Article by Gord McGuire
2017 saw the 40th anniversary of the Ontario Court of Appeal’s seminal decision in Fine’s Flowersbut proved an otherwise unremarkable year in the law of insurance broker’s negligence. Here is a look at three notable decisions in Canada and other commonwealth countries.
This case arose after a fire destroyed a pub in Halifax’s north end in 2007, and the insurer denied coverage because the insurance application had inaccurately stated that the building was sprinklered and made of masonry. The misstatement was unintentional and stemmed from the fact the insured owned a number of different properties subject to various insurance arrangements, which were managed by a variety of individuals within the company.
The trial judge dismissed the owner’s claim against the insurer but found the broker negligent and 50% responsible for the loss. In a decision that was seen by some as expanding the duty of care, the judge held the broker ought to have made inquiries to ascertain whether the insured’s representative had the necessary training or experience to accurately complete the insurance applications, and, if not, to discuss the benefits of property inspections with him.
In what was no doubt welcome news to brokers, the Nova Scotia Court of Appeal allowed the appeal. It interpreted the holding as imposing on brokers a requirement to verify information supplied to them by their insureds, which in the court’s view “would be a significant departure from the law as it presently exists.” The court listed several other ways in which the trial judge’s formulation of the duty of care was both factually and legally flawed, providing helpful appellate guidance on the nature and scope of a broker’s duty in the insurance application process.
This case, which shared many similarities with Grafton, is another helpful precedent for brokers. The insured plaintiff here was a recycling company that suffered property damage and business interruption after a major fire in 2010. The case turned on the interactions between the insured and its broker during the renewal process before the fire, including information the insured gave the broker regarding its expected profitability during the upcoming policy period (which information was needed to determine the limits for its business interruption coverage).
The insured alleged that the broker’s renewal questionnaire eliciting the expected profit growth was ambiguous, and that communications from the insured ought to have caused the broker to make further inquiries of the insured to make sure the insured’s answers in the form were accurate. As in Grafton, the insured alleged the circumstances placed a duty on the broker to do more than simply take the insured’s answers at face value.
The trial judge rejected all three arguments, finding that the broker had not breached the standard of care in this respect. The judge also held that, in any case, the insured would not have obtained higher limits of insurance even if the broker had made further inquiries of the insured, and as such there was no causation. In reaching the latter conclusion the judge placed considerable emphasis on the lack of evidence from the insured’s relevant decision makers as to what they would have done differently had the broker behaved differently. The judge cited various cases as to how such “counterfactual evidence” (or its absence) should be treated. These authorities would likely prove helpful in a Canadian case where the parties are arguing over what would have happened had the broker acted differently.
This decision from the Court of Appeal of England and Wales is another testament to the importance of proving causation in a broker’s negligence case. Here, the plaintiff was a chartered accountant who also worked as a director of a property development company. Investors in that company sued the plaintiff in 2009 for negligent investment advice after losing their investments. At that point the accountant learned that his insurance broker had not obtained any insurance for him since 2007, leaving him without any insurance that responded to the claims. He ultimately settled the investors’ lawsuits and sued his broker.
The accountant obtained default judgment against the broker, who was as a result deemed to admit negligence. After a three-day hearing on damages, however, which unlike the liability issue was contested, the judge assessed the accountant’s damages at $0, finding that the chance the insurers would have indemnified Mr. Channon and defended the claims was “no more than speculative”.
On appeal, the accountant argued there was “a significant prospect” that the insurers in fact would have taken legal advice which would have caused them to respond to the claim. The court reviewed in detail the expert evidence from the hearing as to what the insurers likely would have done, and like the trial judge found the suggestion the insurers might have taken a different course to be mere “speculation”, and dismissed the appeal.
This decision may prove useful to Canadian litigants seeking to understand how a court will address the counterfactual question of how an insurer would have responded to a particular claim.