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Brokers have duty to act in good faith: lawyer

Adrian Fawden, partner for London-based Simpson Millar Solicitors, said the case of Marchand versus Jackson before the high court of New Zealand, proved that brokers need to act in the utmost good faith.

The case revolved around a claimant (Nicole and Jacques Marchand) who instructed a broker (Jackson) to obtain house, contents and business insurance. The claimants informed the broker they had been ‘dumped’ by their previous insurers but omitted to mention that this was because one of the claimants had criminal convictions.

The broker submitted the proposal form, completed by the claimants - which did not mention the convictions - to an insurer who consequently gave cover.

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Despite informing the claimants that cover had been arranged, the broker failed to follow up with the insurer and arrange the house and contents cover, leaving the claimants uninsured.

When the claimants made a small claim on their insurance, the broker tried to cover up his failure to obtain cover by paying the claim himself, which he ultimately also failed to obtain.

When in 2010, the claimants’ house was damaged in the Christchurch earthquake, the broker attempted to arrange cover by submitting a proposal, completed by himself, that was backdated to before the earthquake. Cover was not offered and the claimants claimed against the broker.

The broker’s defence was that: the claimants had not disclosed the previous convictions to him. He said had they done so, and he had obtained cover, the insurer would have avoided the policy for non-disclosure; the cover would have been limited and there was contributory negligence.

The high court found the broker to be in breach of duty for failing to place the claimants’ insurance, adding that, with full disclosure, the claimants would have been able to obtain insurance so the broker was unable to rely on causation defences.

It added that the broker had not taken all the necessary steps to elicit the information relating to the cancellation of the previous insurance policy, and that the claimants had therefore lost the chance to obtain insurance and were entitled to damages to put them in the position they would have been in had the insurance been obtained.

The broker has been held liable for the full amount of the claim.

Mr Fawden said: “As far as the provider is concerned, the principle of ‘uberrimae fidei’ – or ‘in the utmost good faith’ – would apply. The broker not only knew the truth about the criminal convictions by the time of the earthquake, but also did not tell the claimants they had no insurance, which broke his good faith contract with them, thus invalidating all other counterclaims by the broker no either other party.”

Adviser View:

Kim Barrett, managing director, Hertfordshire-based Barretts Financial Solutions, said: “Once a broker has accepted an application from a client then the letter of the law holds that this is a solid contract, albeit a verbal one, and the broker is liable, it’s as simple as that. Had the broker not tried to cover his tracks, rendering himself looking complicit, then he might have obtained some sympathy from the court, but clearly here he made things a lot worse.”