When an Insurance Broker Does Not Know the Insurer’s Acceptance Standards
By Carole Chauvin, A.I.B, Cert. Admin., syndic (2013)
This summary does not constitute a legal opinion. The information it contains may not reflect the current state of the law.
A chimney fire results in the total loss of the insured’s semi-detached residence. When the insured declares the loss to her personal-lines damage insurance broker following the incident, she learns that she has no insurance coverage. Furthermore, the insurer of the adjoining house is suing her for $81,000. The insured lodges a complaint with the syndic’s office against her insurance broker. She cannot understand how this could have happened to her and above all, she wants to avoid this ever happening again.
We carried out an ethics investigation of the conduct of the personal-lines damage insurance broker, based mainly on the following two professional obligations, found in the Code of ethics of damage insurance representatives :
Section 37 :
The fact that a damage insurance representative acts contrary to the honour and dignity of the profession constitutes a breach of the Code of ethics, including:
(1) carrying on activities dishonestly or negligently; (…)
(6) failing to act as a conscientious advisor by not informing his clients of their rights and obligations and not giving them all necessary of useful informations; (…)
The Facts of the Case
During the summer and fall of 2006, the insured experienced financial difficulties, mainly due to the loss of her job and expenses related to her mother’s death. In order to consolidate her debts, she took out a second mortgage from a lender who was considered to be non-standard. She notified her broker, who informed the insurer, who asked the insured to sign a consent form to conduct a credit check. The results of the check did not meet the underwriting standards of the insurer of the risk. As a result, on November 2, 2006, the insurer asked the broker to place the risk with another insurer. Although the insurer expressed its intention to rapidly withdraw from the risk, it did not set a specific deadline.
The broker researched the market and on November 6, 2006, found another insurer that agreed to accept the risk. He immediately contacted the insured to tell her that her insurer was withdrawing from the risk and that he had another contract to present to her.
On November 7, 2006, the insured met with the broker at his office where he explained the situation to her. Although the insured found the new insurer’s premium excessively high (her home insurance premium would go from $400 to $1,300), she understood that she had no other choice but to accept. Accordingly, the insured signed a request to terminate her current home insurance policy and signed an application with the new insurer. She also left a cash deposit of $60, which was all that she had with her, and a cheque post-dated to November 15, 2006 for $270. She left the firm’s office with a copy of the insurance application and a receipt for the amount paid.
On November 14, 2006, her house was destroyed by fire. On November 15, 2006, she filed a claim with her broker who presented it to the insurer.
The new home insurance contract that was supposed to come into force on November 7, 2006 had not been issued by the date of the claim, nor was it in force since the quote provided to the broker was conditional upon receiving certain additional information, including a duly completely RCT form and a consent form to conduct a credit check on the insured. All of this was in fact indicated in the insurer’s written quote, dated November 6, 2006.
On November 15, 2006, when the insured reported her loss, the broker realized that he had not followed up on the information that the insurer had required—information that he had in fact gathered when he met with the insured on November 7, 2006. The broker bent over backwards to have the insurer accept the risk, but he was unsuccessful. The new insurance contract was not in force before the fire and the broker did not have the power to bind this sub-standard insurer.
The Formal Complaint
I was responsible for filing a formal complaint before the discipline committee of the ChAD. In particular, the complaint included charges 1 and 3, as follows:
1. On or about November 7, 2006, failed to act as a conscientious advisor and pursued his activities as a personal-lines damage insurance broker with negligence by obtaining the insured’s signature to terminate her home insurance contract (…) and by sending or allowing the request for termination to be sent without first obtaining a confirmation of insurance from another insurer, thus causing harm (…).
3. On or about November 7, 2006, failed to act as a conscientious advisor by signing and giving the insured an insurance proposal (…) as an insurance binder (…) whereas in fact, he was not authorized to bind the insurer, thus creating in the insured’s mind the false impression of being duly insured, as described in the proposal. (sic)
The Discipline Committee
In its ruling of guilt, the discipline committee made the following comments regarding the broker’s professional conduct:
In light of the many factual elements presented, it is reasonable to believe that a consumer could have had the impression that he was duly insured, given the respondent’s behaviour. But that is not all: the respondent showed gross negligence by having the application for termination signed before placing the risk with another insurer.
The committee feels that the respondent failed to fulfill his ethical duty by going ahead with the termination of the insurance contract in force without already having an alternative at hand. This is a basic rule of caution.
(…) the respondent failed in his duty to advise.
It should be noted that, despite the insured’s difficult financial situation, she was obliged to take her damage insurance broker to court, given her loss and the claim of $81,000 made against her by her neighbour’s insurer. This issue—addressed by both the defence and the committee—resulted in the following comments:
The Committee observes that its jurisdiction is limited to ruling on the whether or not the disciplinary charges are valid, regardless of the civil liability of the various parties to the case. It will be up to the civil courts to rule on the extent to which each party is liable since disciplinary proceedings are independent of civil court proceedings. [unofficial translation]
The broker explained that he rushed to request termination of the insurance contract in force in order to avoid having the insurance company proceed with the termination itself before the contract expired, which would have resulted in the insured having to declare this when applying for home insurance in the future. Such gross professional negligence—in other words, terminating the contract before confirming that a new homeowner policy was in force—caused serious harm to the insured whom he was trying to protect.