In this judgment, Mr Justice Cooke had to determine the comparative responsibility of placing and producing insurance brokers for failing to advise an insured to make a “block notification” of “circumstances that may give rise to a claim” against a backdrop of payment protection insurance (PPI) mis-selling. The Court’s decision is considered by Mark Cullen of 4 New Square.
The Claimant companies (collectively OFML) sold secured loans and PPI. OFML retained the Defendant (Oval) as its producing broker, who in turn retained Senior Wright Insurance Limited (Senior Wright) as the placing broker. For the period 31 October 2008 to 31 October 2009 OFML had a primary layer professional indemnity policy with a limit of £1.7 million with CNA Insurance Company Limited (CNA) and an excess layer policy with a limit of £3.3 million with Hiscox Insurance Company Limited (Hiscox). Both primary and excess policies were renewed for the policy year 2009/10.
During 2007 and 2008, the Financial Services Authority (FSA) indicated that it intended to target the sale of PPI. Throughout 2008 OFML was confident that it had adequate policies and procedures in place to meet the increasing allegations of PPI mis-selling. However, OFML’s confidence ultimately turned out to be misplaced.
In late 2008 the volume of claims relating to PPI mis-selling increased significantly and the Financial Ombudsman Service (FOS) began to find in favour of more and more complainants. By April 2009, adjudications were awaited from the FOS on 110-120 complaints in relation to OFML’s sales of PPI. In July 2009, 37 adjudications were received from FOS, all of which were adverse to OFML. The decisions revealed the same re-occurring complaints, broadly characterised as a failure to make proper oral disclosure of the terms of the policy or a failure to adopt appropriate selling practices for the sale of PPI.
On 29 September 2009, the FSA published a Consultation Paper on “The assessment and redress of Payment Protection Insurance complaints”, suggesting that firms selling PPI may be required to re-examine all claims for PPI mis-selling which had previously been rejected and which had not been referred to the FOS. Thereafter, and in the run up to the 2009 renewals, various discussions took place between OFML, Oval and Senior Wright in relation to the impact of the Consultation Paper, the problems with OFML’s practices and the claims position.
On 29 October 2009, Senior Wright made a limited notification of circumstances to Hiscox under the Hiscox 2008/2009 policy, in respect of the customer complaints which had already been made and rejected by OFML which were to be subject to further review by OFML (the Limited 2009 Notification). Senior Wright made the Limited 2009 Notification in light of information supplied to it by Oval, but without any prior discussion of the matter with Oval or with OFML.
However, no block notification in relation to all PPI sales was made in the 2008/09 policy year. A block notification was made on 29 October 2010. Subsequently, CNA paid claims both on its 2008/09 policy and on the 2009/10 policy. However, Hiscox declined to accept the block notification in 2010 and contended that any block notification should have been given in the 2008/09 policy year under the terms of that policy, with the consequence that cover was excluded in the following year, by virtue of a provision in the 2009/10 policy. It also sought to avoid the 2009/10 policy for material non-disclosure.
OFML brought a claim alleging that Oval had, in breach of its tortious and/or contractual duties, failed to advise OFML to make a “block notification” to the 2008/09 policies of the entirety of OFML’s sales of PPI policies as “circumstances that may give rise to a claim” before the expiry of those policies.
Oval initially denied breach of duty and causation of loss. Oval also brought a Part 20 claim against Senior Wright, averring that if Oval was found liable to OFML, then Senior Wright as placing broker had negligently and/or in breach of contract caused Oval to incur any such liability. Alternatively it contended that Senior Wright was itself in breach of direct tortious duties owed to OFML and that Oval was entitled to contribution from Senior Wright under the Civil Liability (Contribution) Act 1978.
On 21 December 2015, Oval settled OFML’s claim and accepted that a block notification of all PPI sales should have been made to the 2008/09 policy year. However, Oval contended that Senior Wright, as placing broker, was mainly responsible for failing to recommend that a block notification should have been made in 2008/09. Senior Wright denied any breach of duty, whether to Oval or to OFML, and contended that Oval never requested advice on block notification in 2008/09 and did not pass on key information to Senior Wright which would have alerted it to the need for any advice about making an effective block notification. The third party claim proceeded to trial.
THE JUDGE’S DECISION
The Judge found that Oval’s personnel had greater knowledge of the systemic problems with OFML’s sale practices than Senior Wright, who were essentially left to work out the problems and risks for themselves, in circumstances where Oval’s claims executive was playing down the risks of multiple claims emerging. However, the Judge concluded that both brokers were at fault in that they failed to grapple with the question of block notification at all in 2009, which they should have done in light of the information they had (even though this information was different).
Furthermore, the Judge found that in making the Limited 2009 Notification, without instructions from Oval to do so, Senior Wright assumed a duty in contract and in tort to Oval (and potentially a duty in tort to OFML) to make an appropriate notification to the 2008/09 year insurers. In the circumstances, no competent broker with the knowledge of Senior Wright would have failed to consider a block notification and recommend to the insured that they should, subject to legal advice, make a block notification.
In the context of Oval’s direct claim against Senior Wright, the Judge found that the appropriate responsibility which rested on Senior Wright was 30% whereas the responsibility of Oval was 70%.
The judgment makes clear that brokers must consider whether it is appropriate or indeed necessary to make a block notification of claims and to advise on the need for a block notification, or the need to obtain legal advice before making such a notification, where appropriate. In particular, the Judge found that a placing broker in the position of Senior Wright was under a duty to be aware of regulatory developments (here, the FSA Consultation Paper) and to review the information received from the producing broker Oval in the context of presentation for renewal and consider any notification of circumstances which was required. The Judge also noted that whilst the expert evidence showed a market awareness of the unwillingness of underwriters to accept block notifications, it also illustrated (as did the case law) that similar valid notifications had been given in the context of pensions mis-selling and regulatory action.
The judgment contains an interesting discussion of the risks and practicalities of block notification of circumstances under Professional Indemnity Insurance policies. The Judge accepted that there were obvious commercial risks to making a block notification. For example, a block notification may have resulted in a refusal to offer cover for the ensuing year (as Hiscox did on receipt of the 2010 block notification). Such a refusal could have had serious consequences for OFML, as a finance broker who required professional indemnity cover or its equivalent to trade, in circumstances where there was a very limited market for cover on PPI selling. However, if no block notification was made, there was a more serious risk that the following year’s cover would be jeopardised. That risk eventuated when Hiscox rejected the 2010 block notification in light of the fact it should have been given a year earlier. The Judge indicated that the commercial impact might be mitigated by renewing first (with disclosure of the material facts) prior to expiry of the existing policy year and then making the block notification. The Judge’s decision also contains a helpful consideration of what will actually amount to a block notification. Of course, the validity of a block notification largely depends upon the notification clause in the policy in question but the judgment indicates that a high degree of specificity may be required before a block notification can validly be made, whilst at the same time indicating that an insured cannot provide what is not reasonably available but could notify and follow up with further particulars when available.
The judgment illustrates that placing brokers must be alive to the possibility of assuming a duty of care directly to the insured. In this case, the Judge held that by making a Limited Notification without instructions to do so, not only had Senior Wright assumed a duty to Oval, but also it had potentially assumed a direct duty in tort to OFML to make an appropriate notification.
Keywords: Brokers’ negligence, Notification of claims and circumstances, Professional Indemnity Insurance