Clear guidance given around causation in PI claims following insurers’ avoidance

The recent judgment in Dalamd Ltd v Butterworth Spengler Commercial Ltd has clarified the appropriate test for causation in insurance brokers’ negligence cases. Butcher J held that a court should assess on the balance of probabilities whether an insurance policy was voidable or would not have provided an indemnity, for reasons other than the insurance brokers’ negligence.

Facts

The claimant’s claim for insurance brokers’ negligence arose out of a fire and destruction of business premises at a waste recycling facility. The claimant sought an indemnity from their insurers, under a policy for the premises which the defendant insurance broker had arranged. The insurers avoided the policies on the grounds of non-disclosure and misrepresentation of material facts, which the claimant did not challenge. Instead, it brought a claim against the defendant broker for negligence.

Legal argument

The claimant alleged that the defendant had failed to:

• Adequately advise as to what matters ought to be disclosed to insurers
• Give proper disclosure of matters which it knew itself.

As for causation, the court considered two points of interest:

1. Whether the claimant was required to show that the claim under the policy had failed as a result of the defendant’s negligence. Was it enough to demonstrate that there was a significant risk that any challenge of insurers’ position would fail and for the claim be assessed on a loss of chance basis?
2. How should the court approach the contention that the policy would not have responded in any event, even if the defendant had not been negligent?

Judgment

The court agreed that the defendant had been negligent in advising the claimant what should be disclosed to insurers and in failing to disclose matters inside its knowledge.

In considering the first point on causation, the court found that, in circumstances where the insurers’ avoidance had not been challenged (as in this instance), the issue of whether the claimant’s claim on the policy would have failed as a result of the defendant’s negligence had to be determined on a balance of probabilities. The claimant had to show that the claim on the policy would have failed, and that, but for the negligence, it would have succeeded. The court therefore rejected the claimant’s loss of chance argument. The Judge highlighted that, had insurers been party to proceedings, the avoidability of the policy would have been determined on a “yes” or “no” basis.

On the second point, the court followed the approach of the court of Appeal in Fraser v Furman, accepting that it must consider, on the balance of probabilities, whether the claim against the policy would have failed for reasons other than the defendant’s negligence.

Butcher J also confirmed that, if a non-disclosure induces a variation of an insurance, the ordinary position is that only the variation is avoided. The remaining cover survives.

Comment

One in a spate of recent judgments in favour of PI insurers, this is an important ruling for those involved in claims against those who advise insured clients.

Historically, those acting for defendants have been reluctant to run causation defences in isolation, preferring instead to settle this type of claim with a reduction to reflect the claimant’s failure to mitigate its losses. Butcher J has now made it clear that the courts will not tolerate claimants abandoning claims against their insurers simply because insurers have an arguable defence and because their advisors' PI insurers are, apparently, “waiting in the wings” to pick up the claim.

Unless insurers’ reasons for an avoidance or declinature are clear and undisputable, those acting for claimants should consider challenging insurers’ stance and making efforts to enter a reasonable settlement before pursuing advisors for the deficit.

On a practical level, it may be worth engaging with the broker (or other advisor), who may be prepared to accept that insurers’ position is so strong that a challenge of the avoidance or declinature is not cost-effective. If that acceptance is not forthcoming, the court may consider the costs of challenging insurers’ decision to be recoverable in any PI claim against the advisor.

Statements from the underlying insurers confirming their approach to the policy issues and whether they would have entered a settlement or defended their position may also be helpful in determining the outcome in this type of claim.