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clarification by the court on causation and loss in brokers negligence claims

21 November 2018

The UK court has recently clarified the law in relation to causation and loss in broker’s negligence claims in the case of Dalamd Limited v Butterworth Spengler Commercial Limited [2018] EWHC 2558.

The case arose out of a fire at a waste-recycling facility in 2012. The broker had been retained to arrange insurance for the insured’s premises. The insured made a claim under its relevant policies and insurers declined to indemnify the insured on the grounds of non-disclosure and misrepresentation of material facts. The insured chose not to challenge the declinature and instead sued its broker for negligence. 

Breach of duty was established and the judgment focused on causation and loss. 

The issues for determination were (1) did the insured have to show that the claim on either policy failed as a result of the broker’s negligence and (2) was there some other ground (for which broker is not responsible for) on which the insurance would not have provided an indemnity and if so, on what basis should it be determined?

The court first decided that the insured has to show that the claim on the policy would have failed, and that, but for the negligence of the broker, it would have succeeded. It rejected the insured’s argument that it only had to prove the broker’s negligence impaired its claim against insurers. It was accepted that an insured could settle with insurers and then proceed against the broker for the shortfall, notwithstanding the fact the insurer’s defence may be a bad one. Where there was no settlement with insurers it would be necessary to decide whether insurers were in fact entitled to decline payment which had to be determined on the balance of probabilities.

The second issue concerned what entitlement to an indemnity would have been available but for the broker’s negligence. The issue to be determined was the hypothetical stance that insurers would have taken (including any settlement or trial) and whether it was to be decided on a loss of chance basis (as the insured wanted) or whether it was based on a finding of fact on the balance of probabilities (as argued by the broker).

The court found in favour of the broker and held that it is to be determined on the balance of probabilities rather than as a claim for loss of chance. Whether another defence exists (for which the broker is not responsible for) is a matter of law on the balance of probabilities rather than loss of chance. If following assessment, there was a chance that the insurer would not have enforced its rights to decline indemnity on that basis then the approach to damages would be on a loss of chance basis.

Where insureds choose to proceed with a claim against its broker (and not insurers) they will have to consider whether they can persuade the court that (a) insurers were entitled to decline; and if relevant (b) the insurers would not have established any independent reason for declining cover unrelated to the brokers negligence (or would not have taken the point). 

This decision is helpful for brokers and where insurers raise arguable coverage defences, insureds should tread carefully when deciding to pursue claims solely against the broker where the coverage issues have not been fully settled or determined by insurers. 

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