Policyholder fails to prove broker negligence claim

In Hamsard One Thousand and Forty-Three Ltd v AE Insurance Brokers Ltd [2024] EWHC 262 (Comm), the High Court rejected a negligence claim against an insurance broker brought by an insured facing an avoided property damage policy. The insured failed to establish breach of duty by the broker or causation.

The Court was critical of some of the witness and expert evidence before it and emphasised the limited value of broking expert evidence in cases such as these given that brokers' duties have become a matter of law to a substantial extent.

BACKGROUND

The Claimant, Hamsard One Thousand and Forty-Three Ltd, was an insured (the Insured) under a property insurance policy (the Policy) in respect of an industrial site in West Midlands (the Premises). The Defendant, AE Insurance Brokers Ltd (AE) was the Insured's broker and placed the Policy on behalf of it with the insurer.

Mr Beresford was a director of the Insured and the key person working on the placement of the Policy.  Mr Rees (General Manager of AE at the relevant time) was the key person involved from AE. He first became involved with Mr Beresford in the late 1990s when he worked for another firm of brokers. Mr Beresford had in the past owned and acted as director for a number of failed companies of which Mr Rees was aware.

The Premises were at the time occupied by Incanite Foundries Limited (Incanite), a subsidiary of the Insured purchased by Mr Beresford and his wife in January 2012. Incanite conducted its foundry business at the Premises.

Prior to placement of the Policy

The preceding policy was placed with Zurich for the year commencing 30 June 2013 initially covering a building sum of £6.7 million and loss of rent for 12 months up to £100,000. Premiums were to be paid in instalments.

During the second half of 2013, Incanite started to have cashflow issues and by the end of the year Incanite's business had failed and a winding up petition was issued in January 2014. The Administrators subsequently took over control of the business. 

Between August 2013 and February 2014, Mr Beresford asked AE to reduce the buildings sum insured a number of times eventually to c. £1.2 million despite AE's advice that it should reflect the reinstatement cost.

Placement of the Policy

In early 2014, there were discussions between Mr Beresford and Mr Rees about whether to pay the outstanding premium in respect of the Zurich policy or to start a new policy which, as Mr Rees informed on more than one occasion, could be problematic, more expensive and result in a reduction in the insured perils to fire, lightning, aircraft and explosion (FLEA) cover only.

In an email in February 2014 Mr Beresford confirmed he would like to obtain a new property policy with a lower premium payable in monthly instalments, and that he would be instructing agents to sell the Premises shortly.  In Mr Rees' absence, Ms Goulding of AE wrote to Mr Beresford to request further information regarding the new policy which included an assumption that "loss of rent is no longer required…". Mr Beresford replied swiftly that "(a)s soon as the debenture is lifted we will sell the buildings as site" which, as AE submitted (and with which the Court agreed), intended to mean that loss of rent was indeed not required.

Mr Beresford asserted there was a telephone call between himself and Mr Rees in which he told him that loss of rent cover was required. This assertion was not backed by any contemporaneous record and was not brought up until the letter of claim served by Mr Beresford's third firm of solicitors in June 2019. This was referred to by AE at trial as the "Invented Phonecall".

Mr Rees obtained quotations for the new cover in March 2014 which presented two options:

• Option 1 was for standard property owners' buildings insurance covering "Fire and Perils including subsidence" on the basis that the Premises were being used by the administrators only.
• Option 2 was unoccupied property owners' cover limited to FLEA perils and subject to unoccupancy conditions.

Neither option included cover for loss of rent or accidental damage and neither option was stated to include such cover.

Mr Beresford instructed AE to cancel the Zurich policy and place cover as per Option 1. Mr Rees then proceeded to complete the proposal form for Option 1 (the Proposal Form). The Proposal Form provided that the insurer assumed, for the purposes of the quotation, that the Proposer (i.e. Mr Beresford) had never been subject to bankruptcy proceedings or any mandatory or voluntary insolvency proceedings.

The Policy Schedule, Key Facts and Policy wording documents were then sent to Mr Beresford under a covering email which asked him to "read through [the documents] to make yourself aware of the policy terms conditions and warranties and to ensure the cover given meets with your requirements (failure to comply with a condition or warranty can invalidate your policy cover)" and to contact AE in the event that any amendments were required. The Statement of Facts for the Policy recorded "No" to "Accidental damage cover for buildings".

Property damage

The Premises were in poor condition and unsuitable for letting in March 2014. The removal of equipment from the Premises was said to have caused significant damage when the Administrators handed back the Premises to the Insured in May 2014. While Mr Rees did not believe the Policy would cover such damage, he notified the insurer about a possible claim shortly after he was informed of this in June 2014. Loss adjusters were later appointed by the insurer to investigate the claim.

