Reprinted with permission from the Insurance Brokers Association of Alberta’s magazine – The Alberta Broker (January 2020)
Over a period of six years, Elaine Badry stole over $500,000 from her employer, Duraguard Fence Ltd. (“Duraguard”). Bit by bit, the ‘well-liked’ employee processed numerous fraudulent refund transactions into accounts that she held or controlled.[1] When her employer discovered her scheme, Ms. Badry was charged and convicted with fraud. She was sentenced to three years in jail, and the Court ordered her to pay $250,000 in restitution.
In response to its loss, Duraguard started a lawsuit. In addition to naming Ms. Badry, Duraguard also named its insurance broker and brokerage on the basis that the broker failed to assess its insurance needs and failed to place proper insurance against employee dishonesty such that Duraguard had been unable to recover insurance proceeds for Ms. Badry’s crime. In October 2019, Justice Douglas Mah rendered his judgment in the matter of Duraguard Fence Ltd v Badry,[2] holding the broker and brokerage liable for nearly $250,000 of Duraguard’s loss.
The Facts
According to Justice Mah’s decision, Duraguard relied greatly upon the expertise of its broker to secure the right kinds of commercial insurance. The principal of Duraguard was known to follow the broker’s recommendations and to pay the associated costs without question. The broker’s relationship with Duraguard began with a meeting with its principal to get a clear understanding of the business’s activities, looking into things like building uses, fire protection, assets, revenue, number of employees, and the nature of the business generally. Prior to yearly renewals, the broker would arrange a meeting to discuss any changes to Duraguard’s needs.
Historically, Duraguard experienced some incidents of crime. At one point, it had a $7,000 piece of equipment stolen from its yard. At another point, an employee forged two company cheques for $4,000 each (although that incident resolved quickly with a confession and the amounts being paid back). The former had been disclosed to the broker, but not the latter. For the most part, insurance discussions between Duraguard and the broker focused on the company’s physical assets without venturing into employee dishonesty.
In 2004, the broker switched Duraguard’s insurer from Aviva to Peace Hills, and the limit for crime coverage reduced from $10,000 to $5,000, as Peace Hills did not have any $10,000 package for such coverage. The broker considered the reduced limit sufficient for Duraguard’s business.
The broker’s usual practice following each renewal was to provide a binder containing the policies and a plain-language executive summary of the coverages. The broker would encourage customers to review the binder. Duraguard’s principal stated that he might have reviewed the broker’s summary, but he would not have read the policies: “he relied on and trusted [the broker] to take care of Duraguard’s insurance needs”.[3]
Then, in the spring of 2007, Duraguard discovered Ms. Badry’s fraudulent transactions. Eventually, Duraguard learned that Ms. Badry had stolen approximately $589,000. When it reported the loss to the broker, the broker assured Duraguard that the loss would be covered.
Unfortunately, this was not the case. It turned out that Peace Hills’ limit was an aggregate limit and that all of the transactions would be treated as one occurrence. Accordingly, it paid out its $5,000 limit and was done.
The Law
Unsurprisingly, Duraguard looked to the broker and brokerage for compensation for its loss (i.e. the amount of the fraud loss that was uninsured), which Duraguard said would not have occurred if the broker had properly placed the necessary coverage. Its primary argument was that the broker had negligently breached its duty of care.
Justice Mah referred to the central authorities that define the scope of the insurance broker’s duty of care: the Ontario Court of Appeal’s 1977 decision in Fine’s Flowers Ltd v General Accident Assurance Co of Canada[4] and the Supreme Court of Canada’s 1990 decision in Fletcher v Manitoba Public Insurance Company.[5]
In Fine’s Flowers, the plaintiff company operated a greenhouse that lost its crops when a broken water pump caused the greenhouse’s heating system to shut down. The plaintiff’s insurance claim was denied for lack of coverage, and the plaintiff sued the defendant insurance agent on the basis that the agent had negligently failed to place the proper coverage for the loss. The Ontario Court of Appeal affirmed the agent’s liability for failing to obtain insurance for the water pumps and for failing to obtain the full coverage that the plaintiff requested. The Court’s comments on the scope of the agent’s duty are worth quoting in full:
In many instances, an insurance agent will be asked to obtain a specific type of coverage and his duty in those circumstances will be to use a reasonable degree of skill and care in doing so or, if he is unable to do so, “to inform the principal promptly in order to prevent him from suffering loss through relying upon the successful completion of the transaction by the agent”.
