Insurance brokers’ negligence: the approach to causation

The court has provided useful clarification on the approach to causation in claims against insurance brokers, in particular what a claimant has to prove in order to succeed in establishing whether the negligence deprived the claimant of an indemnity from the insurer.

Background

The claimant’s claim against the placing broker related to non-payment and avoidance of insurance by insurers following a fire at a waste recycling facility in Cheshire.

In September 2010, the tenant and the freehold owner instructed the broker to obtain property and plant and machinery cover in respect of the property. For the 2011/2012 year, various covers were placed with Insurer 1 and Insurer 2 for the freehold owner and tenant company’s benefit.

In February 2012, Insurer 1 gave notice to cancel the policies it had written because the risk was deemed to be unacceptable. The cover placed with Insurer 1 subsequently lapsed and replacement cover was immediately incepted with Insurer 3. Insurer 3 subsequently carried out a survey of the property and identified a breach of the External Storage Condition in the policy.

In July 2012, the tenant company ceased trading and a new company (with the same directors) took over the tenant’s goodwill, premises and the bulk of plant and machinery. The broker was asked to ensure that the tenant’s existing liability and property damage policies were transferred to the new company.

In October 2012, following a significant fire, the tenant and freehold owners both made claims under their policies. After investigations, Insurer 3 sought to avoid liability on the grounds of misrepresentation as to the insolvency of the tenant company and breach of the External Storage Condition. Insurer 2 sought to avoid liability on the grounds of misrepresentation and non-disclosure in relation to warnings and notices received by the tenant company from the Health and Safety Executive and the Environment Agency, and non-disclosed historic fires at the property.

The claimant subsequently brought a claim against the broker pursuing five heads of claim for various breaches of duty and negligence. The claimant chose not to challenge the insurers’ refusals to pay the claims.

Breach of duty

Insofar as relevant to the issues in the case, a broker’s duties when arranging insurance cover include advising the client on the type and scope of cover needed and having regard to the obligations of disclosure to the insurer. With regard to disclosure, if the broker is actually made aware of material facts there is a duty to the client to disclose them. The broker must also take reasonable care to advise the client of the existence of the duty of disclosure and assist the client in identifying matters that need to be disclosed (Jones v Environcom, 2010).

The five allegations made against the broker were:

(A) failure to disclose to Insurer 3 what the broker had been told about the tenant’s insolvency and/or making a misrepresentation to Insurer 3 about that insolvency;

(B) giving inadequate advice in relation to Business Interruption cover;

(C) giving inadequate advice in relation to loss of rent cover;

(D) giving inadequate advice about the existence and/or effect of the External Storage Condition in the Insurer 3 policy; and

(E) failure to give disclosure of what they knew and/or giving inadequate advice in relation to the matters which should be disclosed to Insurer 2.

The judge found on the evidence that there had been a breach of duty by the broker in respect of (1) allegation A by referring only to a ‘change in the trading name’; (2) allegation C because loss of rent was known to be a key risk; and (3) allegation E in relation to HSE and EA notices, and previous fire incidents (which, the judge said, was “the type of question that a broker ought to ask of a client in respect of a policy which covers property damage caused by fire”).

Causation

The judgment provides important clarification of the test for causation where, as in this case, the claimant argues that as a result of the broker’s negligence it has been deprived of indemnity under the policy. The claimant argued that the correct approach was a loss of chance basis, and that it was not necessary for it to prove that a claim for indemnity under the policy failed solely as a result of the broker’s negligence. The judge said that such an approach would produce “potentially anomalous results”.

In summary, the principles that the court laid down for assessing causation were:

• It had to be decided on the balance of probabilities whether an insured’s claim against its insurer would have failed due to the broker’s negligence.
• If the broker’s negligence had caused an insured’s position to be unclear due to some form of compromise with the insurer, then it was open for the insured to pursue the broker for the difference between the compromise and the indemnity.
• In circumstances where it was argued that the insured’s claim against the insurer would have failed for another reason (not due to the broker), the court will examine this on a balance of probabilities basis. If, following that assessment, there was a chance the insurer would not have enforced its right to refuse an indemnity for that reason, then the court will approach the assessment of damages on a loss of a chance basis.

Applying this approach, the judge found that only one of the broker’s breaches satisfied the causation test - in relation to allegation E. The judge concluded that, if asked specifically by the broker, the claimant would have revealed material information relating to historic (non-notified) incidents of fire and that “if there had been disclosure of these matters [Insurer 2] would at least have adjusted its terms”. In relation to the other breaches, the judge found that (1) there was no cover available under the policies written by Insurer 3 in any event (allegation D); and (2) it was unlikely that the freehold owner would have taken out loss of rent cover, even if offered (allegation C).

The judge awarded damages to the claimant in respect of the plant and machinery costs, for which an indemnity was claimed under the policy written by Insurer 2.

Comment

This case reaffirms a broker’s duty to advise an insured regarding the duty of disclosure, following the decision in Environcom. The case also affirms the correct approach to causation, that being whether (on a balance of probabilities) a policy is voidable, or indemnity declined, for reasons other than a broker’s negligence, and not simply that the negligence had ‘impaired’ an insured’s chance to make recovery under a policy (as was argued by the claimant).

The case also confirms that “if there is a non-disclosure which induces a variation of an insurance, the ordinary position is that the variation is avoided, not the cover, which survives as unamended”.

The decision is a move away from arguments based on existing case law (FNCB v Devanney, 1999) that, to claim against a broker, it is sufficient to show that an insurer has a reasonably arguable ground to defend liability. In this case, the guidance is that the assessment whether a broker is responsible for the insurer refusing the claim will be determined on a “yes/no basis” on the balance of probabilities both in relation to elements the broker is responsible for and those it is not. In the circumstances, and particularly where the insurers are not a party to the action, causation will be a hot bed for evidential argument and will likely require witness evidence. It also remains to be seen how this will interact in practice with the provisions of the Insurance Act 2015 and the proportional remedies stipulated by the Act.

Further Reading

Dalamd Limited v Butterworth Spengler Commercial Limited [2018] EWHC 2558 (Comm).

Jones v Environcom Limited [2010] EWHC 759 (Comm).