Dalamd Ltd v Butterworth Spengler Commercial Ltd

There was little dispute as to the content of Butterworth Spengler’s duty to take reasonable skill and care.

In Jackson & Powell on Professional Liability (8^th ed., 2017, para 16-044), the duties of a broker are said, correctly, to include the following:

“1 The broker should identify the type and scope of cover which the client needs, and advise the client accordingly;

2 The broker should take reasonable steps to arrange the insurance cover which the client has instructed him to obtain, and which is suitable for and clearly meets the client’s requirements;

3 In placing the insurance, the broker must have regard to the obligations of disclosure owed to the insurer;

…

Once the cover has been placed, the broker should consider and explain to the client what cover has been arranged; and

At renewal of an existing policy, the broker should go through the same exercise that was carried out at inception of the policy”.

In relation to disclosure, if the broker is actually aware of material facts he has a duty to the client to take reasonable care to disclose them. (Jackson & Powell para. 16-086).

Insofar as the broker is not actually aware of material matters he will have obligations to take reasonable care to warn the client of the existence of the duty to disclose and to assist the client in identifying matters which need to be disclosed. A broker’s obligations in relation to the disclosure to be made to insurers were explored in Jones v Environcom [2010] Lloyd’s Rep IR 676, where David Steel J said, at [54]-[56]:

“54.

In short, a broker:

Must advise his client of the duty to disclose all material circumstances;

Must explain the consequences of failing to do so;

Must indicate the sort of matters which ought to be disclosed as being material (or at least arguably material);

Must take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention.

All this flows from the requirement that the broker should take reasonable steps to ensure that the proposed policy is suitable for the client’s needs. By definition, a policy which is voidable for non-disclosure is not suitable.

55.

Moreover it was, or became, common ground that where a change in personnel led to a new person being responsible for insurance matters in the client’s organisation, the broker must ensure that an appropriate understanding of questions of materiality is held by that person…

56.

The rationale for the imposition of these duties on a broker is that it is an unusual obligation for a contracting party, and an area of the law which can have harsh consequences, not least because any non-disclosure relied upon by the underwriter to avoid the policy may have no causative significance as regards the claim that will as a result not be paid. This makes it all the more important that the lay client is told of the paramount duty to disclose and what it involves. Further, in case the client does not appreciate what may be material, (as will often by the situation) he needs to be advised to err on the side of caution so as to disclose anything that might impinge on the judgment of a competent underwriter in assessing the risk and be helped to unearth such matters.”

Dalamd makes a number of different allegations of breach of these duties by Butterworth Spengler. Those which were pursued may be summarised under 5 heads, which it is convenient to consider in the following order:

I have already set out most of the basic facts in relation to this issue, including my finding that it was on 1 August 2012 that Colin Douthwaite told Andrew Thomson as to the insolvency of Doumac, and asked him to ensure that Doumac’s existing covers were transferred to JLS.

Butterworth Spengler’s case was that there was disclosure of the insolvency to Miles Smith, which was Aviva’s agent, on 1 August. It accepted that the follow up email of 2 August ought to have mentioned the insolvency, but contended that that did not alter the fact that disclosure had already been made.

In my judgment it was not established that Miles Smith was, for the purposes of the conversation of 1 August, Aviva’s agent. Miles Smith is a placing broker and in the ordinary way would be an agent of the insured. There was no cogent evidence that Miles Smith had been made Aviva’s agent for relevant purposes, and the documents which exist pointed the other way. Thus, Aviva itself denied that Miles Smith was its underwriting agent; underwriting decisions were taken by Core Underwriting; and Miles Smith charged Widnes and JLS a placement fee of £250. That access to the Core Underwriting product might have been exclusively through Miles Smith does not of itself make Miles Smith an agent for insurers.

In addition it was not established that the person to whom Andrew Thomson spoke on 1 August 2012 had authority to receive information about the risk. The person to whom he spoke on that date has not been identified, but it appears that he or she was not a person who was authorised to deal with the risk. This is the probable reason why that person requested that Andrew Thomson should send an email to Hayley Jennings. That would be consistent with the fact, which appears to be the case from information given by Greenwoods, that he or she did not leave an internal message for Ms Jennings. I found unconvincing the suggestion made by Butterworth Spengler that the person to whom Andrew Thomson spoke must have had sufficient authority because the words in the note “change with effect 1/8/12” indicated that he or she had actually authorised the change. I consider that the note recorded the leaving of a message by Andrew Thomson, and was not a note of a substantive conversation with someone who had authority to agree the change.

Further, and in any event, I consider that the email which Andrew Thomson sent to Ms Jennings on 2 August was inaccurate and did not properly disclose Doumac’s insolvency. It was, in my judgment, a breach of Butterworth Spengler’s duty to send, as the only written communication crossing the line between themselves and Miles Smith, an email which failed to mention the insolvency and which referred only to a change in the trading name.

Furthermore, nothing was done by Butterworth Spengler after 2 August to put right the misstatement in the 2 August email, or otherwise to make fuller disclosure of the position in relation to the insolvency of Doumac.

Accordingly I consider that Dalamd has established a breach of duty on the part of Butterworth Spengler in relation to the non-disclosure to Aviva of Doumac’s insolvency.

Dalamd’s case in this regard is that BI cover was not adequately explained by Butterworth Spengler at any point. The cover which was effected was ICOW cover as a standalone, i.e. not as part of gross profit cover. This, Dalamd contends, was not appropriate to a risk like Doumac’s because, in the event of the occurrence of a major peril which destroyed the premises, ICOW would not pay out to any significant degree because, in such circumstances, there would probably be little that could be done to mitigate the loss of profit until the property and plant were reinstated. This, Dalamd says, was not adequately explained. Further Dalamd contends that BI cover was not considered at all after JLS replaced Doumac, which it contends it should have been.

Butterworth Spengler’s case is that there was an adequate explanation given of how ICOW cover worked, including as a standalone cover and that it had had no obligation to advise on BI after the Doumac insolvency because its retainer by JLS was to transfer Doumac’s existing policies.

