Cheap Security, Expensive Lesson
A UK commercial broker places a £2.4m marine hull and machinery risk for a Greek shipowner. London rates are high, so the broker writes 55% with a Lloyd's syndicate and 45% with a Caribbean-based insurer that is neither FCA/PRA-authorised nor a Lloyd's insurer. The client asked in writing for 'London market security throughout'. The placing file contains a rating agency report marking the Caribbean insurer 'B' on negative watch; the broker does not pass it on, and the placing note describes the insurer as 'a long-established specialist marine carrier'. The client is a family-owned single-ship company. Eight months later the vessel is damaged in a collision, the Caribbean insurer pays nothing and goes into liquidation, and the Lloyd's syndicate pays its 55% share of the £1.8m claim. The shipowner complains to the broker and asks about compensation schemes.
1. Assess the broker's conduct against its duties to the client.
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Three failures.
Security. The client asked in writing for London market security throughout; 45% went to an unauthorised Caribbean insurer. The instruction was not met, and the broker should have gone back to the client and obtained documented, informed consent to the alternative - not substituted its own view of value for money.
Disclosure. The broker held a 'B' rating on negative watch and did not pass it on, while describing the insurer as 'long-established specialist'. That is a misleading half-truth. ICOBS requires the broker to disclose the identity, status and material facts about the insurer and to act honestly and in the client's best interests.
Suitability. A single-ship company could not absorb the failure of 45% of its hull cover; the concentration was foreseeable and avoidable.
The Lloyd's syndicate's 55% stands. The client's loss is the missing 45% of £1.8m - £810,000 - and the broker is exposed for it.
2. What compensation routes are open to the shipowner, and which are unlikely to help?
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FSCS - almost certainly no. The Financial Services Compensation Scheme excludes marine, aviation and transport insurance, so a marine hull claim against an insolvent insurer is not a protected contract.
FOS - depends on eligibility. The ombudsman needs an eligible complainant: an individual or a micro-enterprise (broadly under 10 employees and under €2m turnover). A family-owned single-ship company may qualify; if it does not, jurisdiction fails and compulsory jurisdiction is unavailable without consent.
The broker - the real route. A negligence claim and, where the client qualifies as a private person, breach of statutory duty for the FCA rule breaches. This runs through the broker's complaints procedure, then the ombudsman if eligible, then litigation.
The broker should notify its professional indemnity insurer now; a late notification can prejudice the cover it needs.
3. What should the broker have done differently at placement?
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Put it in writing and on the file:
- Either place 100% in the London market as instructed, or obtain a signed waiver for the 45% explaining what the client was giving up.
- Before using an unauthorised insurer, verify its regulatory status on the register, obtain the rating report, send it to the client, explain that marine insurance is outside the FSCS, and record that the client understood and still consented.
- Apply an approved security list or market security committee, with ratings refreshed regularly rather than at renewal only.
- Complete sanctions and financial crime checks on the insurer and its ownership.
- Issue a written schedule naming each insurer, its regulatory status and its share.
None of that is bureaucracy: it is what converts a bad outcome into a defensible one.