With insurance disputes running at an all-time high, and the prospect of unsatisfied policyholders seeking alternative means by which to recover their losses, we examine the types of loss for which compensation is awarded in claims arising from broker negligence.
It is important to appreciate at the outset, that before a court will consider either the type or the amount of loss for which it may award damages as compensation, a claimant policyholder will first need to establish that the broker has committed an actionable wrong, either negligently or in breach of its retainer.
While in some cases establishing wrongdoing might be a relatively straightforward exercise, in many cases it is more challenging. Moreover, and as all cases are fact sensitive, care must be taken when relying on the decision of the court in one case to predict the outcome of another. Nevertheless, and by way of assistance, we have provided examples of a number of reported cases where broker negligence has been established in our related article: Successful claims against negligent insurance brokers
In addition, a claimant will need to satisfy the court as a matter of fact that the broker’s wrongdoing caused the loss in question. Again, that exercise can be a complicated one, particularly where there is more than one potential cause.
However, where liability is established the court will then move on to consider issues of quantum.
The purpose of a damages award is not to punish the professional concerned, but to compensate the claimant party. A classic formulation of the principle was given by Lord Blackburn in Livingstone v Rawyards Coal Co., where he stated that the measure of damages is:
‘…that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.’
Over the years an array of legal rules and principles have been established by the courts to ensure that the damages awarded to clients, and the corresponding financial exposure of professionals, is kept within sensible bounds. While those rules and principles lie beyond the scope of this article, in the result, not all financial loss will be compensated.
Types of recoverable loss due to broker negligence
The following are examples of those heads of loss which the courts have been willing to recognise as compensateable and for which damages have been awarded for broker negligence:
1. Loss of cover
The loss of cover under the relevant insurance policy is the most common head of loss claimed in cases of broker negligence and has long been compensated by the courts, despite attempts to avoid liability for it.
Such an attempt was made in the Court of Appeal case of Fraser v BN Furman (Productions) Ltd & Others. Here the claimant factory worker had been injured when her hands became trapped in an electric welding machine. In an action against her employer, she recovered damages as a result of its failure to fence the dangerous parts of the machine. In turn, the defendant employer commenced proceedings against its insurance broker for failing to arrange employers’ liability insurance cover.
In defence, the broker argued that even if it had arranged cover, the insurer would have been entitled to decline the policy claim on the grounds that the defendant had failed to comply with an important condition of the policy. It further argued that where an agent employed to enter into a contract had failed to do so, the only measure of damages is what the principal would have recovered under the contract if the third party to the contract had exercised all his legal rights in resisting the principal’s claim.
On appeal, the court held that while such a restriction was established by common law authority, it represented a special rule that only applied to contracts that were null and void and did not apply in the present case, where there was no question that the policy of insurance would have been a valid and enforceable contract, subject to any election by the insurer. Accordingly, the defendant was awarded as damages that sum which has been awarded as damages to the claimant and which the defendant would have recovered under a liability policy, but for broker negligence.
2. Loss of chance
In some instances, the insurer may be entitled to decline a policy claim, and/or avoid the entire policy, on grounds which are additional to and separate from those caused by broker negligence. In such cases, the broker might well contend that, as cover would not have been available in any event, no loss has in fact been suffered.
This was the argument presented to the Court of Appeal in the case of Alfred Dunbar v A&B Painters Ltd & Others. Here the claimant sustained serious injuries when he fell over 40 feet, when the scaffolding he was using to paint a bus station collapsed. In an action against the defendant employer, the claimant recovered damages of £125,000. In turn, the defendant claimed an indemnity against the insurer or damages against the broker.
At trial the judge found that the insurer had been entitled to repudiate the policy on the grounds of misrepresentation, which itself was due to broker negligence. However, the judge also found that the claimant was working at more than 40 feet above floor level, which was in excess of the height restriction stipulated by the policy and above which cover was excluded. The broker therefore contended that, in so far as the particular circumstances of this accident were concerned, the defendant had no right to be indemnified under the policy and thus had suffered no loss.
On appeal, the court held that what loss the defendant had suffered did not depend upon whether the insurer would have been entitled as a matter of law to repudiate liability under its policy, but whether as a matter of business it would have been likely to do so. Therefore, what the defendant had lost was the chance of obtaining an indemnity from the insurer. Further, and as the chance of repudiation was nil, the value of that chance was equal to the full amount of the cover otherwise available under the policy.
3. Consequential losses
Where broker negligence results in the loss of cover under a first party material damage policy, the business of the policyholder can experience additional disruption and consequential loss beyond that which is covered by the policy. Commonly, this takes the form of a loss of profits due to an inability to trade.
