INSURANCE BROKERS:
SOME TOPICAL ISSUES RELATING TO CAUSATION & LOSS
Ben Elkington, 4 New Square.
Causation.
1.
As a result of (i) the high standards expected by the courts of insurance brokers, and (ii)
the low standards usually encountered in practice, the typical broker is vulnerability to a
finding of breach of duty. As a result, the issue of causation requires particularly careful
attention when considering a claim against a broker.
2.
In a standard claim against an insurance broker the claimant alleges that, but for the
broker’s negligence, he would have had the benefit of a policy of insurance that
responded to his loss, and that he has lost the payment he would have received from his
insurer. Such a claim presents a number of obvious causation defences.
Defences based on the claimant’s conduct.
3.
The first category of defence focuses on the claimant’s conduct. If the claimant had been
properly advised, would he really have had the benefit of effective insurance? So, for
example, where it is alleged that the broker failed to advise the insured of a particular
condition precedent in the policy which the insured later breached, the broker can allege
that the insured would not have complied with that precedent in the policy even if made
aware of it. Such defences are fact specific and straightforward.
4.
In appropriate circumstances the claimant’s conduct may amount to a break in the chain
of causation. For example:
a)
Brokers frequently complete proposal forms, and frequently do so inaccurately.
Sometimes this allows the insurer to avoid the policy for misrepresentation or
non-disclosure. If the insured was aware of the error or omission in the proposal
form when he signed it, then there will be a break in the chain of causation (J W
Francis & Co v Kapur [1999] Lloyd’s Rep PN 834).
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b)
In a recent case the claimant insurer sued the broker who had arranged its
reinsurance. The insurer decided to make payments to its insured when it had no
legal liability to do so, and when it knew that the reinsurer disputed the validity of
the insured’s claim. It was held that the true cause of the claimant’s loss was its
own decision to make payments to its insured rather than its broker’s breach of
duty (HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd [2007]
EWCA Civ 0710).
Failure to sue the insurer.
5.
Where there is insurance in place but the insurer refuses to pay the claim, the insured will
have to decide whether to sue the insurer, broker, or both. If the insured decides only to
sue the broker, can the broker defend the claim on the basis that the insured’s failure to
sue the broker was the true cause of its loss?
6.
If the broker can show that the point taken by the insurer really was hopeless, then it will
have a good defence (e.g. Gaughan v McDonagh & Co Ltd [2007] EWCA Civ 1115). As
a matter of analysis it can be said that the true cause of the claimant’s loss was his own
failure to challenge the insurer’s bad rejection of the claim. Additionally, it can be said
that the broker’s duty does not extend to protecting its client against the risk that the
insurer will refuse to meet a claim without good grounds for so doing, and that such
losses are not reasonably foreseeable.
7.
More commonly, however, it will be difficult to show the insurer’s position was hopeless.
The difficulty faced by the broker is that the broker’s duty extends to protecting the
insured against the unnecessary risk of litigation. Therefore if the insurer has refused to
meet a claim, the insured can claim damages on the basis that the broker was negligent,
the insurer has refused to pay up and therefore it has suffered a loss. As long as the
position taken by the insurer is not “spurious” (Standard Life Assurance Ltd v Oak
Dedicated Ltd [2008] EWHC 222 (Comm) (Tomlinson J)) then the broker’s defence will
fail.
8.
In such a scenario there is an alternate option for the broker, viz to join the insurer as a
third party to the proceedings seeking a declaration that the insured is entitled to an
indemnity under the policy. In Dunlop Haywards (DHL) Erinaceous Insurance Services
Ltd [2009] Lloyd’s Rep 464 the Court of Appeal held that an insurer could be joined
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pursuant to rule 19.2 in these circumstances. If such a declaration is granted, then the
claimant will recover from the insurer, and there will be no loss to claim from the broker.
Under-settlement with the insurer.
9.
