Brokers PI: Limitations on scope of Broker’s Duties

United Kingdom

The Commercial Court has reaffirmed important limits on the scope of duties that brokers owe their clients.

The facts

The Defendants ran an electrical goods waste recycling facility. In 2005 and 2006, the Defendants made substantial claims under their property insurance policies as a result of two major fires. Upon the occurrence of a further major fire in September 2007, the Defendants again claimed on their property insurance. Insurers sought to avoid the policy on grounds of material non-disclosure by the Defendants of (i) their use of plasma guns (a hot works tool) in disassembling pentane fridges; (ii) the recurrent ignitions of fridge insulation that resulted from that use; and (iii) the occurrence of further fires. Insurers commenced proceedings for declaratory relief.

The Defendants joined their broker as a Third Party for failing to obtain unimpeachable insurance. Only the Defendants’ claim against the broker continued to trial. The Defendants asserted that had there been proper disclosure, there was a realistic and substantial prospect of obtaining cover and that they were entitled to recover in respect of the loss of that chance (Allied Maples Group Ltd v Simmons & Simmons).

The decision

Although the Defendants successfully established certain breaches of duty by the broker, they failed to persuade the court that, had full disclosure been made, they would have been able to obtain renewal terms from their existing insurers or alternative insurers in the market at the time. This was even allowing for the fact that in embarking on the hypothetical task of assessing the chance of obtaining cover, any difficulty with discerning the prospects of success should count against the broker. The court concluded:

  • On the facts, the Defendants would not have proposed the fire risk improvements that they asserted would have been offered to insurers. Even if they had been offered, no insurer in the market would have offered terms (the broker adducing contemporaneous and expert evidence to this effect). Furthermore, even had terms been offered, the prospect of the Defendant accepting such terms was remote.
  • In any event, any such cover would have been impeachable due to the fact that the Defendants were conducting their operations in breach of their Waste Management Licence (which was another fact that was not disclosed).
  • Even if cover had been obtained, by definition it would have been a precondition of any such cover that there be no deployment of plasma cutters and no throughput of pentane fridges. Accordingly, the September 2007 fire would not have occurred and no loss would have been sustained by the Defendants.
  • The Defendants’ argument that, if the effect of the fire risk improvements would have prevented the occurrence of the fire, they were still entitled to recover damages reflecting the financial loss that would thus have been avoided, failed. Such a loss was too remote and not within the reasonable contemplation of the parties as likely to result from the breach of retainer. It was not the broker’s job to advise about fire prevention measures (see Transfield Shipping Inc v Mercator Shipping Inc (the Achilleas). Rather, the fire was attributable to the Defendants’ own failure to identify and enforce appropriate fire precautions by way of changes to the whole working process without which the process was effectively uninsurable.

Comment on the decision

This decision reaffirms the limitations on the scope of a broker’s duty to its clients. In particular, it confirms that a broker will not be liable for failing to prevent the very peril that a policy is designed to insure against – even if his/her negligence caused that policy to be impeachable for some reason. The rationale for this limitation is that this is not a duty that a broker ought fairly to be taken to assume. The decision also confirms that, in exceptional cases, a broker can successfully defend a claim on the basis that the risk in respect of which the action is grounded was effectively uninsurable.

CMS Cameron McKenna LLP acted for the broker in the case.

Further reading:

Nicholas G Jones v (1) Environcom Ltd (2) Environcom England Ltd and MS plc t/a Miles Smith Insurance Brokers [2010] EWHC 759 (Comm)

Transfield Shipping Inc v Mercator Shipping Inc (the Achilleas) [2009] 1 AC 61 (HL)

Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 (CA)