A recent decision of Butcher J in the English High Court contains important guidance on the duties of insurance brokers both in the placement process and also in the provision of post-contractual advice. Most importantly, it determines an important and previously unresolved issue: when is a broker able to argue that the assured's claim should be against the insurers and not against the broker?
The facts are complex. In summary, two policies had been procured by the relevant policyholders, whose rights had been assigned to the claimant.
One policy, placed by the defendant brokers with Aviva, was on premises owned by Widnes and leased to a tenant, Doumac, to be used for the recycling of waste. The Aviva policy, which was renewed in March 2012, incorporated an External Storage Clause whereby coverage was removed if combustible materials were stored within 10 metres of the buildings.
The second policy was a combined commercial cover Doumac also placed by the defendant brokers, but with XL. The policy included cover loss of plant and machinery. On the renewal of the combined commercial policy in August 2012, XL were informed that Doumac had changed its name to JLS. The reason for the transfer of ownership was that Doumac had become insolvent, but that fact was not disclosed.
A catastrophic fire occurred on 21 October 2012 and the premises were entirely destroyed. Claims were made against both Aviva and XL, but were rejected. Aviva relied primarily upon breach of the External Storage Condition. XL relied upon non-disclosure of: a series of regulatory warnings and notices issued to Doumac as regards the storage of waste material; small fires that had occurred in 2010 and 2011; and the poor state of repair of the buildings.
Widnes and JLS did not pursue the insurers. Instead they assigned their rights to Dalamd, which commenced the present proceedings directly against the brokers. Dalamd's case was that the defences raised by Aviva and XL were the result of the brokers' own breaches of duty, and that Dalamd was able to recover from them the sums that would have been payable but for such breaches. Dalamd also asserted that the policyholders had been underinsured in respect of business interruption and loss of rent, by reason of inadequate advice provided by the brokers.
For their part the brokers raised a number of defences:
- The assignment by Widnes and JLS to Dalamd was ineffective;
- There had been no breach of duty by them in respect of the renewals;
- There had been no breach of duty by them in respect of warnings; and
- In any event it had not been shown that Aviva and XL had valid defences against the claims made under the policies independent of any breaches of duty by the broker.
Justice Butcher dismissed the suggestion that assignment had not become effective because the sums payable by Dalamd to Widnes and JLS were late.
What level of proof is required?
Justice Butcher proceeded to examine the underlying principles applicable to a default claim against brokers. The first question was: what had to be proved when an assured sued its brokers following denial of liability by its insurers?
This appears to be the first reported case in which the point has arisen in this way. In earlier cases, the assured had sought to recover from the insurers and had settled for a lesser sum, then seeking to recover the balance from the brokers. The courts tended to be generous to the assured in such cases, on the ground that the duty of a broker is to protect the client from disputes with insurers, and the authorities recognised the validity of such settlements unless plainly unreasonable.
Justice Butcher refused to extend the same indulgence to the situation where there has been no attempt at settlement with insurers, and held that Dalamd was required to prove on the balance of probabilities that, had the claim been taken to court, the insurers would not have faced liability by reason of the brokers' breach of duty.
The test for a broker's breach of duty
The second question was: if the brokers asserted that the insurers would have been able to deny liability by reason of some act or omission on the part of the assured which was independent of any breach of duty by the brokers, what test was to be applied?
On that matter there was a good deal of authority, the rule being that the court is required to estimate the percentage chance that the alternative defence would have been relied upon had it stood alone. The courts have not adopted the approach of assessing what the outcome would have been had the point gone to trial, but rather have made an assessment of the likelihood of the insurers taking that defence.
Applying these principles, Butcher J dismissed the claim in respect of the Aviva policy. On the balance of probabilities Aviva would have been discharged from liability by reason of the breach of the External Storage Condition. The evidence was that at the time of the fire waste was being stored within four metres of the walls of the sheds, and it was likely that Aviva would have maintained its adherence to the point. The evidence also showed that Widnes had been aware of the nature and content of the Clause and that the brokers were in those circumstances under no duty to provide further explanations. Butcher J found that there was a breach of duty in respect of failure to advise about loss of rent insurance, but that breach had no consequences given that the Aviva were not liable under the policy.
Butcher J allowed in part the claim in respect of the XL policy. He found that the brokers were not in breach of duty in failing to give advice as to the business interruption insurance, because Doumac had made it clear that they could not afford the premiums. However, he allowed the remainder of the claim for loss of the plant and machinery.
The brokers' duty had been to warn Doumac of its duty of disclosure, and the brokers ought to have made it clear to Doumac that the duty encompassed issues with the regulators and the earlier fires. Further, although XL had not relied upon non-disclosure of Doumac's insolvency, had it chosen to do so the insurers' defence would have been made out, although the failure to disclose was in any event the fault of the brokers for failing to advise JLS that the insolvency of its predecessor in title was a material fact.
This judgment will be important for anyone considering whether a claim should be brought against an insurer or a broker. Even where there is negligence by a broker, if there is a question over whether the insurer would nevertheless have been able to decline cover, the prudent solution may be to claim against both.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.