Frequently a broker will find that by the time it is sued the insured has reached a
settlement with the insurer. What then? Can the broker defend the claim on the basis that
the true cause of the claimant’s loss was its unreasonably low settlement with the insurer?
10.
In principle, such a defence is available, but it is unlikely to succeed. The defence was
recently advanced in Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011]
EWHC 124 (Comm) (Blair J.). The law is as follows:
a)
The court’s task is not to reach a conclusive judgment on the merits of the
insured’s claim against the insurer. Instead its task is to decide whether the
settlement was reasonable.
b)
If the terms of settlement with the insurer were entered into upon legal advice,
then the terms are taken to be prima facie reasonable. It is then for the broker to
displace that inference by showing, for example, that some vital matter was
overlooked.
c)
The question is whether the settlement was, in all the circumstances known at the
time the settlement was concluded, within the range of settlements which
reasonable men might have made.
11.
Given the unhappy position that insureds typically find themselves in when an insurer has
refused to meet a claim, it will usually be very difficult for a broker to persuade the court
that the insured’s settlement was not within the range of settlements that a reasonable
insured might have entered into.
Defences based on the insurer’s hypothetical conduct.
12.
It is often the case that there are 2 grounds on which the insurer was entitled to decline an
insured’s claim, and that the broker is only responsible for one of those grounds.
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13.
For example, the broker’s negligence may have meant that the insured was in breach of a
policy term, but the broker may be able to show that the whole policy was voidable for
material non-disclosure in any event. In such a case can the broker defend the claim on
the basis that the insured would not have received any payment from the insurer in any
event? In other words, can the broker say that, even if it had given the insured full advice
so that it was not in breach of the policy term, no payment would have been received
because the policy would have been avoided?
14.
There is now a long line of cases which has considered such a defence. The approach
taken by the court is to assess the insured’s damages on the loss of the chance basis, i.e. it
assesses the insured’s chance of having made a recovery from the insurer absent the
breach of duty. As a result, the insured almost always recovers some damages from the
broker even if (as a matter of law) it was not entitled to a payment from the insurer due to
a reason for which the broker is not responsible. Damages are assessed by taking the sum
payable under the policy and discounting it to reflect the chance that no payment would
have been received even if the broker had acted competently (e.g. Fraser v BN Furman
(Productions) Ltd [1967] 1 WLR 898; Dunbar v A&B Painters Ltd [1986] 2 Lloyd’s Rep
38).
Where the insured event would not have occurred if the broker had not been negligent.
15.
It will often be the case that, if the broker had acted with due skill and care, then the event
which has caused the insured a loss would not have occurred. For example:
a)
A broker is negligent in failing to advise a business of a policy condition requiring
24 hour guarding of a site. There is then a theft when the property is left
unattended. It might be argued (by either the insured or the broker) that, had the
insured known of the condition then he would have ensured the site was attended,
and the theft would not have occurred.
b)
A broker is negligent in failing to advise the insured of the insurer’s requirement
that all portable heaters needed to be removed from a premises. A fire is then
caused by such an appliance. It might be argued (by either party) that, if properly
advised, the insured would have ensured that all such appliances were removed
and thus the fire would not have occurred.
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16.
Such scenarios give rise to 2 questions. First, does this give rise to a defence for the
broker? Second, if there is no defence for the broker, what damages are recoverable by
the insured?
17.
For example, assume a property owner retains a broker to insurance for his property in the
sum of £5m. The broker does so, but negligently fails to tell him of a condition precedent
in the policy that all portable heaters be removed from the premises. A fire is then started
by such a heater, and the property is destroyed. It transpires the sum insured was
inadequate and the insured’s total loss is £10m. What is he entitled to recover: £10m,
£5m or nothing?
The causation defence.
18.
The broker’s defence runs as follows. If I had advised you of the requirement to remove
all heaters, then you may or may not have removed all heaters:
a)
If you had not removed all heaters, then my failure to advise made no difference.
