Reflective loss: insurers’ gain?

The recent Court of Appeal decision of Titan Europe 2006-3 Plc v Colliers is a reminder of the importance of the rule on reflective loss in defending professional negligence claims. It also supports the argument that the rule can be used more widely than just in the shareholder/company situation.

The widely-understood basis for the rule on reflective loss, put simply, is that where a company suffers loss arising from a breach of duty, only the company may bring a claim in respect of that loss. A shareholder cannot bring a claim, because his loss (primarily, but not exclusively, the decline in value in his shares) simply "reflects" that of the company. Several cases suggest that this rule is capable of extension, and we consider that in this article.

At its most basic, the reflective loss rule is vital for professionals and their insurers, as it can present a complete defence to a professional negligence claim. For example, we recently had struck out a £1.2 million claim by shareholders of a dissolved company against their former solicitors using the rule.

Webster v Sandersons Solicitors

However, there have been some notable extensions to it, one being the Court of Appeal decision in Webster v Sanderson Solicitors (2009) where Mills & Reeve also acted for the successful defendant firm. This concerned investments in a scheme to extract coal from spoil from US mines. An unhappy investor sued his solicitors (Walker Morris), but that claim failed because his solicitors (Sandersons) failed to serve the claim form in time.

The investor then brought a lost chance claim against Sandersons, which made necessary a review of the merits of his original claim against Walker Morris, and the losses allegedly arising from the failure of the investment. Part of the investment had been made by a company controlled by the investor, and also by his pension fund. The investor tried to claim in his name for losses suffered by his company and pension fund. That attempt failed in the Court of Appeal, applying the reflective loss rule.

Webster is interesting because it demonstrates that the reflective loss principle applies to other, similar, relationships (here, the pension fund). Similarly, in Gardner v Parker, the rule was used to defeat a claim by a creditor of the company.

Titan v Colliers

A further possible extension arose recently in the Court of Appeal decision of Titan v Colliers. The court’s comments were not binding, as they had already decided that the defendant valuers (Colliers) were not negligent, but they are worth looking at. The claim concerned a commercial valuation, following which a large loan was made on the security of the property valued by Colliers. Titan acquired the loan five months after completion, and securitised it by a complex arrangement which resulted in Noteholders being the ultimate beneficiaries of the loan. Importantly, Titan retained the legal and beneficial interests in the loans, but had passed the risks on to the Noteholders.

The Court of Appeal was clear that this meant that Titan had “title” to sue Colliers. They accepted that it was possible that that the Noteholders would also have title to sue (because Colliers’ valuation expressly envisaged this), but they used the principle of reflective loss to explain why such claims might fail. They said that the Noteholders were in a similar position to shareholders, and were susceptible to the same argument that their “loss” was reflective of the company’s loss (or here, of Titan’s loss).

Titan is potentially an important extension to the reflective loss rule: it suggests that the close relationship between a company and its shareholders can be compared with a much wider range of relationships than perhaps had been previously understood, to support the same rule. If correct (and we understand that the issue was not argued extensively before the Court of Appeal), then it will significantly widen the scope of the rule. This is of particular relevance to insurers defending professional negligence claims, providing a pivotal defence to a claim which might also fit within the reflective loss analysis, whether or not a company and its shareholders are involved.