Property consultant – Professional indemnity insurance – Excess cover – First defendant broker obtaining professional indemnity insurance for claimants through sub-broker – Clients suing claimants for negligent valuation – Insurers refusing pay out under policy owing to endorsement limiting liability – Claimants seeking damages for negligence against brokers – Whether excess insurance policy covering valuation work – Broker admitting negligence but claiming policy covering valuation work – Whether policy properly construed or by rectification covering valuation activity — Whether insured contributorily negligent – Whether sub-broker contributorily negligent — Claims allowed in part
The first and second claimant companies were part of a group (the third claimant) that carried on business as property consultants, including commercial property valuation work. In 2006, the first defendant broker was instructed by the third claimant to obtain professional indemnity cover for the entire group including valuation cover. The cover was placed through a sub-broker in two layers: a primary layer of £10m and an excess layer of £10m excess of £10m.
The claimants received claims from a number of lenders in connection with the alleged provision of negligent or fraudulent valuations and claimed under their professional indemnity insurance. The primary layer insurers accepted the claims up to the limit of the indemnity. However, the second defendant excess insurers rejected the claims on the ground that the cover was limited by an endorsement in the policy to the group’s commercial property management activities.
The claimants commenced legal proceedings against the first defendant on the basis that it had been instructed to obtain excess cover which, as in earlier years, protected the claimants in respect of their valuation activities. The first defendant admitted liability in failing to draw the claimants’ attention to the endorsement, but argued that, despite the endorsement, either as a matter of construction or by a process of rectification, the policy did cover the claimants’ valuation activities. That was disputed by the second defendant, which was joined as a party to the proceedings. The first defendant also contended that the sub-broker had been responsible for the final wording of the policy, contrary to its instructions. It also argued that the claimants were contributorily negligent in failing to notice the limitation in the endorsement so that any recoverable damages should be reduced.
The issues for the court were whether: (i) on its true construction or by rectification, the excess insurance policy covered the claimants’ valuation activities; (ii) the claimants were contributorily negligent in respect of the damage suffered; and (iii) the sub-broker was contributorily negligent.
Held: The claims were allowed in part.
(1) In construing the words of the excess insurance policy the relevant question was what a reasonable person, having all the background knowledge available to the parties, would have understood the words to mean using the language in the contract. There was a major difference between defining the cover in terms of the claimants’ activities and commercial property management activities. The former identified the cover by reference to all the activities of a particular company; the latter by reference to a limited range of activities carried out by the group as a whole. The nature and extent of the difference strongly supported the prima facie inference that there had been a deliberate decision to depart from the earlier wording. The first defendant had instructed the third party to obtain excess cover for commercial property management.
The party seeking rectification had to show that: (i) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (ii) there was an outward expression of accord; (iii) the intention continued at the time of execution of the instrument to be rectified; and (iv) by mistake, the instrument did not reflect that common intention. In the instant case, the first defendant had failed to establish the necessary prior agreement between the parties that the policy would cover valuations. The common intention had always been to provide cover for commercial property management: Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 WLR 267 considered.
(2) In the context of a claim against insurance brokers, the question of contributory negligence involved a consideration of whether the client had been guilty of neglect of what would be prudent in respect of their interests. In the instant case, the claimants were not at fault for failing to review the policy in detail. The first defendant was employed to obtain cover on the relevant terms and, in that context, to conduct the necessary review of the policy to ensure that cover was obtained on those terms. The claimants’ reliance on their professional brokers to do their job properly was reasonable and there was no fault on their part.
(3) In most cases the duties between a client and its insurance broker also arose between the broker and the sub-broker it employed to place the cover. Those duties were to: (i) exercise reasonable care and skill in the fulfilment of its instructions and the performance of its professional obligations; (ii) carefully review the terms of any quotations or indications received; (iii) explain the terms of the proposed insurance; and (iv) use reasonable skill and care to draw up a policy, or to ensure that the policy accurately reflected the terms of the agreement with the underwriters and was clear so that the insured’s rights under the policy were not open to doubt. It was the broker’s, rather than the sub-broker’s, function to ensure the insured’s needs were met. However, in order to perform its duties to obtain quotations and place insurance, it was necessary for the broker to ensure that the instructions were understood. It was also accepted that in order to do this, a duty could arise to request clarification, or to query the instructions given if, for example, these appeared to be illogical or absurd.
Although the first defendant was primarily responsible for failing to obtain the correct cover, the third party was contributorily negligent for failing to check that the instructions were correct. Accordingly, the claimants’ claim for £10m failed against the second defendant, but succeeded in full against the first defendant. The first defendant’s claim against the third party for breach of duty succeeded, but their damages would be reduced by 80% to reflect their contributory negligence.
Alistair Schaff QC and Michael Holmes (instructed by Fulbright & Jaworski International LLP) appeared for the claimants; Adam Fenton QC and Julia Dias QC (instructed by Cayton & Co) appeared for the first defendant; David Railton QC and Sioban Healy (instructed by Kennedys) appeared for the second to seventh defendants; George Leggatt QC and Nicholas Craig (instructed by Simmons & Simmons) appeared for the third party.
Eileen O’Grady, barrister
