In Dalamd Limited v Butterworth Spengler the Court considered allegations made by 2 insureds that, as a result of their insurance broker’s negligence, they had lost the chance to receive an indemnity for losses they had suffered in a major fire. In his judgment Butcher J. made important statements of principle regarding the proper approach to causation in such claims, and in particular (a) what an insured has to prove to succeed in a claim, and (b) what an insurer has to prove to defend the claim. The decision is essential reading for anyone acting for, or against, an insurance broker.
Neil Hext QC of 4 New Square acted for the successful claimant insured. The decision, and its implications, are considered by Ben Elkington QC of 4 New Square.
SUMMARY OF THE FACTS
The key facts, simplified for convenience, may be summarised as follows.
A company called Widnes Land Partnership LLP (“the Freeholder”) was the freehold owner of a waste recycling facility in Widnes, Cheshire. It had the benefit of buildings insurance with Aviva, which was arranged by the defendant broker Butterworth Spengler Commercial Limited (“the Broker”).
The recycling facility was operated by JL Sorting Limited (“the Operator”). It had the benefit of plant and machinery insurance with XL London Market Ltd (“XL”), which was also arranged by the Broker. The Operator was a ‘phoenix company’ which purchased the business of a company which had gone into liquidation.
On 21 October 2012 there was a substantial fire at the recycling facility which destroyed the buildings, plant and machinery on site.
Following the fire the Freeholder made a claim on its insurance with Aviva. However, Aviva refused to pay the claim on the grounds that (a) the Freeholder was in breach of an External Storage Condition in its policy, and (b) the policy was voidable for non-disclosure of the fact that the Operator was a phoenix company.
The Operator also made a claim on its insurance with XL. However, XL refused to pay the claim on the grounds that it was entitled to avoid the Operator’s policy for misrepresentation and non-disclosure relating to a variety of matters.
By the time of trial, both the Freeholder and the Operator had assigned their claims against the Broker to Dalamd Limited, which is the reason why that company is the named claimant.
Neither the Freeholder nor Operator commenced proceedings against their insurers. Instead their assignee proceeded to sue the Broker.
The Freeholder alleged that the Broker was responsible for the grounds of declinature relied upon by Aviva because (a) the Broker failed to give it adequate advice in relation to the meaning and effect of the External Storage Condition, and (b) the Broker failed to give it adequate advice regarding the duty of disclosure.
In response, the Broker denied that it was in breach of duty, and asserted that the Freeholder had no valid claim under the Aviva policy because it was in breach of the External Storage Condition.
The Operator also alleged that the Broker was responsible for the grounds of declinature relied upon by XL, because the Broker had failed to give it adequate advice in relation to the duty of disclosure.
In response, the Broker denied that it was in breach of duty, and denied that XL was entitled to avoid the Operator’s policy.
Thus the case involved the different positions that may be adopted by a broker: first, asserting that the insured had no cover (but for a reason for which the broker was not to blame); second, asserting that the insured did have cover (and thus had suffered no loss).
THE JUDGE’S FINDINGS
Breach of Duty
The Judge accepted that the duties of a broker are accurately set out in Chapter 16 of Jackson & Powell on Professional Liability. He accepted some of the allegations of breach, but rejected others.
The Judge rejected the Freeholder’s allegation that the Broker had failed to give it adequate advice regarding the External Storage Condition. However, he found that the Broker had breached the duty it owed the Freeholder in relation to the duty of disclosure.
So far as the Operator’s claim was concerned, the Judge found that the Broker had failed to give the Operator adequate advice in relation to the duty of disclosure.
Causation – the proper approach
The parties disagreed on what was the proper approach to questions of causation in this type of claim. Where an insured claims that, as a result of its broker’s negligence it has lost the chance to receive an indemnity from its insurer, which matters fall to be decided on the balance of probabilities, and which fall to be decided on a loss of a chance basis?
Having had the benefit of “the citation of a considerable number of authorities” the Judge reached the following conclusions.
