The broker is usually the “agent” of the insured, in the principle sense, and it is within this relationship that most claims arise against the broker. The broker does not usually have the duty to give a meticulous interpretation of each and every clause of the insurance contract to the insured, but if he or she does endeavour to give such advice and it is proved to be wrong, the broker will incur common law liability.
The General Code of Conduct as set out in the Financial Advisory and Intermediary Services Act requires a financial services provider or representative thereof to provide a reasonable and appropriate general explanation of the nature and material terms of the insurance agreement. Commonly it is required of the broker to make a full and frank disclosure of any information that will enable the insured to make an informed decision and to provide the insured with any appropriate contractual information that would be material.
If the insurance recommended by the broker contains unusual provisions that limits or exempts the insurer, it is the duty of the broker to bring such provisions to the attention of the insured.
The following scenario illustrates the events that often result from the insured not having sufficient cover, resulting in the insurance company applying an average on the amount claimed, when an insured concludes an insurance agreement with the underwriter or broker of the insurer for a specified cover period for comprehensive cover, as particularly set out in the Policy Schedule for house hold contents of the insureds main residence.
When the insured then suffers substantial damages after falling prey to an armed robbery at his/her main residence, which damages far exceeds the amount insured fro in respect of the insured’s insurance policy, it is clear that the insured seems to be under insured, under which circumstances the insurer will then apply an average. When an average is applied an insured becomes liable for a portion of his loss, bearing in mind that valuation documentation dated before the occurrence usually must be presented to the insurance company.
If the insurer tenders an amount, which is rejected by the insured and the insured subsequently issues a summons against the insurer, citing only the insurance company and not the broker, it often happens that an insured is under-insured due to the broker neglecting to inform the insured of his risk of becoming liable for a portion of his own the loss, should the risk for which he is insured materialise and it appears that he does not have sufficient cover.
In PFC Foods CC v Three Peaks Management Ltd 2012 the legal duties of the broker towards the insured was dealt with, the Plaintiff’s claim against the defendant arose from a contract with Zurich Insurance Company South Africa Limited, in respect of which the Defendant was the intermediary. The Plaintiff averred that the Defendant breached its obligations in terms of the mandate to the extent that when the insured event occurred, the Plaintiff was not paid the full amount insured for by the insurance company.
The court found that the duty to exercise reasonable care and skill extends, in appropriate cases, to the duty to take reasonable steps to elicit and convey material information from and to the insured. This includes information about terms of the policy which, if contravened it might leave the insured without cover, this being part and parcel of the broker’s general duty to use reasonable care to ensure that the insured is covered – see Lenaerts v JSN Motors (Pty) Ltd 2000 (1) 4 SA 1100 (W) at 1109H-J.
In Stander v Raubenheimer 1996 2 SA 70 (O) at 675 G-676 I the court held that the broker was under a duty to elicit all material information from the insured and to convey that to the insurer. The broker knew that the contents of the insured’s house would not be covered if they were damaged or destroyed in a house with a thatch roof but failed to ascertain from the insured whether his house had a thatched roof or not. The decision was that the broker breached its contractual obligation to ensure that the insured’s assets were covered.
The question concerns legal liability with obligations in this regard either based on contract or delict. The first enquiry to be made is, what is the legal liability of the broker in terms of the contract, whose main function is to facilitate the contract of insurance between the insured and the insurer. In order to establish the legal liability and the extent to which the insured was aware that he was under-insured, the broker must explain the extent of the cover to the insured, informing the insured that he or she is under-insured and informing the insured that his insurance policy should be adjusted to sufficiently cover all insurable interests. The broker should keep a record of these communications and information should the question of legal liability arise once the litigation proceedings have been instituted.
Once a broker has done everything reasonably possible to draw the attention of the insured to obligations imposed by the policy, it becomes the insured’s responsibility to ensure compliance see Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd  4 All SA 317 (SCA).
Having considered all the evidence the court found that the Defendant did not act with reasonable care and skill and that the Defendant (being the intermediary) was liable to pay the Plaintiff the amount claimed from it.
Insurance brokers should accordingly ensure that, the insured is sufficiently covered in terms of the insurance policy agreement and accordingly advise their clients when suspecting that their clients might be under-insured. Reciprocally, the insured must also inform the insurance broker of any changes in their insured interest to enable the insurance broker to advise the insured regarding possible adjustments of their insurance cover.
by Samantha Wonfor