There are thus two main issues which arise in relation to this alleged breach. The first is as to the adequacy of the explanations and advice given to representatives of Doumac as to BI insurance. This itself involves a factual dispute as to what Andrew Thomson said on the subject at the mid-term review meeting on 9 February 2011 and the renewal meeting on 17 August 2011. Andrew Thomson’s evidence was that, at the meeting on 9 February 2011 he had gone through with Andrew McQueen the different types of BI cover, including cover for gross profits, as well as ICOW and Additional ICOW cover and stock debris removal cover, and he had recommended that Doumac take out the entire suite.

It is clear from the documents that thereafter Andrew Thomson sent to Andrew McQueen gross profit calculation sheets, together with guidance notes, and, as I have set out above, thereafter Andrew Thomson obtained quotations for gross profit BI cover, and quotations for ICOW, Additional ICOW and stock debris removal cover, which were to be discussed at the renewal meeting on 17 August 2011.

Andrew Thomson says that at that meeting, there was a discussion of how the various types of BI cover worked, including how ICOW would work as a standalone cover. His evidence was that he was sure of this, and more generally that he believed that Andrew McQueen had been aware of these matters because they had been carefully discussed with him on “multiple occasions”.

I have set out above the entry in the minutes of the meeting of 17 August 2011 which were made by Andrew Thomson, and were sent by him to Andrew McQueen on the same day. Andrew McQueen gave instructions on 16 September 2011 with the email which I have quoted above, and Andrew Thomson then emailed Ms Clarke of THB.

Andrew McQueen’s evidence is that at no point in this process did Andrew Thomson give any explanation of how standalone ICOW would work. His evidence was that it was “sold to me as being an alternative type of business interruption cover which would provide adequate cover following a loss”, and that “it was very much sold as a more affordable alternative to business interruption cover”.

On this aspect of the case, where Andrew Thomson’s and Andrew McQueen’s evidence differed, I preferred Andrew Thomson’s evidence. I find that he did give Andrew McQueen, in their various discussions on the subject, an adequate understanding of the difference between gross profit cover and ICOW cover on its own. As I have said, I generally found Andrew Thomson to be a fair and essentially reliable witness. Moreover, while Andrew Thomson accepted that it would have been desirable for the nature of the advice given in relation to standalone ICOW to have been expressly set out in writing, it appears to me to be clear from the documents that there were lengthy discussions of the question of BI cover and of its various types. Furthermore, the email which Andrew Thomson sent to Ms Clarke on 27 September 2011 evidences the fact that Andrew McQueen was aware that the covers which he had asked to be effected on 16 September 2011 were less satisfactory than gross profit cover. I consider that the various discussions did provide Andrew McQueen with an adequate explanation of the difference between the different types of cover, and that if he had been in doubt as to how they worked, he would have contacted Andrew Thomson for further explanations, which he did not. As I will deal with in more detail below, the reason why gross profit BI cover was not taken out was not because of a lack of understanding of what standalone ICOW cover entailed, but because it was considered that Doumac could not afford it.

For the reasons which I have given Dalamd has failed to make out its case that there was a breach of duty in relation to the advice given to Doumac in relation to BI insurance.

The second aspect of this allegation of breach relates to whether Butterworth Spengler should have given advice to JLS, after Doumac’s insolvency, in relation to BI. I do not consider that this is made out either. Butterworth Spengler’s instructions on 1 August 2012 were to effect a transfer of Doumac’s insurances. There was no request, and no possibility, at that juncture to carry out a general review of JLS’s insurance needs.

Nor do I consider that it was established that any broker acting with due care and attention would have reverted to the issue of the adequacy of its BI cover with JLS in the period between 1 August 2012 and the time of the fire. I accept Mr Powell’s evidence that, if a broker has adequately explained the existence of an uninsured exposure but been told by the client that cover for it is financially unaffordable, he does not necessarily have to go through a consideration of the same exposure with the insured every time there is a mid-year review. Mr Powell’s evidence was that a broker might not do such an exercise every year, although he should still do it periodically and that to raise it each year might well be unwelcome to the client. I accept this evidence as well, though what might be needed must depend on the precise circumstances. In the present case, the personnel at JLS were exactly the same as those who had run Doumac, and Butterworth Spengler had been told that the business was the same. Especially given these matters, Butterworth Spengler had no reason to think that JLS had greater funds or would have a greater desire to effect an insurance cover which Doumac had not been able or willing to afford. Accordingly, I do not consider that Butterworth Spengler can be said to have been in breach in not raising the issue between 1 August and 21 October 2012.

A part of Dalamd’s pleaded case was that Butterworth Spengler had failed to take adequate steps to “bring home” to either JLS or Widnes the consequences of breach of the External Storage Condition. This part of its case received little attention in its closing submissions. As will appear hereafter it faced insuperable causation difficulties.

In any event, I am not satisfied that there was a breach of duty in this respect in any event. At the time Butterworth Spengler initially obtained a quotation from Aviva in March 2012, it incorporated the External Storage Condition. The quotation and the terms of the condition were sent to Colin Douthwaite on 14 March and he was asked to check through the documents. I have quoted the terms of the External Storage Condition above. It is quite clear as to the effects of non-compliance.

It is, nevertheless, true to say that, at this point, Butterworth Spengler appear not to have specifically drawn the existence of the condition to Colin Douthwaite’s attention, at least in writing. Whether or not that was a failure to exercise reasonable care appears to me, however, to be academic. This is because I accept Andrew Thomson’s evidence that, at the survey held on 17 July 2012 the Aviva Surveyor, Ms Rhead, had drawn attention to the breach of the External Storage Condition and told Colin Douthwaite and Phil Roche that they would not be covered in the event of a claim; and also that he had himself reiterated this after Ms Rhead had left. I find that his communication with Hayley Jennings on 17 July 2012, when he gave an estimate that it would take four to eight weeks to clear the bales which were non-compliant with the External Storage Condition was written after a discussion of the issue with Colin Douthwaite. I reject Colin Douthwaite’s evidence to the contrary. Furthermore, I consider that this discussion, taken with what had been said at the survey, must have made both the existence of the External Storage Condition, and the consequences of non-compliance clear to Colin Douthwaite, even if they had not been beforehand. The importance to insurers of the External Storage Condition and compliance with it was, furthermore, confirmed to Colin Douthwaite by the summary of the Aviva survey report which was sent to him on about 9 August, under cover of an email in which Andrew Thomson again drew attention to the issue.