Whether or not such losses are recoverable was considered by the High Court in the case of Arbory Group Ltd v West Craven Insurance Services (A Firm). Here the defendant brokers had failed to explain to the claimant how its business interruption insurance cover would operate and in turn, how it should determine the amount of cover it required.
After a serious fire at its premises, the claimant discovered that it was substantially underinsured for business interruption. It therefore commenced an action for broker negligence, claiming not simply the profits lost as a result of being underinsured, but also the additional profit lost as a consequence of the delay in being able to re-establish its business, caused by the reduced policy payment received from its insurer.
After reviewing the authorities, the judge concluded that the court was firstly required to determine the kind of loss that could reasonably be foreseen in the event that insufficient business interruption cover were to be effected due to broker negligence. It was then necessary to determine if the cause of the claimant’s loss of profitability could be attributed to the breach of duty identified.
Here it was held that the claimant could recover total damages of £611,746, representing both the shortfall in the payment it received from the insurer due to the underinsurance (being £299,902) and the loss of profit it had suffered as a result of that shortfall (being £311,844).
4. Transactional losses
Depending on the scope of the retainer entered into with the broker, the court may be willing to award damages not only in respect of the loss of cover under an insurance policy, but also for additional losses arising from entering into a particular transaction.
That was the decision which the House of Lords was required to make in the case of Aneco Reinsurance Underwriting (In Liquidation) v Johnson and Higgins Ltd. Here the claimant underwriter had been approached by the defendant broker to reinsure certain risks written by the Bullen syndicate, on the understanding that $11 million of cover would be ceded to other underwriters as retrocessionaires, which the broker would arrange.
After writing cover on this basis, the claimant was subsequently required to pay claims totalling $35 million. When it in turn made a claim against the policies written by the retrocessionaires, cover was avoided for misrepresentation due to broker negligence.
On appeal by the broker, the court observed that there was a fundamental distinction to be drawn by the law of damages between a defendant who undertook to advise a claimant generally whether to enter into a particular transaction, and if so on what terms, and one who merely agreed to provide particular information. In this case, where the broker had undertaken to provide general advice, rather than specific information, the claimant was entitled to recover the entirety of its foreseeable loss, namely $35 million, and not just for the loss of cover for $11 million.
5. Litigation costs
It is not in every case that the decision taken by the insurer to decline cover for a claim, or to avoid a policy altogether, will be a lawful one. Therefore, in some instances, it might be appropriate to commence a coverage claim against the insurer as a first step and before pursuing a claim for damages for broker negligence.
If the coverage claim against the insurer is unsuccessful, the policyholder may well become liable to pay the insurer’s associated costs, as well as its own. Moreover, and even if the coverage claim is successful, it is unlikely that the policyholder will recover all of its litigation costs from the insurer. Provided that the policyholder has acted reasonably, the courts have generally been willing to compensate the policyholder for such liabilities where broker negligence has subsequently been established.
An example of this approach can be found in the High Court case of Ramco Limited & Another v Weller Russell & Laws Insurance Brokers Limited. Here the claimants traded in army surplus stock, some of which was destroyed by fire. Claims were then made against their insurance policy, but were rejected. In response, the claimants commenced proceedings in the High Court against their insurer, following which the insurer accepted the claim of the first claimant but not the claim of the second. The second claimant then appealed to the Court of Appeal, but was unsuccessful. It subsequently sought permission to appeal to the House of Lords, before then electing to discontinue its claim. Both claimants then commenced proceedings for broker negligence.
Amongst other losses, the claimants sought compensation for the costs incurred in the litigation with their insurer. The first claimant claimed £7,500, being the difference between its actual costs and those it had recovered from the insurer. The second claimant claimed in respect of the High Court proceedings the sum of £35,000 for its own costs and the same amount for the costs it had been ordered to pay to the insurer. It also claimed in respect of the Court of Appeal proceedings the sum of £49,341.20 for its own costs and £15,000 for the costs it had to pay to the insurer. In each case, these claims were accepted by the negligent broker and approved by the court. However, the second claimant also claimed £4,799.57 for the costs of its petition to the House of Lords. Although the broker asserted that these costs were not recoverable, damages for them were nevertheless awarded by the court.
Further legal assistance
As professional negligence solicitors we act for clients nationwide, to resolve claims against a wide range of professionals, including claims for broker negligence.
Answers to many of the important questions we frequently get asked about making a claim against an insurance broker are set out in our related guide: Claims Against Insurance Brokers – A Brief Guide
If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at email@example.com.
At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.