An imperfect understanding between a broker and her client may result in the broker being responsible for gaps in insurance coverage

The Insureds were successful in an action against their Broker in negligence for failing to provide them with sufficient advice about their home insurance policy.  The Broker did not provide negligent advice. However, the broker was negligent because their clients had an imperfect understanding about the nature of a water endorsement on the insurance policy provided by the Broker and what additional steps might be required to obtain the additional endorsement.

Clark v. D.A. Hargreaves Insurance Ltd., [2007] A.J. No. 985, Alberta Court of Appeal, D.  Lee J., September 6, 2007

The Insureds obtained home insurance coverage through the Defendant Broker in 1982. Between 1982 and 1991, the Insureds’ policy contained a sewage backup endorsement (“SBU”), which insured their home against water damage sustained as a result of sewage backup. The Insureds experienced a sewage backup in 1992 under a subsequent policy that had not been placed by the Defendant Broker. This loss was covered under their policy; however, the Insurer refused to renew the Insureds’ policy when it expired later that year. The Insureds then contacted the Defendant Broker to secure a new home insurance policy. A policy was subsequently secured and took effect in November 1992. The Insureds’ home sustained significant water damage in July 2001 as a result of a sewage backup. They were told by the Insurer that this loss was not covered since their policy did not contain an SBU endorsement.

The Court was asked to determine whether the Defendant Broker had either breached its contract with the Insureds or was negligent by failing to obtain the SBU endorsement that was bargained for. The Insureds conceded that they were aware that the endorsement was not initially included in the policy, but argued that the Broker had informed them that this would be incorporated after 2-3 years without them having to do anything further. The Broker argued that it did not inform the Insureds that the endorsement would be incorporated into their policy, and would not have made this representation as it is not possible for any clause to be automatically incorporated into an insurance policy.

The Court noted that if the Broker had failed to obtain the type of insurance coverage that it agreed to obtain, it would be liable for breach of contract on the basis of the Ontario Court of Appeal’s decision in Fine’s Flowers Ltd. et al vs. General Accident Assurance Co. of Canada et al (1977) 81 D.L.R. (3d) 139 para. 13 (Ontario Court of Appeal). The factual issue for the Court was whether the parties had bargained for future inclusion of the SBU endorsement. The disagreement concerning what transpired at a 1992 meeting between the Insureds and the Broker boiled down to a contest of credibility and the evidence concerning this meeting was diametrically opposed.

On the evidence, the Court found that the parties had likely exited the 1992 meeting with an imperfect understanding of the importance of the SBU endorsement and what was to be done about this clause in the future. The evidence failed to establish that the Broker and the Insureds had come to any mutual understanding as to what steps were going to be taken. As a result, the Court could not find that the endorsement was a term “bargained for” as discussed in Fine’s Flowers and the Insureds’ claim for breach of contract could therefore not succeed. However, the Court found that the Insureds had relied upon the Broker to obtain insurance for their home, including the SBU endorsement. In the particular circumstances of the case, the Broker owed a duty of care regarding the future treatment of the endorsement.

The Court noted that the scope of the duty owed to the Insureds was governed by Fine’s Flowers and the subsequent decision of the Supreme Court of Canada in Fletcher vs. Manitoba Public Insurance Co. [1990] 3 S.C.R. 191. In particular, the Court found that the Broker had a duty to provide sufficient coverage and that any failure on the part of the Insureds to specifically articulate their needs did not absolve the Broker of liability. The evidence was that the parties were aware of the possibility that future losses might result from a sewage backup and despite this, the Broker did absolutely nothing to inform the Insureds about the sewage backup gap.

The Court concluded that the Broker had failed to provide the Insureds with sufficient advice regarding their insurance coverage in breach of its duty of care. This duty of care included the obligation to raise with the Insureds the issue of the SBU endorsement following commencement of the policy in November 1992. Accordingly, the Court concluded that the Broker was liable to the Insureds for their uninsured losses in an amount that was significantly less than they had claimed. The Court rejected the Broker’s argument that the Insureds’ inaction between 1992 and 2001 constituted contributory negligence.  It did so on the basis that the Insureds did not have the requisite knowledge to make relevant inquiries into the lack of an SBU endorsement, and that this lack of knowledge was directly related to the Broker’s negligence.

This case was originally summarized by Shanti Davies and originally edited by David W. Pilley.

To stay current with the new case law and emerging legal issues in this area, subscribe here.