The fire would have occurred and you would have been uninsured in any event,
because you would still have been in breach of the condition precedent.
b)
If you had removed all heaters, then you would have been insured. However, in
this scenario the fire would not have occurred. Therefore you would not have
received any payment from the insurer, so you have no claim for loss of that
payment. It is true that your property would not have been destroyed, but the
scope of my duty does not extend to protecting you from the risk of suffering a
loss directly caused by an insured peril.
19.
This line of argument was advanced in Nicholas G Jones v Environcom Ltd [2010]
Lloyd’s Rep IR 676. The insured’s business involved the use of plasma guns. A fire was
caused by the use of a plasma gun. The insurer refused to pay up on the basis of the
insured’s failure to disclose its use of the guns. Thus the insured sued its broker.
20.
The broker was found to be at fault in failing to discover that the insured used plasma
guns and in failing to advise that the use of plasma guns be disclosed to the insurer. So
far so good for the insured. However, the judge (David Steel J) went on to find that, had
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the use of plasma guns been disclosed, then it would have been made a requirement of
any policy that the use of plasma guns was prohibited, and the claimant would have
complied with that prohibition. Therefore the fire would not have occurred, and so there
could be no claim for loss of the payment from the insurer. Further, any claim for the loss
caused by the fire itself was not of the type for which the broker was liable.
21.
Thus the claim failed. Applied to the example above, it means that the property owner is
entitled to recover nothing, rather than £10m or £5m.
22.
If this decision is correct, then it will have serious ramifications. It will often be open to a
broker to allege that, had he acted with due skill and care, the peril would have been
avoided. Indeed, the defence will always be available when the broker’s breach was a
failure to advise the insured of the existence of a condition precedent in a policy, when
the breach of that condition caused the peril to occur. Will the decision be followed?
a)
Permission to appeal has been granted, and the appeal is being heard later this
month.
b)
The decision is difficult to reconcile with some previous authorities (Cee Bee
Marine, Mint Security and O&R Jewellers referred to below).
c)
Instinctively it feels wrong. Usually a causation defence alleges that, but for the
breach of duty, the claimant would have suffered the loss in any event. This
defence is the reverse – but for the breach of duty the claimant would not have
suffered any loss. Can it be right that a broker can avoid liability on the basis that,
had it acted with due skill and care, the claimant would not have suffered any
loss?
23.
Identifying exactly why the decision is wrong (if it is) is less straightforward. It might be
said that the assessment of the claim against the broker should assume that the peril has
occurred, and go on to consider whether the policy would have responded but for the
broker’s breach of duty. However, that involves assessing damages on the basis of a
counter-factual which is an impossibility: it seeks to put the claimant in the position it
would have been in if (i) the fire had occurred (because the heaters were not removed)
and (ii) there had been no breach of the condition precedent (because the heaters were
removed).
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24.
One approach would be to say that, since the broker’s duty does not extend to preventing
the occurrence of the fire (so that the broker is not liable for all the consequences of the
fire) it is not open to the broker to defend the claim on the basis that, if it had acted
competently, there would have been no fire. If the broker does not have the burden of a
duty to protect against the risk of fire, it should not be able to take the benefit of a
causation defence based on its hypothetical prevention of the fire.
The proper measure of damages.
25.
Assuming that the broker does not have a causation defence as set out above, what is the
measure of damages? The competing arguments are obvious:
a)
The claimant will say that, if he had been properly advised, he would have
removed all heaters and the fire would not have occurred. Therefore the broker’s
negligence has caused him a loss of £10m, being the loss caused by the peril and
the resulting destruction of his property.
b)
The broker will say that its duty does not extend to protecting the insured against
losses caused by peril. However, if its causation defence has failed, that argument
will fail. The fall back argument must be that the scope of the broker’s duty, and
thus liability, is limited to the extent of the insurance it was instructed to obtain,
viz £5m.
26.