As to the issue as to whether there was proper advice to Widnes, as opposed to Doumac or JLS, I consider that there was, because Widnes, by Douglas McQueen, had, as I find, delegated full responsibility for dealing with Widnes’s insurances in relation to the Premises to Andrew McQueen and subsequently to Colin Douthwaite. In August 2009 Douglas McQueen asked Andrew McQueen to take over responsibility for renewing Widnes’s policies. From 2010 Douglas McQueen left it up to Andrew McQueen to deal with Widnes’s insurance. Thereafter he did not check that the insurance had been obtained nor ask to see the policy documentation. It was in those circumstances that Andrew McQueen signed Butterworth Spengler’s mandate dated 22 September 2010 “on behalf of” both Doumac and Widnes. From late 2011 the primary responsibility for dealing with the insurance of the Premises passed to Colin Douthwaite. In handling the insurance thenceforth Colin Douthwaite was either Widnes’s agent or sub-agent to Andrew McQueen. What is apparent is that Douglas McQueen had passed all matters of Widnes’s insurance to Andrew McQueen, Doumac and JLS. In the circumstances, I consider that Widnes is imputed with the knowledge of Andrew McQueen and of Colin Douthwaite in relation to the existence and effect of the External Storage Condition.

Dalamd’s case in this area is that Butterworth Spengler were in breach of their duty to Widnes in failing to advise it as to whether it was desirable and feasible to obtain cover for loss of rent.

On the issue of breach, which is all that I am considering at this juncture, there was little real dispute. Mr Mooney and Mr Powell both agreed that loss of rent cover for Widnes ought to have been considered by Butterworth Spengler and discussed with their client. Andrew Thomson accepted that he had known from an early stage that Widnes leased the Premises to Doumac, and that he needed to know whether rent was being paid under the lease. He accepted further that loss of rent was a key risk for Widnes.

In fact, however, I find that the risk of loss of rent was not raised or discussed with Doumac or JLS (or Widnes) at any stage. It was not mentioned in the New Business Report of September 2010, or in the Risk and Insurance Report of August 2011. It was not discussed at the meetings on 9 February 2011 or 29 June 2011, or when the Novae cover was replaced with the Aviva cover in March 2012, or at the renewal of the XL policy in August 2012. Andrew Thomson accepted this. It was also not raised after the insolvency of Doumac when JLS was substituted as an insured under the Aviva policy. It appears to have been simply overlooked. The failure to raise the issue amounted to a breach of the duty owed by Butterworth Spengler to Widnes.

There were two aspects to Dalamd’s case in this area. In the first place, it was said that Butterworth Spengler failed to ensure the disclosure to XL of matters which were arguably material of which they were themselves aware. Secondly, it was said that, in any event, Butterworth Spengler gave inadequate advice as to the insured’s duty of disclosure, and in particular failed to fulfil the obligations, summarised in paragraphs 54(iii) and 54(iv) of Jones v Environcom, to indicate the sort of matters which ought to be disclosed as being material or arguably material, and to take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention.

As to the first aspect, Dalamd relied on two particular matters, and I will consider each in turn.

The first is that Butterworth Spengler, by Andrew Thomson, knew of the significant build-up of waste which had occurred by the time of the Aviva survey, that Aviva had not been satisfied with this situation, that there was a real likelihood that there would still be waste being stored outside at the time of the XL renewal, that the accumulation of waste went to fire risk, and that when a build-up of waste had arisen in January / February 2012 it had led to a breach of the conditions of the EA permit which had led to Novae’s cancelling its policy.

There is no doubt that Andrew Thomson knew these matters: he accepted that he did. Butterworth Spengler, however, contended that the build-up of waste was not material to the XL risk, because it was a CAR policy. This was not a reason which Andrew Thomson himself gave for the build-up not being disclosed to XL, but was based instead on Mr Powell’s evidence. That evidence was to the effect that a CAR policy would cover mobile plant, which would be expected to be in use where there was waste around it. The difficulty with Mr Powell’s evidence on this point, however, was that in the present case the bulk of the plant and machinery was static equipment which was installed in the sheds. I did not consider that he gave any cogent reason why the insurer of such plant and machinery should not be just as interested in an increase in the fire risk as would an insurer of the buildings. On this point I prefer the evidence of Mr Mooney.

In the circumstances I find that Butterworth Spengler ought to have ensured that there was disclosure to XL of the fact that there had been a build-up of waste.

The other arguably material matter which Dalamd contends that Butterworth Spengler actually knew about were two previous fire incidents, or incidents which had had the potential for fire, one in 2010 and the other that of 27 November 2011. Dalamd’s contention was that Andrew Thomson had been told about these at the time of the Aviva survey on 17 July 2012. Andrew Thomson denied that he had been.

This difference was part of a wider dispute as to what had occurred on that occasion. Dalamd’s contention, and the evidence of Colin Douthwaite, was that Andrew Thomson had arrived early for the survey, well in advance of the surveyor; that he had advised Colin Douthwaite that he should not mention previous fire incidents to the surveyor; and that in the course of this discussion, Colin Douthwaite had told him about two previous incidents, namely “an electric motor running hot”, when no claim was made; and the incident on 27 November 2011. Colin Douthwaite’s evidence was that, despite Andrew Thomson’s advice, once the surveyor, Ms Rhead, had arrived, there was a discussion of previous incidents, and Phil Roche had shown Ms Rhead the fire record log book.

Phil Roche’s evidence in his witness statement was to similar effect. He stated that prior to the surveyor arriving on 17 July 2012 Andrew Thomson had suggested that the insured should not volunteer any information about previous fires or incidents. But, he said, when Ms Rhead requested the fire record book, he had immediately presented it to her.

