The case of Dalamd Limited v Butterworth Spengler Commercial Limited  EWHC 2558 (Comm) deals with the sadly not uncommon scenario where an insurer declines cover under a policy and the insured, almost inevitably, looks for someone to blame.
Often the spotlight falls on the insurance broker either with regard to the placing of the risk or the handling of the claims process.
The precise allegations in this case included that the broker had failed to advise in relation to both the conditions of the policy and the adequacy of disclosure. Dalamd is important in clarifying some of the legal hurdles that an insured must overcome in bringing a claim against brokers. From a practical perspective, it is a useful prompt to review what can be done to avoid these scenarios occurring in the first place.
The claim arose because of a fire at a factory that led to two separate insureds bringing claims under their policies. The insurers declined cover for a number of reasons which, the insured argued, were as a consequence of the broker’s negligence. The court found that the broker was negligent only in certain respects. The court was then tasked with considering whether the insured satisfied the test of ‘causation’, namely did the loss flow from the breach such that the broker could be held liable?
The legal issues
The court grappled with two key legal questions:
Whether the insured had to establish that the insurer was entitled to decline the claim. This was particularly relevant in that the insured had only sued the broker, not the insurer. The insured argued that it was sufficient that the broker’s conduct had impaired the claim such that the insurer had reasonably arguable grounds to decline. The insured argued that they should not be expected to challenge the insurer in those circumstances but could instead sue their broker. The court disagreed. An insured was required, on the balance of probabilities, to prove that insurer was entitled to decline. Otherwise, this would place too great a burden on brokers in defending such claims.
To the extent there were any valid reasons (independent of any broker negligence) to decline the insurance claim, how that would impact on the insured’s legal claim. The insured argued that this should be looked at on a ‘loss of chance’ basis i.e., once it was established the broker’s negligence had given grounds for declining cover, it should simply be a question of what the percentage chance was it would have been declined anyway. This was important as, if damages are assessed on a ‘loss of chance’ basis, it would very likely receive some damages with the amount dependent on the chance. The broker argued that the court should instead decide whether, on the balance of probabilities, the insurer would have declined anyway or not. This is much more of an ‘all or nothing’ scenario. The court again agreed with the broker. If there was a valid reason to decline, wholly unrelated to the negligence, then the breach would not have caused the loss as the same outcome would have occurred in any event.
what it means
In a sense this is a welcome outcome for brokers and their professional indemnity insurers. Brokers have often been seen as an easy target in declinature scenarios, given their heavy involvement in both placing the risk (and therefore presenting key material on behalf of the insured) and/or in the claims process. The case can be seen to reflect a tightening up of the test that an insured must satisfy.
Of course, brokers would wish to avoid this scenario altogether and in the vast majority of cases, the cover sold will give the protection intended, the broker will ensure that policy conditions are adequately understood and insureds will be happy with the service. Equally, all brokers will recognise scenarios which present particular difficulties outside of the norm. These can arise where, for example, the presentation of risk or application of conditions is particularly challenging, due to the nature of the insured’s business or claims history, or because the claim that is being presented has complex issues to be addressed, either in terms of liability or the nature of the losses claimed. Usually brokers will be able to address these issues within their own expertise and resources, but sometimes outside assistance (particularly early in the process) can prove invaluable.
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