In my view damages should be limited to the sum of £5m. They should be limited to £5m
because the broker’s duty did not extend to protecting the insured against the happening
of the peril and the chance it would suffer a loss by fire. The broker’s duty was limited to
protecting the insured against the chance that it would suffer a loss of up to £5m in
circumstances in which the insured had no insurance cover.
Practical implications.
27.
Whatever the rights or wrongs of Environcom, in any case where there is a possibility that
a peril would not have occurred if the broker had acted with due skill and care, anyone
drafting Particulars of Claim should be careful not to limit the pleading to a claim for the
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loss of the payment that would have been received from the insurer. If the pleading is
limited in that way, then it will be vulnerable to an argument that there would never have
been such a payment. The pleading should include a claim for the losses suffered by the
insured as a result of the happening of the peril.
Where no insurance cover would have been available at all.
28.
A line of argument that raises similar issues to that set out above is the defence that,
whatever the broker had done, no insurance cover would have been available because the
insured was such an unattractive risk. Such an argument was accepted by David Steel J
in Environcom.
29.
In most cases it will be impossible to show that there was no chance at all that insurance
cover could have been obtained. In Environcom the Judge was satisfied that due to the
insured’s history of fires and the nature of its business there was no chance of the
claimant insured obtaining cover at renewal, whatever the broker had done.
30.
A variant of the argument is that, although it would have been possible to obtain an
insurance quote, it would have been so expensive or on such onerous terms that the
insured would not have accepted it.
31.
If such lines of argument are run, to what extent can the insured respond to them by
alleging that, if no cover had been obtained and it had been advised that no cover had
been obtained, then it would have acted differently? It might have acted differently so
that it became possible to obtain insurance. Alternatively, it might have acted differently
so that it remained uninsured, but avoided the loss that in fact occurred.
32.
Such a claim was allowed by the Court of Appeal of New Zealand in Cee Bee Marine Ltd
v Lombard Insurance Co Ltd) [1990] 2 NZLR 1. In that case it was pointed out that a
broker’s duty included not only taking reasonable steps to obtain insurance, but also
reporting to the client if it were not possible to obtain cover.
If the broker could
successfully run the defence that no cover could be obtained, then the client would have
no remedy for the broker’s breach of the obligation to report that no cover could be
obtained.
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33.
The decision in Cee Bee Marine is consistent with the decision of Staughton J in Mint
Security v Blair [1982] 1 Lloyd’s Rep 188. In that case the insured was a security firm
that was robbed of cash in transit. The broker claimed that, had insurers known of the
claimant’s procedures, no cover would have been obtained. The Judge rejected that
defence on the basis that cover would probably have been obtained but that, if no cover
could be obtained, then the insured would not have carried the cash at all so there would
have been no theft or loss.
34.
Cee Bee Marine was applied in England in O&R Jewellers Ltd v Terry [1999] Lloyd’s
Rep IR 436). In that case the claimant was a wholesale jeweller. One of its directors had
a criminal record, which was not disclosed. The policy was avoided following a theft.
The broker was sued for the failure to disclose, and it ran the defence that no cover could
have been obtained owing to the director’s criminal record. The Deputy Judge (Sir
Godfray Le Quesne QC) accepted that if full disclosure had been given, then it would
have been impossible to get insurance cover. However, he held that the assessment did
not end there. Had no cover been available, then the director might have been removed,
so that cover became available. The claimant recovered damages calculated on the basis
of there being a 30% chance of recovering the full amount payable under the policy.
35.
There are, however, limits to the extent to which a claimant can allege that, if the broker
had acted with due skill and care, then the loss in question would have been avoided. The
reason for this is one of foreseeability. An insured is expected to act in the same way as a
prudent uninsured. Therefore, in general a broker cannot be expected to foresee that a
person would have acted more prudently (and thus avoided a loss) if he had appreciated
that he was uninsured (see Sharif v Garrett & Co [2002] 1 WLR 3118).
The recoverability of damages for consequential losses.
36.