Andrew Thomson’s evidence was that while he had, in accordance with what he considered good practice, arrived before the surveyor, he had not advised the insured to conceal or withhold any matters, and specifically had not told Colin Douthwaite or Phil Roche not to reveal information about previous fire incidents. He had, he said, no knowledge of any such incidents, and so would have had no reason to give such advice even if he had wanted to, which he said he had not. Furthermore, he said that he had not been told about any such incidents on this occasion; that there had been no oral mention of any previous fire incidents to Ms Rhead by Colin Douthwaite or Phil Roche in his hearing; he considered it unlikely that there could have been; and that Ms Rhead had not been shown log book entries relating to previous fires.

Of these differing accounts, I preferred Andrew Thomson’s. As I have already said, I considered him a more reliable witness than Colin Douthwaite or Phil Roche. It did not appear to me credible that Andrew Thomson would have advised the insured not to mention previous fire incidents to a surveyor. Furthermore there is no documentary support of any kind for the suggestion that the previous fire incidents of 2010 or 2011 were revealed either to Andrew Thomson or to the Aviva surveyor on this occasion.

While this means that I find that Andrew Thomson did not actually know of the previous fire incidents of 2010 or 2011, that is not the end of the matter because of the second strand of Dalamd’s case in this area, namely that Butterworth Spengler gave inadequate advice as to what ought to be disclosed and failed to take proper steps to elicit such matters from the insured.

As to this, Butterworth Spengler could point to a number of occasions on which representatives of the insured were given advice as to the obligation of disclosure of material facts, in particular to Andrew McQueen in the Risk and Insurance Report sent at the date of the August 2011 renewal and in letters of 8 September and 16 November 2011, and to Colin Douthwaite in the declaration to the Proposal Form which he was given on 2 April 2012 and in the letter sent to him on 16 May 2012. I also accept that both Andrew McQueen and Colin Douthwaite were at all relevant times aware, in general terms, of the obligation on the part of the insured to make disclosure of material matters.

Nonetheless I consider that there were failings on the part of Butterworth Spengler in the context of the renewals of the XL insurance to take adequate steps to indicate to the insured the sort of matters which ought to be disclosed or to seek to elicit such matters from the insured. I have reached this conclusion on the following basis:

Specifically I consider that it was necessary for Butterworth Spengler to seek to elicit whether there were material matters to be disclosed in two areas. The first was whether there had been any problems with HSE, the EA and the Fire and Rescue Service. This was necessary given that the risk was being placed on the basis of a document which indicated that there were no problems (albeit that Butterworth Spengler did not know its terms). But it was in any event a matter which was of potential materiality and which, in light of Butterworth Spengler’s knowledge of the build-up of waste, they ought to have enquired about. The second was as to previous fire incidents. That is perhaps the most obvious example of the type of question that a broker ought to ask of a client in respect of a policy which covers property damage caused by fire. I accept Mr Mooney’s evidence that a reasonably competent broker ought to ask about previous fires and make it clear that that included fires that did not result in an insurance claim.

In this context, I should refer to a suggestion made that Butterworth Spengler’s obligation to enquire about previous fire incidents was adequately fulfilled by the inclusion of question 38 in the Proposal Form for the Aviva risk, completed in April 2012. I do not consider that this is the case. Question 38, in speaking of “claims and losses … made” can reasonably be understood as referring to losses which have resulted in claims on insurers, an impression which is reinforced by the columns which appear below, of “Settled” and “Outstanding”. So understood the answer to it would not have revealed the fire incidents of 2010 or 2011. In any event, this Proposal Form dates from April 2012, and Butterworth Spengler needed to make an enquiry as to what the position was in August 2012 at the time of the XL renewal.

For completeness I should record that I do not consider that there was any breach by Butterworth Spengler in relation to disclosure of the condition of the buildings. The condition of the buildings, at the time that the XL policy was renewed was that there was no more than cosmetic damage to the sheds, which were otherwise structurally sound and watertight. Even though Butterworth Spengler knew of the state of the buildings, there was nothing material to be disclosed. Furthermore XL’s knowledge of the January 2012 storm and the damage it caused, given XL’s post loss survey, meant that disclosure of the state of the buildings to XL was not, and would reasonably have been considered not to have been, required.

The parties differed considerably as to the correct approach to questions of causation, and as to what matters should be approached by the court on the basis of the assessment of loss of a chance or on a balance of probabilities. There were wide-ranging arguments and the citation of a considerable number of authorities. These arguments were largely made in the context of Dalamd’s case that Butterworth Spengler had been negligent in relation to the disclosure of Doumac’s insolvency to Aviva, but were applicable in part to other aspects of Dalamd’s case.

I will consider first what Dalamd contended were two points of law relevant to these questions. Dalamd characterised these questions as (1) what Dalamd must show in relation to Aviva’s and XL’s avoidance, and (2) what proof is required in respect of what would have happened had Butterworth Spengler not acted in breach of duty.

The first issue relates to whether Dalamd must show that the claim on the Aviva or XL policy would have failed as a result of Butterworth Spengler’s negligence. Dalamd submitted that it was “emphatically not necessary” for it to prove that. Instead, it contended that it was enough to show simply that Butterworth Spengler’s negligence had “impaired” the insured’s claims under those policies. What was meant by this was explained as follows: “In other words, it is enough to show that [Butterworth Spengler’s] negligence has provided the insurer with a reasonably arguable ground to defend liability.” It was said that this was so, because it was part of the broker’s duty to protect his client from unnecessary risks, including the unnecessary risk of litigation. It was supported, Dalamd contended, by the approach of the Court of Appeal in FNCB Ltd v Barnet Devanney [1999] Lloyd’s Rep IR 459.

The second issue relates to how the court should approach a contention that, but for the defendant’s breach, the policy would in any event not have responded by reason of some other point for which the brokers were not responsible, such as, in the case of the Aviva policy here, a breach of the External Storage Condition. Dalamd submits that in this regard, issues as to what the claimant would have done are to be determined on a balance of probabilities basis, but other issues are to be determined on a loss of a chance basis. That includes not only whether insurers would have taken the other point, and whether they would have compromised the case if that point had stood alone, but also what the court would have decided if the point had been maintained to trial by insurers. Dalamd submits that this approach is supported by the general principles in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, and more specifically in the present context by O & R Jewellers v Terry [1999] Lloyd’s Rep IR 436.

