An insurance broker is liable to an insured for failing to disclose a ‘hole’ in the insured’s insurance coverage

Successful action by an Insured against an insurance brokerage firm for breach of fiduciary duty, negligent misstatement and negligence in respect of an alleged obligation on the part of the brokerage firm to disclose a hole in the policy of insurance.

National Crane Services Inc. v. AON Reed Stenhouse, [2007] S.J. No. 18, Saskatchewan Court of Queen’s Bench, Hunter J., January 19, 2007

The Insured was a crane operator who contracted with the owner of a printing press to move the printing press from one building to another. The value of the printing press was in excess of the Rider for “on-the-hook” property covered by the Insured’s policy. Accordingly, the Insured contacted its broker and requested an increase in the coverage for “on-the-hook” property to ensure that the printing press would be insured in case of any damage during the move. The printing press was in fact damaged and its owner made a claim against the Insured, not only for property damage but also for loss of profits.

In order to settle the claim, the Insured contributed $35,000 in excess of the cost required to fix the printing press. It was later discovered that there were no insurers in the marketplace that would insure against “loss of profits” or consequential losses suffered by third parties. The broker was unaware that this type of insurance was not available and therefore did not disclose this fact to the Insured.

The Insured claimed that the brokerage firm failed in its duty to warn him of the “hole” in the policy and that, but for the brokerage firm’s breach of duty, the Insured would have had no exposure to loss beyond the amount for which it was insured.

After referring to Fines Flowers Ltd. et al v. General Accident Assurance Co. of Canada et al (1977), 17 O.R. (2d) 529 (Ont. C.A.), the Court concluded that the broker had breached his fiduciary duty and was negligent. The Court found that the broker had a duty to advise his clients on insurance coverage based on his knowledge of the client’s needs. The lack of coverage for business interruption was a gap or hole in the policy and the broker breached his duty when he failed to advise the Insured of this. The Insured was entitled to damages in the amount of $35,000, which it had paid toward settlement, plus legal fees expended in defending the claim by the owner of the printing press.

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