QUESTION:
I'm dealing with a complex situation involving a commercial property owner. The owner recently obtained a valuation on their property, which has come back effectively doubling the previously insured value. Despite this, the owner has instructed me to ignore the valuation and act as though it doesn’t exist.
I have already advised them of the potential ramifications of their instruction, particularly in the event of a claim, but I am now seeking clarity from a legal and professional standpoint.
As an agent of the insured, I am obligated to act in their best interests and follow my clients instructions. However, the valuation is a material fact that would likely influence any insurer’s decision to underwrite the risk or charge premium.
My questions are:
1. From a legal perspective, whose interests take precedence in this scenario - the insured (my client) or the insurer?
2. As a broker, do I have a duty to disclose this new valuation to the insurer, even if it conflicts with the client’s instructions?
3. How should I balance my obligation to act in the best interests of the insured with the professional and ethical requirement to ensure material facts are accurately presented to the insurer?
Appreciate any advice you may have.
I answer in the same order:
1. You have been appointed by the insured to act for him/her as his/her agent at law. Under the common-law of agency, you owe a duty of care to the insured as your principal. This position has been separately reaffirmed by the recent changes to the Financial Markets Conduct Act 2013 which require you to (amongst other things), comply with the Code of Professional Conduct for Financial Advice Services which requires you to act with integrity towards your client.
2. No, you owe all your duties to your client. You have discharged those duties by advising the client of the possible consequences of his instructions. If, despite this, he/she confirms his/her original instructions, you must follow them. The only possible complication here would be, is if you have signed an agreement with the underwriter obliging you to disclose all material facts to it. This would put you in a conflict situation. Your duty to your client to follow instructions conflicts with your contractual obligation to tell the underwriter. Such agreements with underwriters should be avoided.
3. The duty of disclosure applies to the insured alone (not the insured's adviser). Acting against your client's instructions and disclosing behind his/her back would be a clear breach of your duty of care to your client, and if this causes financial loss to the client, the client could sue you.
The law has got itself into a pickle, in my view, regarding section 10 of the Insurance Law Reform Act 1977. As you know this says that the underwriter is deemed to know about the valuation, even though you have followed instructions and didn't disclose it in fact. In my view this is a dilemma for underwriters only and does not allow you to disobey your client's instructions. Of course you would be right if you advised your client that even though the valuation is not disclosed, the law says the underwriter is deemed to know of it and so is in a catch 22 situation.
I note an equivalent provision has been carried over, unfortunately, in the new Contracts of Insurance Act 2024. Further there is a section expressly preserving the law relating to the knowledge of fraud in this situation. It is not clear to me whether a broker performing his/her obligations to the client (including advising the client that the valuation is material and should be disclosed) would be viewed by a court as being fraudulent when instructed by the client to not disclose the valuation. This seems to be an unsatisfactory provision, not properly thought through.
