global insurance management

Finding the Facts

Sep 22 2014

Finding the Facts 

Relevance:                   All firms.

Action required:           Ensure your file records all relevant client-related facts and information.

There has long been a compliance mantra of “If it’s not written down, it didn’t happen”.  This is important in connection with compliance but just as important when it comes to defending your firm against a client accusing you of negligence.

When a complaint arrives, depending on the circumstances, the investigation will start with the client’s file.  Here, it should be possible to establish the facts and circumstances and be able to offer up a resolution, either by rejecting or accepting the complaint.

BUT, that supposes the file contains all the relevant facts and notes and paperwork. A recent legal case reinforces the value of clear and concise records of your interaction with the client.

The case of Eurokey Recycling Ltd .v. Giles Insurance Brokers Ltd has been found in favour of Giles, when they were sued for £17m. Eurokey claimed Giles gave the incorrect information to insurers which left it severely underinsured when its factory later burned down.

Eurokey was predicting a turnover of £25 million in 2010 and anticipated gross profits of £7-8 million.

However, when the fire broke out, the company – which specialises in plastic, cardboard and metal recycling services – was insured by a Lloyds syndicate on the basis that its projected turnover was just £11 million. 

The sum insured by way of gross profit for business interruption purposes was just £2.5 million and the value of stock and machinery in and around the burnt out premises had also been seriously under-stated.

There was no dispute that Eurokey was gravely under-insured and the insurers, Paladin Underwriting Agency Limited – who had charged a £40,000 premium under the policy – made a once-only offer of £1.5 million to settle the entirety of Eurokey’s claim under the commercial combined policy.  Eurokey was told that, unless the offer was accepted, it would be withdrawn and that Paladin would seek to avoid the policy.

In the High Court, Eurokey argued that £1.5 million was only a fraction of the sum it would have been due had it been adequately insured.  It made a number of allegations of negligence against its then brokers, Giles Insurance Brokers Limited, and claimed the substantial damages.

However, in dismissing Eurokey’s claim, the judge found that:

  • the brokers had adequately explained the nature of the policy and the level of cover; and their files provided clear evidence of this;
  • the figures for turnover and business interruption had been provided to the brokers by Eurokey’s then commercial director who had been clearly warned about the dangers of underinsurance;
  • the wrong figures had been given to the brokers, so far as stock and machinery were concerned and they had no reason to question information given to them by the client
  • the incorrect figures had been passed on to other prospective insurers by Eurokey itself when it was searching for cheaper insurance cover.

So, there can be no substitute for keeping clear and precise notes in all client files and maintaining a good level of communications with clients. 

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