Let clients decide over unrated insurers, brokers told

Commercial lines brokers who only recommend rated carriers to their clients could find themselves in trouble after an intermediary faced litigation for not recommending cheaper but unrated solicitors’ professional indemnity. 

It is understood the broker settled out of court for £100,000. The case is the latest twist in the debate over the use and recommendation of unrated insurance. 

It follows concerns raised in the aftermath of the collapse of a series of unrated carriers, most recently Danish carrier Qudos, which went into liquidation in November 2018, entering into an agreement with run-off provider DARAG that it would continue to serve existing policyholders. 

The deal offered more certainty than had been the case when fellow Danish insurer Alpha filed for bankruptcy in May 2018, leaving taxi drivers and small businesses among those left suddenly uninsured and unable to work.

“Brokers should be aware that there are occasions when a client is happy to accept ‘unrated’ insurers,” says Roger Flaxman, chairman of Flaxman Partners. 

“In some cases it may not be wise to use them, and the broker may not want to offer that security, but the client is entitled to make that choice if it knows and accepts the risks.”

Flaxman adds: “The broker should be sure that the client is fully aware of the broker firm’s policy on the use of ‘unrated’ insurers. 

“That is not best done by a paragraph in the terms of business agreement because the client will probably not notice it, and the courts are aware of that impediment and do not regard it as a defence for a broker.

“If the broker has not established through a demands and needs/know your client process, what the client’s own opinion is about use of ‘unrated’ insurers and explained the pros and cons of the risks, then the broker could be exposed to a claim for not using them, if to do so would have met the client’s demands and needs.”

In a challenging economic climate, price is inevitably favoured by some commercial insurance buyers over quality and breadth of cover. 

This makes it more difficult for brokers to ignore cheaper cover that may be available via unrated carriers, with many also offering cover for distressed risks, such as solicitors’ professional indemnity, care home liability, waste and recycling, and commercial properties with exterior flammable cladding. This is cover that may not be available elsewhere in the market.

On the other hand, brokers that recommend overstretched carriers could be considered to have failed in their duty of care to clients if they did not make them aware of the potential risk. 

The Biba Litmus Test is a facility to help brokers assess the robustness of the 30 unrated carriers most often used by its members.