In a standard claim against a broker the claimant will be seeking to recover as damages
the amount of the payment he would have received from its insurer if the broker had acted
with due skill and care. But can the claimant also recover damages for the additional
losses he has suffered as a result of the non-receipt of that sum?
37.
Take the typical example of a company that runs a manufacturing business from a
factory. The factory is destroyed in a fire. It is insured for £5m, and will cost £5m to
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rebuild, but the company does not have the money to rebuild without receiving a payment
from its insurer. If the insurer does not pay, loss of profits will be suffered. Even if the
policy contains business interruption cover (typically with a 1 or 2 year indemnity period)
the loss of profits will continue beyond that period if the company has to obtain a
judgment against the broker before it can re-build.
38.
In such a case, are the insured’s damages limited to the amount that would have been
received from the insurer if cover had been effective, or can damages be recovered for the
on-going loss of profits?
Ramwade Ltd v W J Emson & Co Ltd.
39.
Until recently it was well established that if a broker acted negligently in the arrangement
of insurance, then the damages his client could recover were limited to the payment the
client would have received from the insurer if the broker had not acted negligently.
40.
This principle was established by the Court of Appeal in Ramwade Ltd v W.J.Emson &
Co. Ltd [1987] R.T.R. 72 and was applied again in Verderame v Commercial Union
Assurance Co Plc [1992] B.C.L.C. 793.
41.
The facts of Ramwade: The client’s lorry was damaged beyond repair. Owing to his
broker’s negligence, he received no payment from the insurer. He could not afford to buy
a new lorry, so he hired a replacement instead. He sued the broker. He alleged that if the
broker had not been negligent he would have received the funds to buy a new lorry and so
would not have had to hire one. He therefore claimed damages for (a) the replacement
value of the lorry (being the sum he should have received from the insurer), and (b) the
hire charges.
42.
The Court of Appeal allowed the claim for the replacement value of the lorry, but rejected
the claim for the hire charges. It did so on two grounds:
a)
First, the reason why the hire charges were incurred was due to the client’s
impecuniosity, rather than by the broker’s negligence.
b)
Second, the reason why the hire charges were incurred was due to the broker’s
failure to satisfy the client’s claim for damages promptly, and so was a claim for
“damages for the non-payment of damages” which was not recognised by the law.
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43.
The first ground is no longer good law. The rule that denied a recovery of losses due to a
claimant’s impecuniosity has been over-ruled by the House of Lords in Lagden v
O’Connor [2004] 1 A.C. 1067. In that case it was observed that the decision in Ramwade
was against the trend of modern authorities.
44.
The second ground is also under attack.
a)
The rule that there is no claim for “damages for the non-payment of damages” is
based on a statement of Lord Brandon in a shipping case (The President of India v
Lips Maritime Corporation (The Lips) [1988] AC 395, where it was held that no
damages could be claimed for losses suffered as a result of a failure to pay
demurrage, as demurrage was an agreed form of liquidated damages. However,
there is a good argument (supported by the decision in The Achilleas (Transfield
Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61) that that rule should be
confined to shipping cases
b)
This is the same ground that has the effect of denying an insured the right to claim
to claim damages for consequential losses in an action against its insurer (see
Sprung v Royal Insurance (UK) Limited [1999] Lloyd’s Rep IR 111 (CA)).
However:
i)
The decision in Sprung falls to be reconsidered in the light of the decision
of the House of Lords in Sempra Metals Ltd v IRC [2007] 3 WLR 354 that
there can be a claim for losses suffered by reason of the non-payment of a
debt.
ii)
In his talk to the PNBA, Rix L.J. indicated that there were good reasons to
think that Sprung would be over-turned should the opportunity arise.
iii)
In its current review of insurance law, the Law Commission has published
a paper indicating that it believes that Sprung is out of line with the
principles of ordinary contract law.1
45.
Thus the grounds for the decision in Ramwade have been undermined. Further, a number
of other subsequent developments indicate that it may over-turned, or at least readily
distinguished, in the future.