To these contentions, Butterworth Spengler answered that, in relation to both aspects, they were not in accordance with authority, and were unprincipled. They submitted that in a case, which they submitted this one was, where what the insured was claiming was that breach of the brokers’ duty had caused it the loss of an indemnity under the policy, the issues were to be approached as follows. First, questions as to whether the policy was valid or was voidable by reason of the brokers’ negligence were to be determined either as a matter of law (if applicable) or, insofar as factual issues were concerned, on the basis of the balance of probabilities on the material before the court in the action against the brokers. Secondly, questions of whether there was some other ground, for which the brokers were not responsible, on which the insurance would not have provided an indemnity, for example breach of warranty or condition or the application of an exclusion, were also to be determined as a matter of law (if applicable) or on the basis of the balance of probabilities. However, issues of what the insurer might have done as a matter of business – for example that it might not have taken the other point, or might have compromised it – were to be determined on the basis of loss of a chance. What the court would not do, however, was to determine on a loss of a chance basis what another court would have decided had the other point been pursued to trial against insurers. Butterworth Spengler submitted that their contention that these were the correct approaches was supported by Fraser v Furman [1967] 1 WLR 898 and by Dunbar v A&B Painters [1986] 2 Lloyd’s Rep 38, and also by other brokers’ negligence cases, including Everett v Hogg, Robinson [1973] 2 Lloyd’s Rep 217, Gunns v Par Insurance Brokers, [1997] 1 Lloyd’s Rep 173 and RR Securities v Towergate Underwriting Group Ltd [2016] EWHC 2653 (QB).

In my judgment, in relation to the first aspect, the position contended for by Dalamd is not established by authority, and would produce potentially anomalous results. The effect of Dalamd’s case is that, if the insurer puts forward an arguable defence based on the brokers’ breach of duty, then the insured would be able not to pursue the insurer, to claim against the broker and, if there were no other point by reason of which it was said that the policy would not have paid, to recover in full. While, according to Dalamd, it would be open to the broker to say that the insured had been unreasonable in failing to sue the insurer, this, Dalamd said, would be an argument that the insured had failed to mitigate the loss caused by the broker’s conduct in having “impaired” its claim, and it would be difficult for the broker to succeed on such an argument because the duty to mitigate is a low one, and furthermore the burden of establishing a breach of that duty would fall on the brokers.

What this would mean is that it would be open for an insured, faced, for example, with an assertion by an insurer in correspondence of what is merely an arguable defence based on the broker’s negligence, not to pursue the insurer but to proceed against the broker and recover the entirety of the indemnity, notwithstanding that a court actually determining the matter would have found that the insurers’ defence was clearly a bad one. On Dalamd’s case the broker could only defend itself by showing that the insured had unreasonably failed to mitigate its loss.

In my judgment the approach contended for by Dalamd makes unduly favourable to the insured an action against the broker for a breach consisting simply of creating an uncertainty as to cover by comparison with the insured’s action against the insurer who, in the type of case I have mentioned in the previous paragraph, is in breach of its obligation to indemnify.

It is the case that, if a breach of duty by the broker has caused the insured’s position to be uncertain, and as a result of that uncertainty, the insured has made a reasonable settlement with the insurer, then the insured can sue the broker for the difference between the amount of the settlement and an indemnity under the policy, without having to establish in that action that the defence for which the broker was responsible was a good one. That is what was decided in FNCB v Barnet Devanney and in Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] PNLR 15.

On the other hand, I was shown no authority in which, where there had been no settlement with insurers, and where the insured had sued the brokers on the basis that they were in breach of duty in failing to make proper disclosure or to ensure that proper disclosure was made to insurers, the court awarded damages without a finding or concession that the policy was actually voidable. Instead, in Everett v Hogg Robinson (at 222) and in Dunbar v A&B Printers (at 40: “… the fact that they were entitled to repudiate…”) the court proceeded on the basis of whether there had actually been an entitlement on the part of insurers to avoid, not whether there was an arguable case that there had been an entitlement to avoid.

Given that the issue of whether or not the policy was voidable depends on the facts in existence at the time of the placement or renewal of the insurance this approach is consistent with the ordinary approach of the courts to determining matters of past fact. Furthermore, there appears to me to be a good reason why, at least in the ordinary case, that should be the basis on which the issue is assessed. That reason is that, in cases of alleged brokers’ negligence, it is a commonplace that both the insurer and the broker are sued, very often in the same action. Manifestly, as against the insurer, the issue of whether the policy is or is not voidable has to be determined on a yes/no basis (i.e., as a matter of law, if and insofar as applicable, or insofar as issues of fact arise, on a balance of probabilities). In my judgment the issue should be determined against the broker on the same basis, and there should not be the possibility of a different basis depending on whether the insurer is and continues to be a party to the proceedings (and does not, for example, settle them).

As to the second aspect, I accept Mr Shapiro’s submission that the approach he advocated was that adopted in Fraser v Furman. There the Court of Appeal first decided whether there would have been a good defence open to the (putative) insurers based on breach of a reasonable precautions clause, and held that there would not have been as a matter of construction and given the facts of the case (905B–907H), and then, as an alternative ground, considered whether the putative insurers, Eagle Star, would have taken the point. Similarly, in Everett v Hogg, Robinson the way in which the court dealt with the question of whether there was a different point than that for which the brokers were responsible which would have precluded an indemnity was first to consider whether that different point was a good one (223 RHC), and then to consider whether it would have been taken by (re)insurers and, if it would have been, whether it would have been settled. It also appears to be the approach adopted in Dunbar v A&B, in that at 40 LHC May LJ accepted that the facts of the accident meant that insurers could have relied on Memo 2 to escape liability, but then found that the judge had correctly come to the conclusion that insurers would not have taken the point. Equally, in Gunns v Par Insurance Brokers the approach of Sir Michael Ogden QC (sitting as a Deputy High Court Judge) was to decide whether or not the facts were such that the policy would not, in any event, have responded to the loss by reason of breach by the insured of a reasonable precautions clause (at 177-178). A similar approach was adopted by HHJ Waksman QC (sitting as a Deputy High Court Judge) in RR Securities Ltd v Towergate Underwriting Group Ltd at [39]-[50]. It also appears to be supported by Jackson & Powell paragraphs 16-154 – 16-158.

