Dalamd Limited v. Butterworth Spengler, Commercial Court, October 2018: the court emphasises the subsidiary nature of the broker’s liability
The English case law on brokers’ professional liability is well established. In a recent decision, the courts have clarified the conditions for imposing liability.
Clients who wished to insure a waste recycling plant contacted a broker to purchase insurance policies that were more favourable than those they held at the time. As a result, two policies were taken out with two different insurers: one by the owner, which insured the building, and another by the tenant, which covered the machines and the risk of business interruption. A former tenant had gone into liquidation and a new company had purchased the assets of the company and continued to trade from the premises. However, this fact was not disclosed when the policy was taken out, as well as two previous minor fires and a regulatory investigation, which were also not disclosed to the insurers.
Some time later, a fire destroyed the premises. The first insurer cancelled the owner’s policy for failing to comply with a condition relating to the storage of waste outside the buildings and for misrepresenting the risk in relation to the former tenant’s insolvency. For its part, the tenant’s insurer cancelled the policy on the grounds of non-disclosure and misrepresentation. The two insureds then sued their insurance broker for breach of the duty to advise.
With respect to the first insurance policy that was taken out by the owner, the court found that the broker had not sufficiently drawn the insured’s attention to the consequences of an incomplete disclosure of the risk. However, the court found that such breach was not the cause of the loss sustained by the company because the insurer had in any event been validly entitled to deny cover due to non-compliance with the storage conditions which the broker had provided clear written and oral advice to the insured about and so was not negligent.
On the other hand, with respect to the second policy taken out by the tenant of the premises, the court held that if the broker had advised the tenant to disclose its history or had asked it more specific questions when the risk was disclosed made, it would have been covered under the policy. While there were some issues for which the broker was not responsible, they did not provide the insurer with grounds to avoid the policy on their own. The broker was therefore liable to the tenant.
This judgement, issued in a complex case, essentially highlights that a broker’s professional liability can only be subsidiary to that of the insurer. In this case, by proceeding solely against the broker, the insured obliged the court to determine its loss without the benefit of any testimony from the insurer, which the court sanctioned by reducing the amount of compensation expend all their energy on recourse from insurers before owed by the broker. This decision is good news for brokers, as it is likely to provide greater incentive for insureds to expend all their energy on recourse from insurers before proceeding against their broker.
Why is this case important?
In this case, the policyholders sued only the broker, without first disputing the insurers’ cancellation of the policies.
They contended that they had lost the opportunity to have the claim covered due to the broker’s failure to meet its, fiduciary obligations.
In the United Kingdom, if the insurer is not a party to the proceedings, the insured must prove that he was not compensated due to a breach on the part of the broker. The court must then determine what arguments the insurer would have raised to deny cover or, on the contrary, to accept the claim.
In this case, the allegations against the broker included the claim that it had failed to sufficiently advise the insureds as to the consequences of an incomplete disclosure of the risk.