Professional negligence: relevant professional standards (Circuit Commercial Court)

In Avondale Exhibitions Ltd v Arthur J Gallagher Insurance Brokers Ltd [2018] EWHC 1311 (QB), the court dismissed a professional negligence claim, brought on the basis that insurance brokers had breached their duty of care in failing to pass on details of convictions to an insurer (who subsequently avoided the policy for material non-disclosure of those convictions) or, alternatively, failing to make clear to their client the importance of disclosing such information.

Speedread

The Circuit Commercial Court has dismissed a negligence claim against insurance brokers. The claim was brought on the basis that the insurance brokers had breached their duty of care in failing to pass on details of convictions to an insurer, alternatively in failing to make clear to their client the importance of disclosing such information. The insurer had successfully avoided the policy due to material non-disclosure of the convictions in question.

The decision highlights the importance, in most professional negligence cases, of adducing expert evidence regarding the scope of duty in a particular profession. It is also of interest that the judge held that the law relating to the duties of insurance brokers, insofar as it was relevant to the present case, could be taken from the decisions in Jones v Environcom Ltd [2010] EWHC 759 (Comm) and Synergy Health (UK) Ltd v CGU Insurance plc [2010] EWHC 2583 (Comm). The decision, therefore, endorses the comments made by the Commercial Court in those cases. (Avondale Exhibitions Ltd v Arthur J Gallagher Insurance Brokers Ltd [2018] EWHC 1311 (QB), 31 May 2018.)

Background

Insurance brokers’ scope of duty

In Jones v Environcom Ltd [2010] EWHC 759 (Comm), a case where there had been material non-disclosure to insurers, David Steel J held that the insurance brokers had been in breach of their duty in failing to give adequate advice to their client regarding its disclosure obligations and failing to elicit the information that needed to be disclosed. He stated (see paragraphs 54 to 56 of the judgment) that, as brokers are required to take reasonable steps to ensure that the proposed policy is suitable for their client’s needs (and a policy that is voidable for non-disclosure is not suitable), their duties extend to:

• Advising their client of the duty to disclose all material circumstances.
• Explaining the consequences of failing to do so.
• Indicating the sort of matters which ought to be disclosed as being material (or arguably material).
• Taking reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention.

He further commented that, where there was a change of personnel meant that a new person was responsible for insurance matters in the client company, the broker must ensure that that person had an appropriate understanding of questions of materiality. The rationale for imposing such duties on brokers was because the obligations for the contracting parties were unusual and there could be “harsh consequences”, not least as a non-disclosure relied upon by the underwriter to avoid the policy might have no causative significance regarding the claim not being paid as a result. This made it “all the more important” that the lay client was told of the “paramount duty to disclose” and “what it involves”. He also identified a need for the client to be told to “err on the side of caution” so as to disclose anything that might impinge on the judgment of a competent underwriter in assessing risk, and “be helped to unearth such matters”.

David Smith J held that documents the brokers had sent to the client were “seriously inadequate” for the purposes of informing their client of the disclosure obligations and, further, said that he was not persuaded that it was sufficient simply to rely on “written standard form explanations and warnings annexed to proposals or policy documents”. The broker needs to be satisfied that the position is, in fact, understood by the client, which usually requires a specific oral or written exchange on the topic: at the time of the original placement and on renewal (particularly if the client representative has changed).

Subsequently, in Synergy Health (UK) Ltd v CGU Insurance plc [2010] EWHC 2583 (Comm) (a case where it was held that the insurer was not entitled to avoid a policy based on material non-disclosure and misrepresentation), Flaux J summarised the scope of the brokers’ duties (which were not seriously in dispute between the parties), albeit on an obiter basis, as being to take reasonable care:

• That the client was aware of, and understood, its duty of disclosure.
• To elicit relevant information from the client for the purposes of enabling it to comply with its duty of disclosure.
• To disclose any material facts of which the brokers themselves were aware and not to make material representations to the insurers which it knew to be untrue.
• To obtain insurance that clearly met the client’s requirements and did not involve unnecessary risks of litigation about its legal scope and effect.

