The Alberta Court of Queen’s Bench decision in Duraguard Fence Ltd. v. Badry, 2019 ABQB 783, is another in the line of case authorities dealing with the duties and standard of care that insurance brokers owe to their clients. The case promises to have far-reaching consequences.
The Duraguard case concerns a claim brought by the plaintiff Duraguard Fence Ltd against the defendant broker and his brokerage (“HDF”) for the alleged failure to place adequate insurance coverage for employee dishonesty. Duraguard was in the business of supplying and installing chain-link fencing. The Court found that, while its principal, Jay Champigny, was well-versed in the business of supplying and installing chain-link fencing, he had limited knowledge and experience with respect to insurance.
Duraguard had been a long-time client of HDF and one of its principals. The Court specifically noted that, as at the date of the trial, The defendant broker had 43 years of experience as a professional insurance broker. He had operated HDF, or its predecessor, continuously over that time and was a specialist in and dealt exclusively in commercial insurance lines. At the time he took over the Duraguard account, the defendant broker himself had some 3500 commercial customers.
As Duragard’s representative for the purpose of the lawsuit, Mr. Champigny, testified at trial that, if the defendant broker made insurance recommendations, he would follow them. He further testified that, as Duraguard’s owner, he did not to seek out bargains when it came to insurance and would have agreed with any recommendations made by the defendant broker with respect to increased coverage. Both the defendant broker and Mr. Champigny agreed that Mr. Champigny would simply accept the defendant broker's recommendations and pay the invoices, as issued, without question.
In light of the foregoing, the Court found at paragraphs 17 and 18 that Mr. Champigny on behalf of Duraguard deferred to the defendant broker's judgment when it came to identifying and responding to Duraguard's insurance needs:
17 ... In essence, Mr. Champigny relied upon and trusted [the defendant broker] to protect the business of Duraguard in the insurance sense.
18 ... More precisely, I find that Mr. Champigny deferred to the defendant broker for all of Duraguard's insurance needs. That is, Mr. Champigny expected HDF to place and [the defendant broker] undertook to place on Duraguard's behalf "full coverage" as that term is defined in Fine's Flowers Ltd. v. General Accident Assurance Co. of Canada (1977), 17 O.R. (2d) 529 (Ont. C.A.), 1977 CanLII 1182 at para 56 meaning "coverage against all foreseeable insurance risks of the plaintiff's business."
The defendant broker testified that it was his practice to meet with a commercial customer on an annual basis just before renewal time to confirm information. Mr. Champigny admitted that these meetings occurred most years. Generally, the meetings consisted of the defendant broker verbally administering a questionnaire. The information gathered at the meeting or through the questionnaire would be used to define and respond to Duraguard's insurance needs for the upcoming policy year.
In 2004, the defendant broker switched Duraguard's insurer from one insurer to another. Mr. Champigny had not requested the change and the defendant broker did not remember why the change was made. To facilitate the change, the defendant broker filled out a "Commercial Lines Application" which described Duraguard's business, its premises and related information that would be helpful to an insurer in determining what coverage and limits were required.
The defendant broker and Mr. Champigny both testified that all their discussions concerning Duraguard's insurance requirements focused on its physical assets. Neither party recalled any discussion at any time about employee dishonesty coverage. Mr. Champigny admitted that he did not tell the defendant broker about a previous incident regarding an employee who uttered two forged company cheques for $4,000.00 each. He explained that the employee had quickly confessed and agreed to make restitution. As a result, Mr. Champigny thought no further of the matter.
The Court found that, even though they did not specifically discuss this subject, both Mr. Champigny and the defendant broker had in their minds that any crime losses sustained by the company would likely be in the form of physical theft, whether of inventory or the relatively small amounts of cash left on the premises. Duraguard kept a locked cashbox with a float so that cash payments could be taken. However, Mr. Champigny testified that, when the cash exceeded a certain amount (say $1,000), he would either make a bank deposit or take the cash home.
Based on the foregoing evidence, the Court found that at no time did the defendant broker and Mr. Champigny have any discussion regarding employee dishonesty coverage and that the prior incident was not disclosed by Mr. Champigny to the defendant broker. However, the Court went on to say that what was noteworthy about the switch from the first insurer to the second that the limits for all categories of crime coverage, including employee dishonesty, were reduced from $10,000.00 to $5,000.00. The reason for this was because the second insurer did not offer a commercial package that featured limits of $10,000.00 for crime coverage. Rather, that insurer’s package offered only limits of $5,000.00 for all categories of crime coverage.
