Insurance – Business interruption risk – Negligence – First defendant insurance broker obtaining insurance cover for claimant’s premises – Fire breaking out and causing damage – Premises being grossly under-insured – Claimant bringing claim against defendant for breach of contract and/or negligence – Whether defendant failing to arrange adequate levels of cover – Whether defendant being liable for under-insurance – Claim dismissed
The claimant owned a recycling plant in Enderby, Leicestershire. This defendant was an insurance broker which arranged a commercial combined insurance policy for the claimant in respect of its premises which covered, amongst other things, business interruption risks for the period from 13 April 2010 to 12 April 2011. In May 2010, there was a fire at the claimant’s premises and it was common ground that they were grossly under-insured.
The claimant brought a claim for breach of contract and/or negligence against the defendant. It contended that the defendant had negligently advised it, and failed to arrange adequate levels of cover, causing insurers to threaten avoidance of cover by reason of under-insurance. It argued that, if it had been properly advised by the defendant, it would have been fully insured and made a claim for the shortfall between the settlement it had reached with insurers and the sum which it said it would have recovered had it been properly advised and insured, together with consequential losses. The defendant denied all allegations of negligence, and said that the insurance was arranged on the basis of specific instructions received from the claimant. Furthermore, the claimant could not prove causation and could not have obtained cover on the basis it contended should have been arranged. In any event, any damages had to be substantially reduced for contributory negligence.
Held: The claim was dismissed.
Whilst a broker was not expected himself to calculate the business interruption sum insured or choose an indemnity period, both of which were matters for the commercial client, the broker had to provide sufficient explanation to enable the client to do so, including an explanation of the method of calculating the sum insured, which would likely require an explanation of terms such as “estimated gross profits”, “maximum indemnity period”, and the considerations to take into account when choosing a maximum indemnity period. In order to do that, the broker would need to take reasonable steps to ascertain the nature of the client’s business and its insurance needs: Youell v Bland Welch & Co. Ltd (Superhulls Cover No. 2) [1990] 2 Lloyd’s Rep. 431, Dunlop Haywards (DHL) Ltd v Barbon Insurance Group Ltd [2009] EWHC 2866 (QB); [2009] PLSCS 330, Saville v Central Capital [2014] EWCA Civ 337 and Arbory Group Ltd v West Craven Insurance Services [2007] Lloyd’s Rep IR 491 considered.
An insurance broker providing the type of service provided by the defendant was neither required nor expected to conduct a detailed investigation into a client’s business. However, the broker’s duty was not diminished because his firm might offer an enhanced service at additional cost. The nature and scope of a broker’s obligation to assess a commercial client’s business interruption insurance needs would depend upon the particular circumstances of the case, including the client’s sophistication, and the number of times the broker had met the client in the past. Although business interruption insurance was for commercial clients, the level of client sophistication would clearly vary enormously. It could not be assumed that an small to medium enterprise, such as the claimant in the present case, would have any understanding of the nature of the insurance. Further, although as a matter of common sense a client might not need annual repetition of advice previously given and understood, that assumed that the responsible personnel remained the same and that the giving of the advice could be properly demonstrated by documentation (or otherwise). The onus was likely to be on the broker to show that. If a client who appeared to be well informed about his business provided a broker with information, the broker was not expected to verify that information unless he had reason to believe that it was not accurate. Having satisfied those obligations, where a broker was given express instructions as to the cover to be obtained, he had to exercise reasonable care to adhere to those instructions: William Jackson & Sons Ltd v Oughtred & Harrison (Insurance) Ltd [2002] Lloyd’s Rep IR 230 and Synergy Health (UK) Ltd v CGU Insurance plc [2011] Lloyd’s Rep. I.R. 500 considered.
On balance, in the present case, the court was satisfied that the defendant had provided an adequate explanation of business interruption cover for the relevant period. The figures recorded for both the sum insured for business interruption and turnover had been provided by the claimant and the defendant had had no reason to suppose that they were inadequate. Furthermore, the indemnity period had been fixed on the claimant’s instructions, and had reflected the period it considered it would take to get its business up and running after an incident. It followed that the claim in relation to business interruption failed. As regards stock and machinery cover, there was no question of any shortcomings as regards advice from the defendant, and that aspect of the claim lacked credibility.
Michael Davie QC and Richard Osbourne (instructed by Freeth Cartwright LLP) appeared for the claimant; Neil Calver QC and Michael Bolding (instructed by Plexus Law LLP) appeared for the defendant.
Eileen O’Grady, barrister