By reason of considerations similar to those I have referred to in relation to the first aspect, there are good reasons why this should be the approach of the courts. The issue of whether there was a defence by reason of some other non-disclosure for which the brokers were not responsible, or of breach of a condition or the application of an exclusion for which they were not responsible, depends on facts which existed at the time, depending on the nature of the point, either of placement or of the occurrence of the putatively insured loss. Furthermore, in an action against the insurers, the application of such defences would necessarily be decided on the basis of a determination as to whether the defence was or was not a good one (namely, as a matter of law if and insofar as applicable and on the balance of probabilities as regards any issues of fact). The basis on which they are decided in a claim against the brokers should not depend on whether the insurers are (or are still at the point of trial) parties to that action.

Mr Hext QC relied heavily in this context on the decision in O & R Jewellers v Terry. In that case the judge, Sir Godfray Le Quesne QC, sitting as a Deputy High Court Judge, included a number of uncertainties in his overall assessment of the insured’s chance of recovering the full claim of £850,000. These included not just the issues of whether insurers would have taken other points, and whether they would have compromised them and if so for how much, which, as I have said, are matters which have been assessed on such a basis in other cases, but also “If fought to a finish, with what result?” Mr Hext QC relied on this to contend that the court should not decide whether the other point which insurers might have taken was correct, but simply to decide the chances of how it might have been decided had insurers been pursued to trial and the point then argued. I do not consider that that case is persuasive authority that that is the right approach, and the judge in that case does not appear to have been addressed with arguments on the point similar to those which I have heard. In any event, I consider that the approach which I have attempted to summarise above, is that which is consistent with the preponderance of authority.

I did not find persuasive Mr Hext QC’s submission that that approach was unsatisfactory because it would mean the decision of issues on a yes/no basis in the absence of underwriters. The evidence of underwriters would be admissible and could be adduced by either party, if relevant. In any event it is a commonplace for issues to be resolved on the balance of probabilities even though parties involved in the underlying events are not party to the proceedings.

As I think Mr Shapiro accepted, there may perhaps be cases in which, by reason of particular facts, the insured may be able to contend against the insurance broker that it has, in effect, deprived the insured of the opportunity of having its claim under the insurance determined by a court, and that in such circumstances different considerations may apply in relation to one or the other of the two issues I have discussed above. I agree with him, however, that the present case is not pleaded on that basis, and Dalamd adduced no evidence to support such a case.

I will now turn to seek to apply the approach I have found to be correct to the facts of this case, and to resolve the other issues of causation which arise, in the context of each of the allegations of breach of duty.

The first issue under this heading is as to whether the non-disclosure of Doumac’s insolvency, for which, as I have said, Butterworth Spengler were responsible, had the effect of giving Aviva a good defence to claims under its policy. In my judgment, it did provide a good defence to JLS’s claims under that policy. I consider that the issue of Doumac’s insolvency was material. It is more difficult to say whether it had any inducing effect, in the absence of evidence from the underwriter concerned, though there are available to the court the contents of Greenwoods’ letter of 16 January 2013. I consider that it is more likely than not that had there been disclosure of Doumac’s insolvency Aviva would at least have stipulated for some alteration of the terms on which JLS was insured, and thus that the non-disclosure did have an inducing effect.

The position is, however, different with regard to Widnes. I understood Dalamd to accept, and I in any event conclude, that the Aviva policy was a composite one, and that where there are two insureds under such a policy, each with differing interests in the subject matter of the insurance, non-disclosure by one insured will not affect the cover of the other insured. Here Widnes’s contract of insurance, cover under which commenced on 14 March 2012 and which was for a period of a year, was not, prima facie, affected by the non-disclosure in the context of a variation of Doumac’s cover to replace it with JLS.

Dalamd’s answer to this is to contend that Widnes’s insurance, even if it can be regarded as a separate contract, was varied by the change of the name of the insureds to include JLS rather than Doumac. I consider that that does not assist Dalamd. If, in the case of a composite policy, there is notionally a bundle of different insurances in one document, I do not consider that in the present case there can properly be said to have been a variation of the Widnes insurance within that bundle. But even if that is wrong, and the Widnes insurance was varied, if there is a non-disclosure which induces a variation of an insurance, the ordinary position is that the variation is avoided, not the cover, which survives as unamended: The Mercandian Continent [2001] 2 Lloyd’s Rep 563 at [22(2)] per Longmore LJ; The Martin P [2003] EWHC 3470 (Comm) at [229] per Richard Siberry QC. (Footnote: ¹)

Dalamd made the further suggestion in its written closing submissions that a possible response of Aviva, in relation to the cover for Widnes, if there had been disclosure of Doumac’s insolvency, would have been to invoke the Alteration of Risk clause in the policy. That appears to me to go too far into the territory of speculation. Dalamd never put to Aviva the point that Widnes’s cover was not affected by any non-disclosure in relation to Doumac’s insolvency. The possibility of the invocation of the Alteration of Risk clause was not raised by Aviva. Furthermore, if the insolvency was an operative Alteration of Risk that would have been a reason for Aviva not to have paid which would not have been the responsibility of Butterworth Spengler.

In the circumstances, while I accept that the non-disclosure of Doumac’s insolvency may have given Aviva an arguable case that Widnes’s cover was voidable, I consider that any such argument would have been wrong, and that that cover was not voidable.

On this basis I would hold that Dalamd has not made out its case that Butterworth’s Spengler’s negligence in failing to disclose Doumac’s insolvency to Aviva has caused any of the losses which would have been claimable under Widnes’s cover (or would have been so claimable in the absence of other defences for which Butterworth Spengler were not responsible).