But there are other cases, and in my view this is one of them, in which the client gives no such specific instructions but rather relies upon his agent to see that he is protected, and if the agent agrees to do business with him on those terms, then he cannot after wards, when an uninsured loss arises, shrug off the responsibility he has assumed. If this requires him to inform himself about his client’s business in order to assess the foreseeable risks and insure his client against them, then this he must do…
I do not think this is too high a standard to impose upon an agent who knows that his client is relying upon him to see that he is protected against all foreseeable, insurable risks.[6]
In Fletcher, the Supreme Court of Canada considered the duty of care owed by Manitoba’s public insurance corporation. There, the plaintiffs had requested the maximum coverage available, and it was not until they had been injured in an accident with an under-insured driver that they discovered the under-insured motorist coverage had not been put in place. In assessing the scope of the duty of care of public insurers, the Court considered the duty owed by private insurance agents and affirmed the Ontario Court of Appeal’s decision in Fine’s Flowers, saying:
[I]t is entirely appropriate to hold private insurance agents and brokers to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client. Subtle differences in the forms of coverage available are frequently difficult for the average person to understand. Agents and brokers are trained to understand these differences and to provide individualized insurance advice. It is both reasonable and appropriate to impose upon them a duty not only to convey information but also to provide counsel and advice.[7]
Against this legal backdrop, Justice Mah assessed whether the broker’s conduct met the standard of care and found that he breached his duty to Duraguard. In particular, the broker had failed to discuss the adequacy of the $5,000 limit for employee dishonesty (knowing, as he did, that a much higher limit could be obtained, if necessary). Although the broker was unaware of the incident with the forged cheques, the broker had been aware of the equipment theft, and even this one occurrence, according to Justice Mah, should have made the broker doubt the adequacy of the $5,000 limit. Further, if the broker had simply asked about previous employee dishonesty, he would have been told about the forged cheques, which, again, showed the inadequacy of the limit. As such, “as an experienced broker he should have known that slavish reliance on a present package with a $5,000 crime limit was inappropriate”.[8]
In addition to failing to “properly inquire into and assess Duraguard’s crime risk, and in particular [the] risk of employee dishonesty,” the broker breached his duty by “failing to determine whether the $5,000 limit was an aggregate or per occurrence amount prior to placing it and failing to investigate other options for Duraguard for crime coverage”.[9]
In Justice Mah’s opinion, “It does not seem onerous … 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”.[10]
Concluding his analysis, Justice Mah was satisfied that the broker’s breach was the cause of the under-insurance loss. Had the broker clarified that the $5,000 limit was an aggregate, he would have concluded that the limit was insufficient, given the history of crime loss; and further, Duraguard’s preference for coverage despite the cost meant that Duraguard would have upped its coverage if it had been given the opportunity. As such, Justice Mah found, based on various factors, that Duraguard would have obtained $250,000 in crime insurance. Deducting the $5,000 already paid by Peace Hills plus a further $1,500 premium that would have been paid, Justice Mah awarded Duraguard a total of $243,500 as against the broker and brokerage.
The Take-Away
Any number of aspects of Justice Mah’s decision in Duraguard could have been discussed further and from various
perspectives, but this review seeks to highlight the decision as the most
recent articulation of the scope of the insurance broker’s duty of care in
Alberta. Justice Mah’s analysis puts a
significant emphasis on the reliance that customers place on their insurance
brokers and the broker’s corresponding obligation to investigate the needs and
histories of their customers. In that
way, the decision aligns with the Supreme Court of Canada’s statements in Fletcher in support of the broker’s duty
to inform both themselves and their customers on relevant risks and coverages. Nevertheless, concerns linger: Is this duty
of care too onerous? Is the burden of
liability fairly placed? How will
brokers properly balance their responsibility to provide coverage that is
responsive to customers’ needs with their own desire to avoid liability for
gaps in coverage?
[1] See “Well-liked woman convicted in $530,000 fraud”, Alexandra Zabjek, Edmonton Journal, 19 Dec 2009.
[2] 2019 ABQB 783 [Duraguard].
[3] Ibid at para 28.
[4] 1977 CarswellOnt 54 (Ont CA) [Fine’s Flowers].
[5] [1990] 3 SCR 191 [Fletcher].
[6] Fine’s Flowers, supra note 4 at paras 43-45 (citations omitted).
[7] Fletcher, supra note 5 at para 61.
[8] Duraguard, supra note 2 at para 52.
[9] Ibid at para 68.
[10] Ibid at para 74.
