Infinity was an online retailer offering personalised gifts for children. It operated out of a warehouse owned by a company called Cygnia, which also provided picking and dispatch services to Infinity, using specialised equipment.
Infinity took out a business interruption policy on the advice of its broker, Heath Crawford, and then renewed the policy at the end of the term. Heath Crawford’s advice included guidance on how Infinity should calculate its gross profits for the purposes of setting the cover under policy.
There was a fire at Cygnia’s warehouse which meant that Infinity had to find alternative premises and fit them out. Infinity claimed under its policy for the GBP12 million in losses that it suffered as a result.
The insurer accepted cover but there was a shortfall of GBP2.75 million in the amount Infinity could recover under the policy, for two reasons.
- First, it turned out that the guidance Heath Crawford had provided on calculating gross profit was incorrect because it did not match the definition of gross profit under the policy. This caused Infinity to be under-insured by about 25%, which meant that the amount payable under the policy was reduced by the same percentage due to the principle of “average”. Under that principle, the insured is deemed to be self-insured for the proportion by which it is under-insured, and so the insurer does not need to pay out that amount.
- Second, the policy only provided limited cover for fitout costs for replacement premises.
Claim against the broker
Infinity sued Heath Crawford to recover the shortfall, alleging that Heath Crawford had breached its duty as an insurance broker by:
- misleading Infinity about how its gross profit should be calculated for the purposes of the policy;
- not advising Infinity to take out a declaration-linked business interruption policy, which would have provided for a full recovery despite any incorrect calculation of gross profit; and
- failing to consider the need for cover for the additional fitout costs that Infinity would incur if it needed to change premises.
The insurance broker’s duty of care
When assessing whether Heath Crawford had breached its duty of care, the Court provided a helpful summary of the principles that apply when a broker is advising a client in relation to a new policy or a renewal:
- The broker’s duty is to use reasonable skill and care to obtain cover on the client’s behalf.
- A major part of the broker’s role is to bridge the gap between the client’s knowledge of its business, and the broker’s knowledge of the cover that is available in the market. This requires a dialogue between client and broker that allows the broker to make sensible recommendations and allow the client to make an informed choice.
- To perform its duty properly, a broker should take reasonable steps to understand the client’s business, and its insurance needs, but the broker does not usually need to conduct a detailed investigation into the client’s business.
- The broker should recommend sufficient and effective cover for the identified risks, to the extent cover is available in the market.
- To enable the client to make an informed decision, the broker must take reasonable steps to ensure that the client understands the key terms of the cover that is being obtained.
- Where the market offers a variety of different terms which might meet the client’s needs, the broker should take care to explain the range of available cover and the advantages and disadvantages of each so the client can make an informed choice.
- The broker should take reasonable steps to enable the client to understand the key aspects of the placement process, including the information that underwriters will require or that the insured should provide.
- At renewal time, the broker cannot just assume that renewal is all that is required, even if nothing appears to have changed. It must apply its mind to the client’s present circumstances and whether cover is sufficient in the circumstances.
On the facts, the Court held that Heath Crawford had breached its duty in each of the ways claimed by Infinity, and awarded GBP2.3 million in damages to Infinity (after a reduction of 20% to reflect Infinity’s fault in calculating its gross profits). In short, Heath Crawford had misled Infinity about the information required for the policy, failed to take the necessary steps to allow Infinity to make an informed decision about the cover available, and failed to explore Infinity’s need for cover of additional fitout costs.
While each case will depend on its particular facts, the decision provides a useful restatement of the general common law standards that insurance brokers need to meet when providing services to their clients.
For completeness, we note that there are particular rules in New Zealand about the principle of average that might have produced a different result in the insurance claim. In particular, the Insurance Law Reform Act 1985 provides that an average clause in a general insurance policy will not have any effect unless the insurer has first provided clear disclosure to the insured about the nature and effect of the clause (and average clauses cannot apply to home insurance at all).
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.
 Infinity Reliance Ltd v Heath Crawford Ltd  EWHC 3022.