First, to succeed in its claim against the broker, the insured must show that its claim against its insurer would have failed as a result of the broker’s negligence. Thus the Court had to decide, on the balance of probabilities, whether the insured’s claim against the insurer would have failed. This is a Yes / No question. If the insured’s claim against the insurer would have failed, then the insured has proven what it needs to prove. If, however, the Court reaches the conclusion that the insured’s claim against the insurer would not have failed then (however arguable the insurer’s position might have been) the insured’s claim against its broker would fail.
The Judge considered and rejected Dalamd’s submission that it was sufficient for the insured to prove that the broker’s negligence had provided the insurer with a reasonably arguable ground to defend liability. He also rejected the argument that (were that sufficient) the broker’s position would be adequately protected by its ability to assert that the insured had failed to mitigate its loss if it chose not to sue its insurer (if the insurer’s position was very weak).
Second, the Judge stated that the position was different where the broker’s negligence had caused the insured’s position to be uncertain, with the result that the insured had entered into a reasonable settlement with the insurer. In that scenario it is open to the insured to sue the broker for the difference between the amount of the settlement and the full claim under the policy, without having to prove that the insurer’s defence for which the broker was responsible was a good one.
Third, the issue of whether or not there was some other reason why the insurance would not have provided an indemnity (for which the broker was not responsible) also fell to be decided on the balance of probabilities, rather than on a loss of a chance basis. If the Court decided that the insured’s insurance would not have responded in any event (i.e. for a reason for which the broker was not to blame) then, subject to a fourth point, the insured’s claim would fail.
The fourth point applies where there is a chance that, despite its strict legal rights, the insurer might not have refused the insured’s claim for a reason for which the broker was not to blame. In this scenario, damages did fall to be assessed on a loss of a chance basis, reflecting the chance that (absent the broker’s negligence) the insurer would have paid some or all of the claim, notwithstanding its strict legal right to decline an indemnity.
Causation – application to the facts
So far as the Freeholder’s claim was concerned, the Judge found that there was a breach of the External Storage Condition, which entitled Aviva to decline the claim. Therefore the Freeholder’s claim failed, because the broker was not negligent in relation to that ground of declinature. The Judge found that there was no chance that (absent the Broker’s negligence relating to the duty of disclosure) Aviva would have paid some or all of the claim despite the breach of the External Storage Condition.
So far as the Operator’s claim was concerned, the Judge found that the non-disclosures by the Operator for which the Broker was responsible were sufficient to entitle XL to avoid the Operator’s policy for material non-disclosure. While there were some additional non-disclosures for which the Broker was not responsible, these did not provide valid grounds entitling XL to avoid the policy.
The result was that the Freeholder’s claim for damages for the loss of an indemnity from Aviva failed. However, the Operator’s claim for damages for the loss of an indemnity from XL succeeded. It therefore recovered damages in the amount of the value of its lost plant and machinery, namely £1,600,000.
The Dalamd decision calls for a binary approach to claims against brokers. The Court will have to determine, yes or no, whether grounds for which the broker was responsible entitled the insurer to refuse to pay the claim: if they did not, then the claim against the broker will fail. The Court will also have to determine, yes or no, whether grounds for which the broker was not responsible entitled the insurer to refuse to pay the claim: if they did, then (in the absence of any evidence the insurer would have chosen not to rely on its strict legal rights) the claim against the broker will also fail.
Such a binary approach is straightforward when the insurer is also a party to the proceedings (as the issues will be resolved as between the insured and the insurer). However, it may be difficult to apply in cases where the insurer is not a party to the proceedings. That is particularly so where issues of non-disclosure and misrepresentation arise, the determination of which depends on the evidence of individual underwriters, who are unlikely to be willing witnesses in proceedings between insured and broker. The issues will be even more complicated in cases governed by the Insurance Act 2015, where the issue of avoidance is no longer black and white, and proportionate remedies will fall for consideration.
The upshot is that (in the absence of an appropriate admission by the broker) unless the insurer’s position is overwhelmingly strong, it will be a risky strategy for an insured to bring proceedings against the broker alone. If it does so, it risks failing in its claim entirely, even if the Court is satisfied that the insurer’s position was well arguable. The safer course will be for the insured either (a) to reach a justifiable settlement with the insurer before suing the broker alone, or (b) to sue both the insurer and the broker, although that exposes it to the risk of having to pay at least one party’s defence costs.
Keywords: Brokers’ negligence