Case Summary: Duraguard Fence Ltd v Badry

An insurance broker who fails to consider the insured's loss history, the foreseeable claims and arranged for appropriate coverage was held to have breached its legal duty to arrange appropriate crime coverage for the insured may be liable for breach of their duty of care. The Court accepted that employee dishonesty coverage is “core” to a commercial policy and the need for it should be assessed properly, even if some insurers consider it to be a “throw in” coverage.

Duraguard Fence Ltd v Badry,2019 ABQB 783, per Mah J.

Facts + Issues

The Defendant Howard, Douglas Farnell Insurance Services Ltd (“HDF”) was an insurance brokerage firm. The Defendant Farnell was one of its principals. The Plaintiff Duraguard Fence Ltd. (“Duraguard”) was a customer of HDF. Its sole principal was Champigny. Champigny relied on Mr. Farnell's expertise and followed his recommendations.

Farnell switched Duraguard's insurer. All discussions of Duraguard's insurance requirements focused on its physical assets. There was no discussion of employee dishonesty. Champigny did not disclose an incident involving an employee who uttered two forged cheques totalling $8,000. On the switch to the new insurer, the limits for all categories of crime coverage, including employee dishonesty, were reduced from $10,000 to $5000. It appears this reduction was not discussed with Champigny and that, if Mr. Champigny noticed, he went along with it as he did all of Farnell's recommendations.

One of Duraguard's employees committed credit card fraud. The total loss was eventually determined to be $589,000. Farnell assured Champigny that the loss would be covered. In fact, unknown to Farnell, the $5,000 limit was an aggregate rather than per occurrence limit. The insurer Peace Hills issued a cheque to Duraguard for $5,000.

The issue was whether Farnell breached either his duty of care or his fiduciary duty by failing to assess Duraguard's insurance needs and secure proper insurance with respect to employee dishonesty.

Both sides called experts on the relevant practices in the insurance industry. The Defence expert (MacWilliams) opined that dishonesty coverage was typically treated as a “throw in” for Commercial General Liability policies. However, the insured's expert testified that “crime coverage is 'core' to a commercial policy”.

HELD: For the Plaintiff; judgement for $243,500, representing the likely coverage amount ($250,000) for enhanced employee dishonesty coverage less the amount...