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Issues Paper 6: Damages for Late Payment and the Insurer’s Duty of Good Faith.
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SAAMCO v York Montague Ltd.
46.
Ramwade and Verderame were decided before SAAMCO.
The question of what
damages are and are not recoverable from a professional such as an insurance broker now
has to be answered (at least in part) by considering and applying the SAAMCO scope of
duty analysis. In the context of claims against insurance brokers, this has already led to
insured’s recovering more than the amount that would have been received from the
insurer.
The decision in Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd.
47.
In Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2002] 1 Lloyd’s Rep
157 the claimant was a reinsurer. The broker had broked reinsurance to Aneco, and had
also arranged Aneco’s own retrocession. As a result of its broker’s negligence, that
retrocession was invalid. As a result, it received no payment from its retrocessionaire.
However, it also suffered much greater losses in the form of the payments it had to make
to its own insureds. The question for the House of Lords was whether Aneco could
recover all the losses it had suffered, or only those losses resulting from the invalidity of
its own retrocession.
48.
The House of applied the SAAMCO analysis, and found that the broker had assumed a
duty to Aneco not only to arrange Aneco’s own reinsurance, but also to advise Aneco
whether or not to enter into the reinsurance that it was broking to Aneco. As a result, the
broker was liable for all the losses suffered by Aneco, and not only the losses resulting
from the invalidity of the retrocession.
The decision in Arbory Group v West Craven.
49.
In Arbory Group v West Craven Insurance Services (A Firm) [2007] PNLR 23 the Court
had to consider whether the principle set out in Ramwade applied in the context of
business interruption (“BI”) insurance.
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50.
The insured was a manufacturer. Its broker arranged BI insurance on its behalf. A fire
occurred which destroyed the insured’s buildings and plant and machinery. The BI sum
insured was too low and average applied. As a result the insured suffered two types of
losses: (a) the shortfall in the BI payment it should have received from its insurer, and (b)
on-going consequential losses because it did not receive the payment it needed to get back
on its feet.
51.
After several years proceedings were issued. The consequential loss element of the claim
was much the larger part of the claim, because substantial loss of profits had been
incurred over several years.
52.
The Judge (HHJ Grenfell sitting as a Judge of the High Court) decided that BI insurance
had to be distinguished from other forms of insurance, because its whole purpose was to
inject funds into a going concern in order to maintain it as a going concern. He held that
the broker’s duty extended to ensuring that the BI sum insured was adequate so that the
client could recover and resume its pre-fire level of profitability at the earliest date. He
held that it was reasonably foreseeable that a failure to effect sufficient BI cover was
likely adversely to affect the profitability of the insured’s business.
53.
On that basis the Judge allowed the client to recover both (a) the shortfall in the BI
payment it should have received, and (b) the consequential loss of profits it had suffered.
This resulted in a much larger award than otherwise would have been recovered.
54.
The broker was given permission to appeal to the Court of Appeal, but the case settled
before the appeal was heard.
Summary.
55.
In an appropriate case the damages that a claimant can recover from a broker who acts
negligently will not be limited to the payment the claimant would have received from the
insurer. In each case it will be necessary to consider the scope of the duty owed by the
broker and what losses were reasonably in the contemplation of the parties should the
broker act negligently.
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56.
In many cases it will be difficult for the broker to resist a finding that consequential losses
were foreseeable, within the scope of the duty it owed, and in the reasonable
contemplation of the parties. This will particularly be the case where the broker’s duty
included the arrangement of business interruption insurance.
57.
An irony arising out of this is that an insured may be entitled to recover more from a
broker who negligently fails to arrange cover than it would have been entitled to recover
from an insurer who wrongfully refuses to meet a claim.
In appropriate cases
consequential losses are recoverable from the broker but, as long as Sprung remains good
law, they are not recoverable from an insurer.
4 New Square,
BEN ELKINGTON
Lincoln’s Inn
17th May 2011
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