In July 2014, Mr Beresford informed AE that he had a new prospective tenant for part of the Premises but it turned out that the tenant's business in waste management was not an acceptable trade from the insurer's perspective and they would not be able to provide cover for the Premises as a consequence. AE started the process of obtaining quotations for new building insurance. The Premises were subsequently insured via a different broker by Amtrust for FLEA perils only for the same sum insured (£1.2 million), and without cover for loss of rent.

During July 2014, Mr Beresford sent AE a series of invoices for works (including engineering, electrical and security) at the Premises to be "processed", and quotes for restoring the buildings to an empty shell with no debris and for clearance of the contents of the Premises which had been left by the Administrators.

In November 2014, the insurer sent a letter to Mr Beresford notifying that they would be avoiding the Policy on the basis of two occurrences of non-disclosure:

1. The Insured failed to disclose the association of its director (Mr Beresford) with prior failed companies; and
2. The Insured failed to disclose the administration status of the occupying tenant, Incanite.

The claim against AE 

The Insured subsequently brought a claim for c. £2.6 million against AE for breach of duty in respect of the non-disclosures and its failure to place loss of rent cover and accidental damage cover.

AE denied the claim in its entirety. In particular, AE argued that there was no breach of duty on its part, that there was in any event no causation between the alleged breaches and the Insured's alleged losses and that the Insured has failed to prove that they have suffered any recoverable loss.  

 

DECISION 

There was no dispute between the parties as to the scope of the duties owed by AE as broker to the Insured and the judge, Lionel Persey KC (sitting as a High Court Judge), summarised in his judgment the well-established principles from Standard Life Assurance v Oak Dedicated Ltd [2008] Lloyd’s Rep IR 552, Dunlop Haywards (DHL) Ltd & Others v Barbon Insurance Group Ltd [2009] EWHC 2900 (Comm) and Jones v Environcom Ltd (No 1) [2010] PNLR 27. He then applied those principles to the facts of the present case and considered each of the disputed issues in turn.

Breach of Duty

Key issues in dispute in respect of breach of duty were:

1. (a) Was AE in breach of duty in respect of the alleged non-disclosure of the association of Mr Beresford with prior failed companies?

     (b) Was AE in breach of duty in respect of the alleged non-disclosure of the administration status of the occupying tenant Incanite?

2. Was AE in breach in failing to place loss of rent cover for the Insured in March 2014?
3. Was AE in breach of duty in failing to explain adequately, or at all, to the Insured the Policy documents that responded "No" to "Accidental damage cover for buildings"?

Issue 1(a): non-disclosure as to prior failed companies

The Insured contended that Mr Beresford's involvement ought to have been disclosed in response to the question "Are there any material facts that the insurer should be made aware of?" in the Proposal Form.  

Mr Rees did not deny that he was aware of Mr Beresford's involvement with various failed companies but AE relied upon a defence of waiver pursuant to section 18(3)(c) of the Marine Insurance Act 1906, which provides that an insurer may not avoid a policy in the event of a material non-disclosure if there is "any circumstance as to which information is waived by the insurer".

The Proposal Form provided that the insurer assumed, for the purposes of the quotation, that the Proposer (i.e. Mr Beresford) and any named person had never been subject to bankruptcy proceedings or any mandatory or voluntary insolvency proceedings.  AE argued that by the wording of this assumption, the insurer had waived disclosure as to whether any other companies which the Beresfords had owned or been directors of had been in administration (per Doheny v New India Assurance Co Ltd [2004] EWCA Civ 1705 and the later cases of R&R Developments v AXA [2010] 2 All ER 527 (Comm) and Ristorante Limited T/A Bar Massimo v Zurich Insurance Plc [2021] EWHC 2538).

The Court agreed with AE that in this way the insurer had waived disclosure of any further material information and there was, therefore, no duty upon Insured or AE to provide such information.

Issue 1(b): non-disclosure as to the tenant in administration

It was not disputed by AE that the fact that Incanite was in administration ought to have been disclosed to the insurer. The only question that the Court had to decide was whether Mr Rees informed the insurer of this fact.

There was no contemporaneous evidence of what was or was not said by Mr Rees to the insurer at the time when the risk was placed and the factual evidence was not clear. On balance, the Court found that the Insured had failed to establish that Mr Rees did not inform the insurer that Incanite was in administration and therefore failed to establish AE were in breach of duty.

Issue 2: loss of rent cover

It was common ground that loss of rent was not covered by the Policy. The Insured submitted that AE was in breach of duty in failing to place such cover. AE contended that loss of rent cover was not required: the Insured had received no rent for some months, it had been agreed that the Administrators would not be paying rent, there was no paying tenant in place or likely to be in place, and it was Insured’s stated intention as at March 2014 that they intended to sell the Premises. Further, as the Court found, Ms Goulding had asked for confirmation that loss of rent cover was not required, and implicitly received such confirmation.

The Court agreed with AE's arguments and found that AE was not in breach of duty in failing to place loss of rent cover for Insured.

