18 February 2016

Insurance broker avoided claim for compensation of more than DKK 1.7 million despite insufficient advice

In a recent ruling, the Eastern High Court stated that insurance advice which is not in accordance with the Executive Order on the good practices of insurance brokers may form the basis of a claim for compensation. However, in the specific decision, the insurance broker's insufficient advice had not resulted in the client's loss. The client was therefore not awarded compensation from the broker.

A client had asked for advice from a broker as the client considered changing his pension from an investment product with a guaranteed interest to a 100 % share-based investment product, and as a consequence of the broker's advice, the client chose to change the pension.

However, the broker only provided the client with insufficient information about the economic risks of the change, and the client was also not presented with a proposal clarifying the economic risks of the change. 

On this basis, the High Court found that the broker's advice did not meet the requirements of section 8 (1) and (2) of Executive Order no. 1253 of 24 October 2007 on the good practices of insurance brokers, and the broker was therefore liable for the client's loss.

But as it was difficult to calculate the client's loss - and despite a comprehensive expert opinion - the High Court found that it had not been substantiated that the client would have had a larger pension saving if the pension had not been changed. The client had therefore not substantiated an economic loss and, consequently, the High Court ruled in favour of the broker.

GUIDELINES CONCERNING INSURANCE BROKERS' PROFESSIONAL LIABILITY?

Insurance brokers' professional liability is assessed based on a professional liability standard. This standard is of course significantly influenced by the rules on fair practices within the area, and, not surprisingly, the High Court attached significant importance to the Executive Order on the good practices of insurance brokers. The Executive Order lays down specific minimum requirements for insurance brokers, and in particular section 8, subsections (1) and (2) serve as a guideline for broker liability in cases on insurance brokerage.

"Insurance brokers must prepare an analysis and description of the client's risks, in particular based on the client's own information.

Sub-section 2. Insurance brokers must present to the client in writing or another permanent medium any possible solutions clarifying the client's risks and justify the advice provided concerning these solutions. Further, insurance brokers must present a calculation of the economic consequence of the provided solutions."

In other words, an insurance broker must prepare a risk profile to the client, and the clients must also be clearly notified and advised through a permanent medium.

A connection does not necessarily exist between a violation of the Executive Order and the insurance broker's liability in damages, but the High Court ruling illustrates this is very often the case. However, the ruling also demonstrates that the insufficient advice must have caused an economic loss, and that the burden of proving that loss rests on the client.

COMMENTS

First of all, the ruling specifies the framework of insurance brokers' professional liability as the rules of the Executive Order on the good practices of insurance brokers lay down the standard of what is normally to be expected from an insurance expert.

Secondly, the ruling illustrates the well-known difficulties of substantiating an economic  loss in connection with investment advice, which will often be subject to substantial uncertainty due to the unpredictability and variability of the securities market.

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