The defendant broker thought the $5,000.00 limit for crime coverages was sufficient given the nature of Duraguard's business. Since no discussion of crime coverage limits ever took place, the Court found that there had been no discussion between the defendant broker and Mr. Champigny regarding the reduction in limits. To the extent that Mr. Champigny noticed this change in policy limits, he simply went along with it (as he did with all of the defendant broker’s recommendations).
The defendant broker also testified that his usual practice following each renewal was to personally deliver a physical binder containing the current year's policies to Mr. Champigny. The binder also contained what the defendant broker described as an "executive summary" of the coverages. The executive summary was intended to be an "at-a-glance" picture of all the coverages in place, including the limits. The executive summary was prepared because, as observed, the actual policies were virtually incomprehensible to laypersons. the defendant broker further testified that his usual practice was to encourage the customer to review the documents.
The Court found that, while Mr. Champigny may have reviewed the executive summary when provided, he did not read the actual policies. Again Mr. Champigny testified that he relied on and trusted the defendant broker to take care of Duraguard's insurance needs. There was no evidence that Mr. Champigny took particular note of the reduction in crime coverage from a limit of $10,000.00 to $5,000.00.
For 2005 (the year after the transition from the first insurer to the second), the executive summary did not appear to have been provided to Duraguard until January 11, 2006 even though the policy periods commenced on September 17, 2005 for Duraguard’s auto fleet and October 1, 2005 for its business insurance and liability policies. As a result, the Court found that, even if Mr. Champigny had noticed the reduction in limits for crime coverage in 2005, it would not have been until some 3 months after the policy had come into effect.
One of Duraguard’s employees committed cheque fraud which was eventually discovered and reported to HDF. When Mr. Champigny telephoned the defendant broker to report the loss (then in the range of $100,000.00), the defendant broker assured Mr. Champigny that Duraguard was covered for the loss. As it turned out, the defendant broker did not know whether the $5,000.00 limit for employee dishonesty was an aggregate limit or a per occurrence limit. He learned from Peace Hills that it was the former and that the insurer was treating all of the employee’s unlawful transactions (which stretched back 5 or 6 years) as one event. Peace Hills issued a cheque to Duraguard for $5,000.00 for the loss, which Mr. Champigny never cashed.
The Court noted that both the experts retained by the parties made similar observations with respect to the defendant broker’s duties and whether he met the requisite standard of care. Among other things, the Plaintiff’s expert stated as follows at page 2 of his expert report:
To my knowledge, there are no published standards for determining an insurance limit for employee dishonesty (crime) insurance. There was a well-recognized guidelinepublished by the American Surety Association that enjoyed widespread use in corporate risk management during the 20th century, but the Association retracted it for fear of being sued if the formula proved inadequate. Others have since adopted it... , but it is no longer endorsed by the ASA.
By way of the foregoing, the Plaintiff’s expert seemed to imply that, while there were (1) some available guidelines with respect to advising as to appropriate employee dishonesty coverage limits and (2) information relating to losses and pricing, use of these guidelines was not widespread or, as he put it, pervasive. Mr. Gordon went on in his report to state as follows: “[a] competent and diligent commercial insurance broker would assess its client's needs and risks in each of these insurance areas and, if needed, offer insurance solutions.”
Similarly, HDF’s expert commented as follows in her report:
An insurance broker is responsible for determining the client's insurance needs and arranging coverage that best meets those needs:
determine the facts about the risk the client wishes to cover;
check on those facts, to ensure they are accurate;
assess the client's requirements;
place the insurance according to the client's directions; and,
provide evidence, when required, that the insurance is in place.
The Court found at paragraph 44 that, in essence, a broker's duty is:
to assess the client's risks;
give advice and recommendations on appropriate coverages for each of the relevant risks; and,
after taking instructions, implement those coverages.
The central question in Duraguard’s action was whether the defendant broker breached his contractual and common law duties to Duraguard. The Court found that the defendant broker breached his duty of care to Duraguard in respect of its employee dishonesty coverage. In this regard, the Court found:
The defendant broker had no discussion with Mr. Champigny at any time regarding the adequacy of the $5,000.00 limit for employee dishonesty. It seems that he did not evencommunicate that the limit had been reduced from $10,000.00 to $5,000.00. There was certainly no discussion about it.
The defendant broker did not determine whether the $5,000.00 limit was an aggregate amount or a per occurrence limit prior to committing Duraguard to that limit. Mr. Champigny testified that he thought, when he read it, that the $5,000.00 limit applied on a per transaction basis. The defendant broker did not disabuse him of this notion. In fact, the defendant broker was not in a position to disabuse him because he did not know himself.