Issue 3: accidental damage cover

The Insured contended that AE failed to procure accidental damage cover. The Insured argued that accidental damage cover had always been provided in the past and that if, for some reason, such cover could not be provided on this occasion, then it was incumbent upon AE to explain why that was the case to give the Insured options. AE submitted that accidental damage cover was never of interest to or required by the Insured, and in any event, it was clear on the face of the Statements of Facts sent to Mr Beresford in March 2014 that the Policy did not cover accidental loss in respect of which Mr Beresford made no complaint.

Mr Beresford gave evidence that he assumed the quotations sent by Mr Rees in March 2014 was for all risks cover and that the sentence in the email which said that "cover is for Fire and Perils including subsidence subject to £350 excess increased to £1,000 for subsidence" meant the fire and perils in an all-risks policy would have a higher excess.

The Court agreed with AE. In particular, while the Court would under other circumstances have some sympathy that the meaning of fire and perils might not be entirely clear to an individual like Mr Beresford, it found it impossible to assess what Mr Beresford did or did not know about the cover, where other aspects of his evidence were unsatisfactory.

The Court accepted AE's expert witness' view that AE had followed ordinary broking practice by providing the documentation produced by the insurer to the client and inviting the client to review and revert with questions. The Court also found that the Insured and Mr Beresford must reasonably have understood that they had a responsibility to check the information and ensure the cover met with their requirements.

The Court considered the proposition established by O'Connor v B D B Kirby & Co [1971] 1 Lloyd’s Rep 454 to be applicable to the present case, namely that where a broker’s breach of duty consists of negligence in completing the proposal form, subsequent negligence of the client in checking the form will exonerate the broker from liability.

Causation

In light of the findings that AE was not liable to the Insured for any breach of duty, it was not necessary for the Court to address the causation issues, but it did so in case it was wrong in any of its liability findings.

The issues the Court considered in respect of causation as set out below were interlinked:

4. If there had been disclosure of (a) Mr Beresford’s directorship of prior failed companies and/or (b) that the Property was occupied by the Administrators of the occupying tenant Incanite, would the Insured have obtained (i) the Policy or (ii) alternative insurance cover, and if so, would such cover have covered the claimed property damage?
5. On 11 March 2014 could loss of rent cover be placed for the Insured and/or at any premium the Insured was willing and able to pay?
6. Whether:

      (a) Mr Beresford would, if it had been explained, have asked for accidental cover,

      (b) accidental damage cover would have been available at all, or at what premium, and/or

      (c) Mr Beresford would have been willing to pay the premium for the same.

The Court found against the Insured on all three issues, on the basis that:

• In respect of Issues 4 and 6, alternative underwriters would not have been prepared to offer accidental damage cover for the Premises given the poor condition that they were in, and that even if they would, the cover would not have been available at a premium that Mr Beresford was either able or prepared to pay in March 2014;
• In respect of Issue 5, in March 2014 there was no prospect of anyone leasing the Premises and Mr Beresford would not have paid or was not in a position at the time to pay whatever extra sum that could have been quoted for loss of rent cover.

Loss

The Court provided only summary findings in relation to quantum, given that it had found that the Insured has failed to establish either liability or causation.

The Insured pleaded a claim for reinstatement costs of the Premises, loss of rent during reinstatement, ongoing loss of rent, and damage to fixtures and fittings, and gave credit for the net sale price achieved for the un-reinstated Premises (sold in July 2016) and for rent received.

The Court said it was unable to follow or assess the claims for reinstatement costs and loss of rent during reinstatement, in the absence of a detailed schedule of the work that needed to be done after the alleged damage to the buildings on the Premises in May 2014 when equipment was removed and sold by the Administrators, and given that no rent was being received and no tenancy was imminent at the time.

In respect of the claim for ongoing loss of rent, the Court relied upon the well-established principle that consequential losses arising from non-payment of an indemnity are not usually recoverable in broker negligence cases. The Court recognised an exception to that principle where the broker had assumed duties akin to those of an investment adviser, but that was not held to be the case in the present case.

No evidence had been specifically drawn to the Court's attention for the fixture and fittings claim, but the Court decided that if there had been findings of breaches of duty by AE, it would have found this claim proven.

 

COMMENT

The decision is a useful reminder of the key elements that are required to bring a successful broker's negligence claim.  The Court was critical of the quality and value of the factual and expert evidence relied on by the Insured. The unsatisfactory nature of the Insured's evidence ultimately proved detrimental to its case.  While the broker successfully defended the claim against it, its position was not assisted by the lack of a broking file recording contemporaneous evidence of what was said (or not said) at the time the policy was placed.  It is a reminder to brokers to capture those interactions and collate them in a file, so as to assist in any future dispute.

The Court also expressed doubts as to the need to call expert broking evidence in cases such as these and referred to the observations of Leggatt J (as he then was) in Involnert Management Inc v Aprilgrange Limited & Others [2015] EWHC 2225 (Comm) who similarly doubted the value of broking evidence, and considered that brokers' general duties have become a matter of law to a substantial extent.