Insurance brokers’ professional negligence claim

Case Summary

In this professional negligence claim against an insurance broker, the court addressed 3 issues that we'll comment on:

1. Whether it is always necessary to obtain expert broking evidence where the general duties owed by brokers “have become a matter of the law”
2. The circumstances in which an insurer might waive its right to the disclosure of information that might otherwise be of material interest to an underwriter
3. Whether a broker can be liable for claims for consequential loss

Hamsard One Thousand and Forty-Three Ltd v AE Insurance Brokers Ltd [2024] EWHC 262 (Comm)

Factual Background

The defendant broker, ‘AE’, was instructed to secure a property owner policy for the claimant, Hamsard. The proposal form (completed by AE but approved by Hamsard’s principal, Mr Beresford) included an assumption that Mr Beresford, had never been subject to bankruptcy proceedings or any mandatory or voluntary insolvency proceedings. Cover was placed with Policyfast (on behalf of Fusion Insurance Services/QBE) in March 2014 (the Policy).

Hamsard made a claim against the Policy for property damage caused by their departing tenants. Following an investigation by loss adjusters, the insurer confirmed their decision to avoid the policy on the basis of two non-disclosures, namely:

1. Mr Beresford’s involvement with prior failed companies
2. The fact that the claimant’s tenant was in Administration 

The Financial Ombudsman Service declined to overturn insurers’ avoidance (their conclusions being the subject of significant criticism during trial). As a result, Hamsard opted to pursue AE, alleging that their broker failed to take them through all questions on the proposal form and failed to consider whether Fusion’s terms met their demands and needs. Hamsard claimed c.£2.65m in reinstatement costs, past and future loss of rent and damage to fixtures and fittings. AE denied the claim entirely, relying on a defence of waiver under s.18(c) of the Marine Insurance Act 1906 (which is effectively what we now know as the s.3(5)(e) exception to the Insured’s duty to disclose under the 2015 Insurance Act ) and that there was no recoverable loss in any event.

What did Persey J decide?

The non-disclosure of Mr Beresford’s involvement with prior failed companies

The Claimant argued that AE should have disclosed Mr Beresford’s association with three insolvent companies in response to the question “Are there any material facts that the insurer should be made aware of”. While AE’s underwriting expert accepted that the non-disclosure was something that would be of material interest to an underwriter, AE successfully argued that the insurer, Fusion, had waived its right to this information such that it did not have to be disclosed. 

The waiver arose where the Statement of Fact said:

"… We are assuming for the purpose of this quotation, the following information:

1.  You, the Proposer or any named persons on this policy have not … been declared bankrupt or are subject to bankruptcy proceedings, any voluntary or mandatory insolvency”

The Judge was taken to the relevant excerpt of MacGillivray on Insurance Law (15th Ed) at 16-083 which states:

“… if an insurer asks whether individual proposers have ever been declared bankrupt, they waive disclosure of the insolvency of companies of which they have been directors …” as supported by the Court of Appeal decision in Doheny v New India Assurance Co Ltd [2004] EWCA Civ 1705.

The court held that:

“The question asked on the proposal form was clear and the reply given to it was correct. Had Fusion wished to have any further information as to whether the insured and the proposer had any interest in businesses which had been declared bankrupt or had made arrangements with their creditors then it could have asked. It did not do so.” 

Persey J was satisfied that Fusion had waived its right to disclosure and as a result, there was no duty on either the claimant or the defendant to provide such information.

As for the Claimant’s tenant being in administration, the court were able to infer from contemporaneous documents, that the factual evidence supported the contention that Fusion were notified of the tenant’s situation and there had been no breach.

As a result, the Claim was dismissed in its entirety.

What are the practical implications of this case?

Effective mitigation

Whilst the court did not concern themselves with the validity of the insurers’ decision to avoid the policy, Persey J’s findings, emphasise the importance of considering whether there is any basis to challenge a declining insurer before a claim is pursued against the broker.

The objective meaning of wording in Proposal Forms / Statements of Fact

The claim was considered under the Marine Insurance Act 1906, but the outcome is still relevant today.  Section 3(5)(e) of the Insurance Act 2015 provides that in the absence of enquiry, the duty of fair presentation does not require the insured to disclose a circumstance “if it is something to which the Insurer waives information.” This decision is a reminder to insurers/underwriters to ensure they ask the right questions to elicit the key information they wish to obtain from a prospective policyholder when considering whether to offer terms.

Use of expert evidence in claims against brokers – a tide change?

It has long been the common position, see Avondale Exhibitions Limited v Arthur J Gallagher Insurance Brokers Limited [2018] EWHC 1311 (QB) that a claim against a broker will rarely be successful without supportive expert evidence. However, this case suggests that parties may be able to establish the general duties of insurance brokers by relying on case law only – especially as those duties have “been considered by the courts in many cases and, to a substantial extent, have become a matter of law”.

Good risk management

The decision in Hamsard is a salutary reminder to brokers of the importance of keeping a written record of advice.  Having said that, in Hamsard, despite the broker’s file being incomplete, Persey J was still prepared to find for the broker based on (i) apparent inconsistencies in the Claimant’s evidence; and (ii) by effectively taking a view based on other documents which were available and which supported AE’s recollection. While a positive outcome for AE, the position remains that the existence of a contemporaneous note is more likely to lead to the early disposal or withdrawal of a claim and, overall, should reduce the legal costs of any dispute.

Claims for consequential loss

Although the claim failed at every stage, the judge did helpfully conclude that claims for consequential losses (ie which arise from non-payment of an indemnity and which would not otherwise have been covered by a suitable insurance policy) are not usually recoverable in broker’s negligence claims. A helpful reminder to brokers and their professional indemnity insurers. 

Case details

• Court: King's Bench Division (Commercial Court)
• Judge: Lionel Persey Kc (sitting as a Judge of The High Court)
• Date of judgment: 12/2/2024