The defendant broker knew that additional coverage (up to at least $250,000.00) was available as he had procured such coverage on behalf of another client. Indeed, the defendant broker admitted at his questioning that there was no limit to the amount of employee dishonesty coverage that could be purchased, as long as the customer was prepared to pay for it.
The Commercial Lines Application contained a notation in the defendant broker's own handwriting that Duraguard had a piece of equipment worth $7,297.43 stolen from its yard on November 22, 2000. As a result, the Court concluded that the defendant broker was aware of a previous loss that exceeded the limits for the crime coverage that he had placed. Further, assuming the defendant broker had asked the question about previous employee dishonesty, he would have been told by Mr. Champigny that an employee had forged 2 cheques totaling $8,000.00, again exceeding the limit he had put in place.
In light of the foregoing, the Court found that, as an experienced broker, the defendant broker should have known that a “slavish” reliance on a pre-set package with a $5,000.00 crime limit was inappropriate, given the loss history. The Court further found that the defendant broker would have known, as his own expert opined:
The standard limits of coverage provided by insurers on package policy enhancements have neither a relationship to the annual revenues of the policyholder nor the specific risk profile regarding predisposition to crime or employee dishonesty losses.
The fact that Duraguard had 2 previous crime events might well have engaged underwriting attention. However, there was no discussion between the defendant broker and Mr. Champigny that would lead to any unique underwriting exercise or recognition of differing risk.
The defendant broker admitted that he had turned his mind to the question of electronic theft and that he would have been aware that Duraguard accepted credit card payments. He just didn't think that anyone would steal more than $5,000.00. If he had asked, he would have found out that someone had already stolen more than $5,000.00.
The defendant broker’s expert also opined that past loss experience is relevant:
In my experience, it would be unusual for a broker to arrange limits of employee dishonesty insurance that were higher than the insurer's limit of coverage provided by the package policy, unless the client in question had experienced previous employee dishonesty losses, or unless the nature of the client's business was indicative of a higher risk profile with respect to losses of this nature.
As a result, the Court concluded that Duraguard's 2 previous incidents (one of theft of property and one of employee dishonesty - both incidents exceeding the limit of $5,000.00) would have and should have been relevant in determining Duraguard's risk for crime loss. However, the inquiry was never made and the discussion was never held. The Court found that the defendant broker and HDF breached their duties to Duraguard by failing:
to properly inquire into and assess Duraguard's crime risk; and, in particular, the risk of employee dishonesty;
to determine whether the $5,000 limit was an aggregate or per occurrence amount prior to placing it; and,
to investigate other crime coverage options for Duraguard.
The Court noted the defence expert’s opinion that crime coverages are “pre-set” packages that are usually a “throw-in” was an apt description of how the defendant broker treated Duraguard’s employee dishonesty coverage: “as an extra, an ornament, something not really worthy of attention or analysis”. The Court also accepted the opinion of Duraguard’s expert that crime coverage is "core" to a commercial policy. Finally, the Court held as follows with respect to the issue of duty of care:
74 ... It does not seem onerous to me that an insurance broker would, at the time of taking over a commercial account and at each renewal, discuss specifically with the customer each coverage that is proposed to determine whether it is sufficient to meet the company's risks, which of course would continue to evolve. For example, the executive summary for 2005... lists some forty areas of coverage. Surely it is not too much to ask the insurance broker to review each area with the customer before placing the insurance. After all, the customer is paying for the coverage, even if some are "throw-ins". [Emphasis is ours]
This is the crux of the Duraguard case: a broker must provide a recommendation to his/her client as to what employee dishonesty limits are appropriate for that client’s business. In terms of the question as to what coverage limits are appropriate, a broker (who is looked to by his clients for advice and recommendations) should seek out guidelines or information to help determine which limits are appropriate.
What should brokers do in the future when advising clients with respect to appropriate employee dishonesty limits?
Based on the reasoning in Duraguard, we would say:
be aware of (and, if need be, seek out) insurance industry guidelines or other resource
materials with respect to appropriate coverage limits (see below);
make appropriate inquiries of your clients as to their respective potential exposures, including their loss histories and what, if anything, those histories may reveal as to their potential risks and appropriate policy limits; and,
rely on those guidelines and your own investigations to make recommendations to your clients as to their appropriate coverage limits.
https://www.canadianunderwriter.ca/inspress/dont-crime-insurance-part-1/ https://www.canadianunderwriter.ca/inspress/dont-need-crime-insurance-part-2-2/
https://www.canadianunderwriter.ca/insurance/brokers-placing-fidelity-coverage- involved-early-fraud-investigations-rims-conference-speaker-1004121103/
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