There remains the question of whether, in any event, Aviva was not liable under the cover by reason of a breach of the External Storage Condition. This is relevant to any losses which JLS might have been able to claim under the insurance but which Widnes was not covered for, and in case I am wrong as to whether Widnes’s cover was unaffected by the non-disclosure of Doumac’s insolvency. Breach of the External Storage Condition was a matter for which Butterworth Spengler were not responsible and accordingly if Aviva could successfully have relied on it as a defence then there was no causative negligence on the part of Butterworth Spengler on this basis. As I have said, I consider that this is an issue which I should resolve on the balance of probabilities on the materials which are before me.

A considerable volume of material and evidence was deployed. It is convenient to begin with that relied upon by Butterworth Spengler.

For Dalamd, reliance was placed on the following:

I recognise that the evidence before me is imperfect. Nevertheless I conclude, on the balance of probabilities, that at the time of the fire waste was, in some areas, being stored within four metres of the sheds. Specifically, it seems likely that this was the case in the area between sheds 2 and 3. I have come to this conclusion the following basis:

Dalamd contends that, even if breach of the External Storage Condition would have afforded Aviva a good defence to JLS’s claim on the Aviva policy, it would not have done so in relation to Widnes’s claim because of the non-invalidation clause in the policy. As to this, I consider that there was, at least, considerable force in the points of construction made on this issue by Cunningham Lindsey in their undated letter, sent before 12 December 2012, to which I have referred above. These were not explored before me. In any event, given my conclusion as to the delegation of responsibility for all matters relating to the insurance to Andrew McQueen and Colin Douthwaite, I do not consider that the breach of the External Storage Condition can be said to have been a matter “unknown to” or “beyond the control” of Widnes for the purposes of the non-invalidation clause.

Given this conclusion there was no cover for either JLS or Widnes as a result of a matter for which Butterworth Spengler were not responsible. Nevertheless, given what I have found to be the correct approach to these issues, I should go on to consider whether damages might still be awarded on the basis that, had the point as to breach of the External Storage Condition stood alone (i.e. without the argument as to the voidability of the policy) Aviva, though it had initially taken it, might not have pursued it to trial, or might have compromised it. Again, this issue would arise in relation to any losses which JLS might have been able to recover under the policy which Widnes could not, or if I am wrong that Widnes’s cover was unaffected by the non-disclosure of the Doumac insolvency.

I consider that the prospects of either Aviva abandoning the point or of having compromised it as being very limited indeed. The material I have does not suggest that there was any substantial chance of either of these things happening. Aviva had taken an absolutely clear stance in relation to breach of the External Storage Condition, based on advice from Burgoynes. Aviva had taken what was described as a “final decision”, based on its being “wholly satisfied” of “the most flagrant breach” of the External Storage Condition. There has been no material shown to me by Dalamd which was of a clarity such as was likely to alter Aviva’s position. The contrary evidence was largely that of Colin Douthwaite and Phil Roche, and principally the former, given that Phil Roche was not on site after 19 October 2012. Such evidence would, I consider, have been regarded by Aviva with suspicion.

I have already set out my conclusion that in this area Butterworth Spengler were not in breach of duty.

I should also indicate that I would have considered that this case would have failed on causation grounds in any event. The reason is that I find that, even had fuller advice as to the nature of the various types of BI cover and the desirability of gross profit BI cover been given, JLS would not have taken it out because of its cost.

Quotations for gross profit BI cover had been provided by Mr Boylan of DRP at the initial placement of insurance for Doumac in 2008 and on the renewal in 2009. On both occasions, Andrew McQueen decided not to take out such cover. Mr Boylan again discussed BI cover with Andrew McQueen at the 2010 renewal. It is apparent from the Premium analysis that Mr Boylan assumed that Doumac would not proceed to obtain gross profit BI cover because of its cost: that must be because there was a discussion along those lines between himself and Andrew McQueen. Indeed, Doumac turned down obtaining ICOW only cover, on this occasion, despite its lower premium, for the same reason, as Andrew McQueen accepted.

Consistently with this behaviour in 2008-2010, when in 2011 Andrew Thomson recommended the taking out of full Gross Profit BI cover, the decision of Doumac’s directors, as evidenced in Andrew Thomson’s email of 27 September 2011, was that Doumac could not afford it.

In 2012, Doumac’s business deteriorated significantly leading to its insolvency. When JLS replaced Doumac, its financial position was weak. Doumac had had two principal customers, one of which was PHS, which had on 24 July 2012 stated that it was terminating its contract with Doumac. By the time of the fire, a company called GFSL contended that JLS owed it £95,000, which was being disputed. Even if that sum was not due, it appears from some management accounts produced in 2015 that, during the short time it had been trading, JLS had had a surplus of sales over cost of sales of only some £83,000, and this figure took no account of overheads, including directors’ salaries, wages, rates, insurance or rent. I find that its directors would not have agreed to pay for gross profit BI cover.

I have already stated my conclusion that there was no breach of duty by Butterworth Spengler in relation to this matter.

Any such complaint fails on causation grounds as well. JLS knew about the need to comply with the External Storage Condition. Andrew McQueen’s evidence was that after the Aviva survey he knew of the condition. He also gave evidence that at some point after the survey Colin Douthwaite had explained to him that bales needed to be moved “or the insurance policy would not pay if there was a claim”. That demonstrates both Colin Douthwaite’s, and Andrew McQueen’s knowledge of the effect of a breach of the External Storage Condition before the fire.

Accordingly if, as I have found to be the case, there was non-compliance with the External Storage Condition, that was not the result of any lack of appreciation on the part of JLS of the importance of compliance or the potential consequences of non-compliance.

I have set out my conclusion that Butterworth Spengler were in breach of duty in failing to raise with Doumac, Widnes or JLS the issue of cover for loss of rent. There remains the question of what would have happened had proper advice been given.

In my judgment it is unlikely that Doumac, or Widnes, or JLS would have agreed to pay for loss of rent cover. In this regard, it is apparent from a quotation request of 4 August 2009 prepared by Mr Boylan of DRP that he had identified loss of rent cover as an insured exposure and was seeking quotations from insurers for such cover. It seems likely that this was discussed with Andrew McQueen and that it was decided at that stage not to take out loss of rent cover. Given that the financial position of Doumac deteriorated after that date, and JLS’s financial position was always parlous, I consider that it unlikely that there would have been a subsequent decision to pay for a cover which it had been decided not to take out in 2009, even if the premiums had been only a few thousand pounds.

