensions mis-selling claims and the failure of a professional indemnity broker to make a 'blanket' notification on behalf of its broker client. The judgment confirms that the standard of care owed to a 'expert' client is the same as that owed to any client.

From 1994, professional indemnity brokers SBJ Ltd arranged professional indemnity cover for their client Alexander Forbes Europe Ltd (formerly Nelson Hurst UK Ltd). This comprised a Group Policy and a separate run-off IFA policy, which ran from 5 March 1994 to 18 February 1995.

In December 1994, Forbes' Claims Director wrote to SBJ with details of a claim for onward transmission to Insurers. The letter was accompanied by copies of relevant correspondence and a claims summary, which set out the background to the SIB Pensions Review and suggested that this had prompted the claim as well as an enquiry from another individual. The claims summary concluded, "We feel however that this is something of which our E&O Underwriters should be aware."

SBJ should have notified the Underwriters of the IFA policy, but instead they notified the Group Policy. SBJ did not realise their mistake until 12 days after the IFA policy period ended, when they belatedly notified the Leading Underwriter, Dominion (who subscribed 50% of the risk) and Aegon (who subscribed 25% of the risk). Dominion accepted the claim referred to in the notification but said, "We do not, however, accept the block advice as a circumstance under this policy". Aegon followed Dominion's lead. Wren (who subscribed 25% of the risk) also underwrote the Group Policy and accepted the broad notification of circumstances.

SBJ did not tell Forbes about the Underwriters' response.

When Forbes pursued a claim for indemnity under the 1994/95 year, Dominion declined to pay. Aegon settled for a one-off payment of £75,000. Forbes sought an indemnity and damages against SBJ for loss of insurance benefits under the 1994 IFA Policy.

Forbes alleged that SBJ were negligent in notifying the wrong Underwriters, because they knew there were two separate policies. On a proper construction the December 1994 notification amounted to a blanket notification of circumstances; and, if SBJ had any reservations about the form of the notification (particularly in the light of Dominion's response) they should have discussed these with Forbes at the time.

SBJ denied any liability for breach of duty on the grounds that: Forbes' role as specialist professional indemnity brokers was highly relevant to the standard of care owed by SBJ; they were entitled to rely upon Forbes' Claims Director's expertise, and the heading of his letter ("Our Group Errors and Omissions Cover") was an "instruction" to notify the Group Policy (rather than the IFA Policy); the December 1994 notification did not constitute a broader notification of "circumstances" relevant to Forbes' exposure to Pension Review claims; and Forbes' failure to pursue a claim for indemnity under the 1995/96 policy year was relevant to issues of causation, mitigation of loss and contributory negligence.

The Judge rejected SBJ's arguments. He found the suggestion that brokers acting for sophisticated insurance brokers were required to be less vigilant than they would be with clients in other professions was unfounded; the standard of care required was not lower.

SBJ were well aware of the existence of two separate policies, having negotiated both of them with the respective Underwriters. If SBJ's own procedures had been followed, they would have identified the correct Underwriters. When the error was belatedly discovered, SBJ took no steps to discuss the matter with Forbes. SBJ's assertion that it was not part of their duty to "teach his expert grandmother to suck eggs" was wholly unfounded. As the Judge put it, "brokers' duties go beyond those of a postbox".

The Judge also held that Forbes' December 1994 notification was a valid notification of circumstances. It indicated a wish to put Insurers on notice that further claims might materialise from the Pensions Review. He rejected SBJ's allegation that Forbes had, in effect, been the author of its own misfortune by failing to pursue a claim under the subsequent 1995/96 policy year. Accordingly, no questions of causation, mitigation or contributory negligence arose.

The Judge refused to grant leave to appeal although he did give SBJ leave to make written submissions on certain limited issues which, it contended, should have been determined in the Judgment, and those will be dealt with in writing by the Judge.

This decision has a number of broader implications. It confirms that a broker acting for a sophisticated and experienced insurance broker does not owe a lower standard of care. It is suggested that the same principle is likely to apply in the context of other professions.

The Court will adopt a broad, common-sense approach when considering the scope of a notification of circumstances which may give rise to a claim and ask what the letter or document in question would have conveyed to the underwriter receiving it.

Finally, as well as underscoring the need to comply with existing procedures relating to the notification of claims, this case emphasises that, once a breach of duty has been established, arguments based upon contributory negligence and an alleged failure to mitigate are unlikely to be sympathetically received by the Court; on the contrary, a Claimant can generally expect a degree of latitude in those circumstances.

For further information please contact Peter Maguire, who acted for Alexander Forbes in this action, at [email protected]