Flaux J referred to David Steel J’s statement regarding insurance brokers’ duties in Environcom, but added that there must be a limit to the scope of the brokers’ duty to make enquiries. The duty would arise in the context where the questions to be asked are ones that a competent insurance broker would be expected to ask in the circumstances (Mc Nealy v Pennine Insurance [1978] 2 Lloyd’s Rep 18 and The Moonacre [1992] 2 Lloyd’s Rep 501). A broker will not be negligent if it fails to ask questions about the risk that it had no reason to ask or, if it does ask appropriate questions and the insured does not disclose important information to the broker (Jackson & Powell on Professional Liability (Sweet & Maxwell, 6th ed) at paragraph 16-059).

Flaux J also considered the significance of a failure to give oral advice to a client regarding the duty of disclosure, noting the following points:

• He did not read Environcomas establishing an “immutable requirement” for brokers to provide oral advice.
• Whether it is necessary to provide oral advice (and whether failure to do so will amount to a breach of duty) depends upon the circumstances.

Facts

On 26 August 2012, the claimant company (C), a manufacturer of exhibition stands, suffered a fire at its premises, which caused serious property damage and destroyed its stock. The defendant insurance brokers (D) had arranged a policy of Commercial Combined insurance, underwritten by QBE Insurance, for the years 2010/11, 2011/12 and 2012/13.

QBE had paid out on a claim under the 2010/11 policy for loss suffered due to a burst water pipe. However, when C made a claim under the 2012/13 policy for the fire loss, after investigations, QBE declined cover and avoided the policies for all three policy years, refusing to pay out for the fire damage, and indicating that it would seek to recover its outlay on the earlier claim. This was on the basis that C had failed to disclose criminal convictions and prison sentences of Mr Patrick Watkins (who owned and ran C with his wife). It was accepted that QBE had been entitled to avoid the policies on the grounds of material non-disclosure, but the question arose as to whose fault it was that QBE had not been told.

C sought damages from D for professional negligence in respect of the non-disclosure to QBE of the convictions. It said that it had informed D of the convictions and, in failing to pass on the information to QBE, D was in breach of its duty of care. D denied that it had been informed of the convictions.

Alternatively, C submitted that, regardless of whether it had informed D of the convictions, D had been in breach of its duty of care for failing to take proper steps to bring to C’s attention the importance of making the necessary disclosure and to elicit the information.

By an order dated 23 November 2017, it was directed that there should be a trial of the following preliminary issues:

• Breach of duty.
• Whether (properly advised) C would have disclosed the convictions to D and/or QBE or another insurer.
• Contributory negligence.

Decision

HHJ Keyser QC dismissed the claim, primarily on the following grounds:

• He rejected C’s case that D had actual notice of the convictions, concluding that Mr and Mrs Watkins’ evidence of three occasions when they said that information about the convictions had been disclosed, was incorrect.
• He held that D had not breached its duty to C.

The decision is of particular interest for its analysis of the scope of the brokers’ duty to C in this case.

HHJ Keyser QC noted that the way C advanced its case meant that the fundamental issues were whether D was under any obligation to orally ask Mr Watkins if he had any convictions and/or orally explain the requirements of disclosure.

Whether in contract or tort, D’s duty was to exercise “reasonable care and skill”. The required standard would be that of a reasonably competent or ordinarily competent of the relevant profession. In his judgment, it was clear that the profession could not be the “ultimate arbiter” of the applicable standard. It was for the court to decide what amounted to “reasonable competence” and it might conclude that the standards observed by a particular profession fell short of what was necessary. As Oliver J observed in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] 1 Ch 384, “The extent of any legal duty in any given situation must … be a question of law for the court”.

The judge noted that, usually, a court will need expert evidence of the standards usually observed within a profession, before it will be willing to make any finding of negligence (citing Sansom v Metcalfe Hambleton and Co [1998] PNLR 542 and Pantelli Associates Ltd v Corporate City Developments Number Two Ltd [2010] EWHC 3189 (TCC), where Coulson J (as he then was) suggested that, save in cases of solicitors’ negligence and limited exceptional cases as identified in paragraphs 6-009-011 of Jackson & Powell, CPR 35 would be “unworkable” if an allegation of professional negligence did not have “at its root, a statement of expert opinion” to that effect).