If I am wrong in relation to whether loss of rent insurance would have been taken out and paid for I consider that Dalamd has not shown that any indemnity would have been payable under any insurance which would have been effected. This is because the only lease which was ever made in respect of the Premises was made with Doumac. By the time of the fire Doumac had failed. There was no lease with JLS and JLS had paid no rent to Widnes. Mr Powell’s evidence was that in such circumstances it was “unlikely that insurers would provide an indemnity”. Dalamd contended that it would have been possible to show that JLS would, at some point in the future, in fact have started to pay rent to Widnes, and accordingly that insurers would have been satisfied that Widnes had suffered a loss. This appeared to me to be entirely speculative. Given what had happened to Doumac, it is very unclear indeed as to what would have been the fate of JLS had the fire not occurred, and whether it would have paid any rent, or for what periods. If the question is whether the putative loss or rent insurers would have been persuaded that Widnes had suffered a loss, I consider that it is highly unlikely that they would have been.

I have found that Butterworth Spengler were in breach of duty, (1) in that they should have made enquires of the insured as to (i) whether there had been any problems with the HSE, the EA or the Fire Service and (ii) as to previous fire incidents; and also (2) in not conveying to XL what they knew in relation to the build-up of waste.

The first aspect ((1)) raises the question of what the insured would have revealed had there been such enquiries. Both aspects ((1) and (2)) raise the further question of whether what would have been disclosed but was not disclosed to XL was material and whether there would have been other matters which would not have been disclosed which would, in any event, have given XL the right to avoid the insurance.

As to the first aspect, and as I understood it, Butterworth Spengler did not accept that, even if he had been asked about these areas, Colin Douthwaite would have revealed the true position. More specifically, Butterworth Spengler contended that, if he had revealed anything about the previous fires, it would have been materially inaccurate.

I have already recorded that I have reservations about much of Colin Douthwaite’s evidence, and I recognise that it appears that he had not informed Phil Roche of the EA Enforcement Notice or the concerns which the EA had raised in August 2012, and did not volunteer information about these matters to Butterworth Spengler. Nevertheless, I consider that had he been asked in August 2012 as to whether there were any problems with the authorities as a result of the build-up of waste he would have revealed the essence of what had happened, namely that an enforcement notice had been served on Doumac in late July and that the EA considered that the build-up of waste involved various breaches of condition. For him not to have done so would have required a lie, which, given its subject matter - being one which involves publicly available information - might well have been exposed, with potentially very serious consequences.

In relation to fire incidents, I consider it likely that if asked about them in 2012, Colin Douthwaite would have revealed the following:

Would the matters identified above, for whose non-disclosure Butterworth Spengler were responsible, have made the XL policy voidable and have justified XL’s subsequent avoidance of the policy? I consider it to be plain that they gave rise to a reasonably arguable case that the policy was voidable. On my view of the correct approach to a case such as the present, however, it is necessary for me to consider whether, on balance, and on the material presented to me, that was actually their effect. In my judgment, they would. The build-up of waste was relevant to fire risk. The issues with the EA, which were themselves focused on the storage of waste, were in my view plainly material. In the context of potentially enhanced concerns about fire risk the information about previous fire incidents was also, I consider, material. The likelihood is that if there had been disclosure of these matters XL, which did not have the benefit of an external storage condition, would at least have adjusted its terms.

The remaining question is whether any of the matters not disclosed on which XL relied to avoid the policy, but for whose non-disclosure Butterworth Spengler were not responsible, of themselves provided valid grounds of avoidance. In my judgment they did not. The matters which Butterworth Spengler contended fall into this category are essentially confined to their contention that, in relation to the 2010 incident, a main jet had been used by the fire brigade to fight the fire, and in relation to the 2011 incident that the fire had not been extinguished by Doumac’s personnel but had had to be extinguished by the fire brigade. There is no evidence that those matters would have been material or would have induced XL, and in the absence of evidence I would consider that they were not material, and that it is highly unlikely that they would have had an inducing effect on XL. I find it highly unlikely that, had they stood alone, XL would have sought to avoid the policy in reliance on them.

Butterworth Spengler contend that Dalamd cannot succeed in respect of a claim for loss of an indemnity under the XL policy because JLS suffered no loss by reason of an absence of indemnity for the plant and machinery because it had no proprietary interest in that plant and machinery and no entitlement to indemnity in respect of it.

The foundation of this argument was that insofar as Doumac had owned some of the plant and machinery, title remained with Doumac, and had not been transferred to JLS; and insofar as the plant and machinery was on hire purchase from Close Asset Finance, which it appears that the great majority of it was, title remained with the original owner until payment.

I do not consider that this argument is correct. JLS as a bailee had an insurable interest in the property bailed to it and could recover under the insurance up to its full value, although it might then have had an obligation to account to the bailor in respect of the bailor’s interest. I consider that an insured bailee would be entitled to sue a negligent broker for the full amount of the indemnity that would, but for the broker’s breach, be recoverable, and the damages would be held on the same basis as the insurance proceeds would have been.

In fact, in the present case, Dalamd and Close Asset Finance have entered into an arrangement in relation to the division of the proceeds. That agreement is either effective, in which the proceeds will be divided in the manner agreed, or it is not, in which Close Asset Finance’s interest would subsist. Either way, I do not consider that it affects the damages which Butterworth Spengler is obliged to pay.

For reasons I have given, Dalamd cannot recover for any sums for which an indemnity was provided by the terms of the Aviva policy.

In the circumstances the issue of whether the Aviva policy covered the buildings on a reinstatement or an indemnity basis does not affect the damages recoverable by Dalamd.

For reasons which I have given, Dalamd cannot recover any damages in respect of these matters.

Dalamd is entitled to recover damages in the value of the plant and machinery, namely £1,600,000.

Dalamd’s claim succeeds in relation to its claim in relation to the XL policy, but otherwise fails.