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All or nothing – causation in broker negligence cases

  • United Kingdom
  • Insurance and reinsurance - E-briefings

17-10-2018

Dalamd v Butterworth Spengler [2018] EWHC 2558 (Comm)

Introduction

At the beginning of October the Commercial Court handed down a decision of interest on the subject of causation in broker E&O disputes.  The Court decided that an insured who had established that his insurance broker was negligent must show that the breach caused its claim against insurers to fail on the balance of probabilities, if he is to make a recovery from the broker.  The Judgment makes it clear that this is a simple “yes/no” question. 

The Court considered two scenarios.  Firstly, it looked at the situation where the broker’s breach had created a coverage defence for insurers.  It then considered the scenario in which the broker had breached its duty of care, but there was some other coverage point for which it was not responsible.

Coverage defences arising from broker’s breach – balance of probabilities

In relation to the first point the Court concluded that it was not enough, as the insured had argued, that the broker’s error had “impaired” the claim in the sense of creating a reasonably arguable ground on which insurers could deny liability.  Mr Justice Baker reasoned that if the insured’s position were correct, then where an insurer had put forward a merely arguable defence based on the broker’s breach of duty, the insured could elect to recover in full from the broker instead.  This would make it “unduly favourable” for the insured to sue the broker in these circumstances rather than the insurer, who may well have been in breach of its obligations under the policy if the defence was ultimately not a good one.  The Court did not agree that the broker would be protected by the right to argue that the insured should have sued the insurer to mitigate its loss.  It said that it would be difficult for the broker to succeed on this argument because the duty to mitigate “is a low one” and moreover the burden of proof would be on the brokers. 

Mr Justice Butcher noted that the position was different where the broker’s breach had caused an uncertainty over cover which led the insured to reach a lower settlement with insurers than would otherwise have been the case.  In such a scenario there was authority confirming that the insured could recover the difference from the broker without having to establish that the coverage defence created by the broker’s breach was good.

Coverage defences not arising from broker’s breach – balance of probabilities/loss of chance

The Court agreed with the broker that whether there was in fact another coverage defence for which the broker was not to blame, was a matter for the broker to establish also on a balance of probabilities i.e. it had to decide whether the other point was correct on a yes/no basis.  If it was correct then the broker would not be liable.  The Court did not accept the insured’s argument that it should simply assess the chances of how the other point might be decided by another court and apply an appropriate discount to the damages payable by the broker.  The Court declined to follow another High Court decision which had proceeded along these lines.      

However, the Court did confirm that it would assess on a loss of chance basis, the possibility that the insurer might not have insisted on its strict legal rights in relation to the other point but for the point created by the broker’s negligence.   

Comment

This decision will obviously be welcomed by the broking community.  If the insured had succeeded in its arguments then it would probably have led to brokers being sued more often and made them subject to greater adverse awards than they are under the status quo.  In our view the decision is also a victory for common sense since, as the Court observed, it would be illogical for the strength of coverage points to be assessed on a different basis depending on whether the insured is claiming against the broker or insurer.

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