When two become one: brokers and the trend for acquisition

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We consider the trend to expand broking businesses by acquisitions, and the implications when the broker and sub-broker engaged in the broking process are from the same company.

The brokers' market has experienced tough trading conditions in recent years. One of the most popular strategies adopted by brokers to maintain growth has been through acquisition (Mazars’ Survey of Brokers 2011), of which there have been 300 plus in the last eight years (Keith Stern UK and Ireland Regional Manager Lloyd’s Market presentation 4 December 2012).

This trend looks set to continue, and could have wider implications where the broker and the sub-broker engaged in the placement process are from the same company. This can happen where, for example, a producing broker retains a placing broker.

Duty of care to third parties

The original broker is the agent of the insured/reinsured and generally there is no privity of contract between the sub-broker and the insured/reinsured. While the original broker is liable to the insured/reinsured for any breach of duty on the part of the sub-broker, the courts have recognised that a sub-broker may owe a duty of care in tort to the insured/reinsured if there is a sufficiently close relationship between them. This may give rise to issues of apportionment of liability between the broker and the sub-broker. In Youell v Bland Welch & Co Limited (No 2), the producing broker failed to advise the reinsured about the time limit on its reinsurance cover which had been negligently obtained by the placing broker because it expired before the underlying cover. The producing broker and the placing broker were held to be equally responsible for the negligent placing of the reinsurance.

Assumption of responsibility

In BP v Aon Plc, BP retained Aon Texas to place its “all risks” cover for its worldwide oil and gas construction projects. Aon London was instructed to place part of the risk in the London market. There was extensive direct contact between BP and Aon London. BP was entitled to infer from what was said and done by Aon London that it was providing its professional services to BP, and that Aon London could be relied upon as assuming responsibility to provide those services. This was despite the existence of a service agreement between BP and Aon Texas governing the scope of the broking operations and any contractual relationship between BP and Aon London.

Comment

Where an issue arises regarding the validity of the cover or the scope of the terms obtained, the finger of blame inevitably points at the brokers. If (for whatever reason) the broker and the sub-broker are part of the same broking house but do not have the benefit of cover under the same E&O policy, this could lead to a politically fraught state of affairs. For example, the E&O insurers of a producing broker may take a different view on the conduct of the defence of the third party claim and blame the placing broker; involving a detailed analysis of the placing broker’s activities on file and the steps taken by the producing broker to monitor them. In those circumstances, issues will inevitably arise concerning the dissemination of privileged information within the organisation and the extent to which information barriers can best protect against its disclosure.

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