HHJ Keyser QC did not regard these (or other similar) judgments as establishing a law that expert evidence is required in every case before a finding of professional negligence can be made, but suggested that they indicated “a matter of common sense” (as Coulson J found) in most cases.

He observed that the role of a professional might be more or less technical and more or less dependent on professional qualifications (for example, surgical oncology practice (as in Pantelli) might raise different considerations than insurance brokering). However, notably, in both Environcom and Synergy there was expert evidence regarding what was expected of a broker.

The judge found it “striking” that, here, C asked the court to find that D fell below the standards of reasonably careful and competent insurance brokers without adducing any expert evidence of the standards of the profession. Although some reliance was placed on guidance in the Financial Services Authority’s Insurance Conduct of Business Sourcebook (ICOBS) (5.14G), that came nowhere near indicating a professional standard. In his judgment, the lack of expert evidence “significantly limit[ed], though it [did] not altogether exclude” the possibility of a finding of breach of a common law duty of care or contractual obligation to exercise reasonable care and skill.

The judge noted that it was common ground between the parties that the starting point was that there was no general obligation in every case to give an oral explanation of material disclosure and to make an oral enquiry about convictions. It was contended that a reasonably skilful and careful broker would have done so in the circumstances of this case, but no evidence was submitted of a relevant professional standard at any material time.

C sought to rely on Mr Watkins’ lack of sophistication but the judge saw nothing to suggest he was not “as savvy as an ordinary businessman”, and also noted that Mr Watkins continually had his eye on the requirements of his business and seemed to have paid more attention to insurance matters than he was willing to admit in evidence.

C also sought to rely on the bulk of documentation through which D said it had made the necessary enquiries and given the necessary explanations. However, the judge thought that this had been exaggerated, and noted that “insofar as there was an impenetrable mass of verbiage” that was in the detailed terms and conditions of the policies, which it always is, and “presumably very few people would read all of that”. In fact, having looked at the documentation, the judge concluded that the material paperwork was limited in amount and was clearly highlighted.

Other points noted by the judge included:

• The numerous letters from D to C identifying specific documentation and making clear the need to check the accuracy of information provided to the insurers.
• The fact that the documentation was not unduly long or dense.
• Attention had been drawn to clear and full explanations of the duty of full disclosure of material facts. Although explanations of the duty did not specify convictions as material facts, there was no evidence of any professional standard requiring that. Further, unless all possible material facts were set out in explaining the duty, specific mention of just some facts, could be misleading. It was “clearly impossible” to set out all material facts, and convictions were only specially significant in the facts of this case. In any event, the documentation provided to C repeatedly mentioned convictions.
• Mr Watkins had some twenty years’ experience in the exhibitions business and had instructed other brokers: he was not a “novice”.
• Although a change in personnel within D required the new representative to acquaint himself with C, it did not indicate that oral advice and enquiries would be required.
• Although there was a change of client when the company was substituted for Mr Watkins, the company was just the incorporation of the same business. In practical terms, Mr Watkins’ role was unchanged. If there is no general requirement for direct, oral communications at the outset of the broker/client relationship, there is no good reason to hold that such an obligation arose due to the substitution of a new client.

On the facts, the judge held that D was not in breach of duty to C. That decision meant that it was not necessary to consider issues of causation and contributory negligence. However, he did briefly comment on causation, noting that he did not believe that an oral explanation of the duty of full disclosure would have made any difference.

The obligation was very clearly set out in the documentation, and the judge was “quite satisfied” that Mr Watkins understood it. In his view, Mr Watkins had given and confirmed incorrect information because he was “cavalier” about the matter and had signed forms recklessly, although his impression was that Mr Watkins would not have lied if asked “eye to eye” about whether he had convictions.

Comment

The decision highlights the importance, in most professional negligence cases, of adducing expert evidence regarding the scope of duty in a particular profession. It is also of interest that the judge held that the law relating to the duties of insurance brokers, insofar as it was relevant to the present case, could be taken from the decisions in Jones v Environcom and Synergy v CGU. The decision therefore endorses the comments made by the Commercial Court in those cases.

Case

Avondale Exhibitions Ltd v Arthur J Gallagher Insurance Brokers Ltd [2018] EWHC 1311 (QB) (31 May 2018).

PLC Practical Law 7.6.18