UK: Broker Duties - Failure To Advise Insureds On Risk Improvement Requirements

Ground Gilbey Ltd v. Jardine Lloyd Thompson UK Ltd [2011]¹
Commercial Court, 2 February 2011

On 9 February 2008, a serious fire occurred at Camden Market in north London, a property owned by the Claimant, GGL. The quantum of damage sustained was in the region of £6 million. The cause of the fire was a liquefied petroleum gas (LPG) portable heating appliance which had ignited clothing stock in one of the stalls. While the use of LPG heaters was prohibited under the terms of the tenancy agreement with stallholders, the practice was nevertheless widespread.

The market was insured under a policy underwritten by Fusion Insurance, acting as agents for Aviva Insurance Ltd, covering property and other associated risks. The business was broked on behalf of GGL by the Defendant, Jardine Lloyd Thompson (JLT).

When Fusion originally quoted for the risk in 2005, it undertook a pre-risk survey, which identified the presence of LPG heaters, amongst other things, as a matter of concern. JLT recommended acceptance of Fusion's quotation to their principal, and reported to them on various matters identified in the pre-risk survey. They did not, however, refer to the removal of LPG heaters nor otherwise draw their principal's attention to the requirement.

Shortly before the 2006 renewal, Fusion carried out a further, pre-renewal, survey. Again, it identified LPG heaters as an issue. Once again, JLT reported to their principals on the finding of the survey, but this time they did also make reference to the removal of "hazardous heaters and associated gas cylinders". Two months after the 2006 renewal, a further survey took place, following which Fusion notified JLT of a number of required "risk improvements". It identified LPG heaters as a "severe fire risk" and stipulated again that they had to be removed. The insurers took the view that they could not impose the requirement as a warranty, since they recognised that GGL would not have day-to-day control over the individual stallholders, but nevertheless asked JLT for confirmation that "all unacceptable heating appliances have been removed", a risk improvement that "needs to be implemented immediately". The stipulation was passed on to GGL.

The risk was surveyed once again at the time of the 2007 renewal, accompanied by a representative of JLT. It was observed that, while there was some attempt at enforcement by GGL, they were not keeping on top of the situation. Tenants, it was noted, were still widely flouting the rules. In response to this, Fusion escalated the obligation of compliance. Upon renewal they made cover "conditional upon" a further survey programme and the satisfactory completion of all its requirements "within timescales stipulated by underwriters". Following a subsequent site visit in September, Fusion emailed JLT in October 2007 stipulating that the timescale for removal of LPG heaters was now "immediate". That email was never passed on by JLT to its principals.

Following the fire, insurers denied liability for the claim, on grounds of failure to comply with the risk improvement stipulation. That claim was settled, at 70% of the claim value, upon leading counsel's advice. GGL then sought to pursue the balance of the loss from its brokers, JLT.

Initially, JLT sought to argue that it was not in breach of its duty as a broker, or, if it was, that the said breach was not causative. GGL was already aware of the existing concerns about the use of LPG heaters, and the escalation of those concerns into a formal survey condition was not something that was unusual or onerous, needing to be drawn specifically to the attention of the insureds. Even if they had passed on those requirements, argued JLT, the evidence was that the insured would have done nothing about it, since the insured had taken no effective steps in response to the previously expressed concerns.

On breach of duty, the court rejected JLT's defence. The formal imposition of the required risk improvement measures had a "material and potentially deleterious effect on the insurance cover" and as such should have been drawn specifically to the attention of the insureds. As to causation, the court was satisfied on the evidence that appropriate steps would have been taken by GGL in response to the news that coverage under the policy was actually in jeopardy. While this might not have entailed immediate removal of the heaters, it could be expected that by February 2008, when the fire occurred, the LPG heaters would have been removed or at least a dialogue would have been opened with the insurers leading to a mutually satisfactory solution to the problem.²

In the alternative, JLT pursued a further defence to the claim. Their breach was causative of the insured's loss, they argued, only if it could be shown that Fusion actually had a defence to the policy claim, or a reasonably arguable defence, based upon breach of the survey condition. This was not so here, they said. The policy requirement lacked the quality of a true condition precedent to coverage or warranty, and the question then arose as to whether the use of LPG heaters by tenants was with the informed acquiescence of the insured, GGL. While the policy imposed a "reasonable care" obligation upon GGL, they had been advised by their own leading counsel that this called for recklessness by GGL, which was unlikely to be proved.

The court declined to rule on the issue of policy liability, though it considered it strongly arguable that the policy claim against Fusion would ultimately have succeeded had it been pursued. Clearly, said the court, brokers should not be prejudiced where their principals had compromised the policy claim simply out of a commercial desire to reach an early settlement, or on the basis of a "spurious construction of the cover". In this case, however, it was at least arguable that the continued presence of LPG heaters would have afforded a defence to the policy claim. On this the judge applied the test set out in the leading academic text³ by asking whether, as a result of the broker's breach, the insured found itself:

In the court's view that was precisely the case here. Consequently, the settlement entered into, at 70% of the claim value, was within the range of reasonable commercial settlements of this claim⁴, and GGL were entitled to recover the shortfall from their brokers, JLT.

Result: Judgment for the insured.

Footnotes

1 [2011] EWHC 124 (Comm)

2 HIH Casualty & General Insurance Ltd v. JLT Risk Solutions Ltd [2007] EWHCA Civ 710

3 Jackson & Powell on Professional Liability 6th ed. Pages 16-138

4 BP Plc v. AON Ltd (No. 2) [2006] 1 CLC 881

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