The silver bullet called causation. The broker’s favourite weapon rears its head again

The recent decision of the Court of Appeal in Channon v Ward is a strange and sorry tale of a slam-dunk finding of negligence in a claim against a broker. It is, however, another decision in the line of reported decisions demonstrating the importance of causation in professional negligence claims against insurance brokers. The Court of Appeal rejected the claimant’s appeal against the decision below that the damages to which he was entitled on a default judgment were nil.

The facts

The claimant, a chartered accountant, retained the defendant broker for many years to arrange his professional indemnity cover. It transpired that due to the broker’s negligence the claimant had been unknowingly trading without professional indemnity insurance for two years. The claimant was also a director in a property development business and shortly before the property market crash of 2008, he persuaded a number of people, some of whom were clients of the accountancy firm, to lend more than £1 million to the property company. The company subsequently became insolvent and the investors lost their money. As a result, the investors brought claims against the claimant in his capacity as an accountant alleging that the investment was made on the basis of his negligent accountancy advice.

Unfortunately for the investors, the claimant was uninsured as a consequence of the broker’s negligence. What can only be described as a madcap scheme then unfolded. The investors negotiated with the claimant to agree a means for them to pursue the claimant’s claim against the broker on the claimant’s behalf. Despite having viewed the investors’ claims as misconceived, the claimant conceded liability and consented to judgment being entered against him (in his capacity as an accountant) with damages to be assessed subject to a cap on his liability to the investors of £85,000. He authorised the investors to pursue the broker in his name which they did. The claim was valued at £1.8 million.

The decision

The broker had obviously been negligent in failing to obtain cover for the accountancy practice, and in fact the claimant had obtained a default judgment against him. That left only damages to be assessed but that involved investigation of whether the claimant would have obtained insurance cover for the investors’ claims under his practice’s policy.

At first instance, the court concluded that the insurer would have decided that the claims were not within the scope of cover because the claimant’s advice to invest was not given in the course of acting as a chartered accountant. Further, the claims would probably have been excluded from cover under the Institute of Chartered Accountants of England and Wales minimum terms in any event and finally, the investors were seeking recompense for losses suffered as a result of a disappointing investment rather than because they had suffered loss in reliance on an accountant’s advice. The insurer would have formed the view without needing to take external legal advice that the investors’ claims “stank” and they would have stoutly resisted any attempt by the claimant to seek cover. The Court of Appeal concluded, rather more simply, that the investors’ claims were simply outside the scope of cover.

At first instance, the judge’s conclusion was that if the insurers had decided there was no cover, the claimant only had two options: either accept that decision and defend the investors’ claims himself or issue proceedings for a declaration. Since the claimant considered the investors’ claims to be without merit and where he considered he had not given investment advice, let alone investment advice in his capacity as an accountant, he would not have challenged the insurers’ decision or have wasted money on pursuing a “hopeless” case. The only reason the claim against the broker got off the ground in the first place was because the claimant was going through the motions that his settlement with the investors required him to do.

Practical point

Finally, this case raises an interesting practical point for those defending broker claims. Both parties obtained expert evidence to establish how a hypothetical insurer would have reacted to the contrived claim brought by the claimant and the investors. However, neither party called evidence from the actual insurer which would have been Aviva. That was perhaps unsurprising since Aviva was never asked to consider the investors’ claim because the policy had never been placed with them. However, the broker was described as having taken the greater risk on that decision because it is the broker, not the claimant, who has the burden of proving that the insurer would have refused to indemnify the claim. While expert evidence may be sufficient (and it was here), the evidence of the underwriter is preferable.