The Court of Appeal of England and Wales recently upheld a decision refusing an application by Marsh to strike out a customer’s claims alleging a failure to arrange appropriate insurance.

Background

Norman Hay retained Marsh as broker for various chemical, sealant, and surface coating companies in its group. These companies were located in different jurisdictions and their employees frequently travelled for business.

Norman Hay complained that Marsh failed to arrange worldwide (including United States) non-owned auto cover under the group’s travel insurance policy. As a result, one of Norman Hay’s subsidiaries had no insurance to indemnify it against liability for a car accident in Ohio involving one of its employees in a hired car. The accident occurred when the employee drove on the wrong side of the road and was tragically killed. Another motorist, who was seriously injured in the accident, brought proceedings against the subsidiary, Norman Hay and others. The claim was settled for USD5.5 million.

Norman Hay had entered into an agreement to divest its subsidiaries, which required it to indemnify the purchaser for the subsidiary’s liability to the injured motorist. The settlement sum was deducted from the purchase price for Norman Hay’s businesses and paid out of an escrow which had been established under the sale agreement.

Norman Hay then brought a claim against Marsh, alleging that it had been negligent in failing to arrange cover indemnifying Norman Hay and its subsidiaries from liabilities arising from employees’ use of hired cars in the United States. It alleged that, had Marsh not been negligent, it would have obtained cover responding to the events or would have acted differently by requiring its employees to take out insurance at the point of hire. Relevantly, Norman Hay’s claim did not assert that it was liable to the injured motorist; a pre-requisite to cover under a liability policy.

Key takeaways from the decision:

In assessing whether a broker’s negligence caused loss, the chances of an insurer paying out in the circumstances was not wholly dependent on whether there would have been a valid claim under the policy.

• A court would still need to consider the likelihood of whether the insurer would have paid out in the circumstances, including for commercial reasons – that requires a loss of chance assessment.
• Because of their intensely factual nature, such claims will rarely be appropriate for strike-out or other summary dismissal procedures.
• We expect that more claims will be settled due to the greater uncertainty introduced by the loss of chance approach.
• New Zealand courts are likely to be more hesitant to apply loss of chance principles in light of appellate authority. New Zealand, although the relevant cases have not been decided in the context of a claim for breach of broker’s duties.

Marsh denied liability, emphasising Norman Hay’s responsibility to provide Marsh with all relevant information at placement and renewal. Marsh also said that worldwide non-owned auto cover is not a feature of standard United Kingdom cover, so it was under no obligation to arrange or advise upon such cover.

Marsh applied to strike out Norman Hay’s claim on two grounds. The key ground was that any loss suffered by Norman Hay was not caused by Marsh’s alleged breach of duty, because a conventional liability insurance policy would only have responded if Norman Hay or the subsidiary was liable to the injured motorist, which Norman Hay did not allege in its claim against Marsh. Norman Hay could not rely on its settlement with the injured motorist as evidence of that liability. Therefore, the putative insurance policy would not have responded. This was the key issue in both the High Court and Court of Appeal.

Marsh’s application failed in the High Court. The Judge held that there was a distinction between what the insured must prove in a claim against its insurer under a liability policy and a claim against its
broker for negligence. For the latter, it was not necessary for Norman Hay to prove on the balance of probabilities that it was liable to the injured motorist and thus that the putative policy would have responded. Instead, the correct enquiry was what would have happened had Marsh not been negligent and Norman Hay had presented its claim to its insurer.

The High Court found that a broader enquiry must be undertaken on a loss of chance basis to allow the Court to ask itself whether, realistically, the putative insurer would have engaged with Norman Hay in dealing with the claim and provided an indemnity of some sort.

Appeal dismissed

The Court of Appeal also rejected Marsh’s application for strike-out. It approved the High Court’s analysis that Norman Hay did not need to establish its liability to the injured motorist. That would just be one factor in the hypothetical counterfactual matrix to be assessed on a loss of chance basis.

Inadequate pleadings

The Court of Appeal was critical of Norman Hay’s failure to provide all the necessary detail of its claim against Marsh. Because Norman Hay had not pleaded in detail the terms of the policy which it claimed Marsh should have obtained, the Court was not in a position to assess the level of cover the policy would have provided, nor dismiss Norman Hay’s claim summarily on the basis that no cover would have been available.

The Court of Appeal accepted Marsh’s submission that a conventional liability policy in the United Kingdom will only respond if the insured is actually liable to the third party. It was not willing to assume in this case that the cover Marsh ought to have placed for Norman Hay was a conventional liability policy, but did address the issues on that basis.

Causation to be assessed based on loss of a chance principles

In the context of the claim against Marsh, the question for the Court was not whether the putative insurer would have been required to pay the insured, but instead whether they would be likely to do so in the counterfactual where the insured is able to establish a breach of duty by the broker.

The Court held it was a factual question to be assessed on a “loss of chance” basis. Whilst a strong claim against the hypothetical insurer would be sufficient to prove the insurer’s likelihood to make the payment, a weak claim against the hypothetical insurer was not on its own sufficient to prove the opposite. Other relevant considerations for an insurer of high-standing might (for example) include market perception, or the value of its contract with the insured.

Therefore, even assuming that Norman Hay would not have been entitled to insurance cover for the settlement payment, the Court of Appeal was not willing to find that this necessarily prevented it from proving Marsh’s alleged negligence caused it to suffer loss.

The application of loss of chance principles took damages from an “all or nothing” assessment to one based on the degree of uncertainty of recovery from the putative insurer.

Different causation tests where there is an extant policy rather than no policy

In reaching its decision, the Court of Appeal distinguished existing United Kingdom authority: Dalamd Ltd v Butterworth Spengler Commercial Ltd. [1] In that case the insured sued its broker for negligence without first suing its insurer under an existing policy or reaching a settlement. The court held that the insured had to establish on the balance of probabilities that cover was not available under the policy put in place by the broker because of the broker’s negligence. It was not sufficient to show that the insurer would have a reasonably arguable defence to a claim under the policy.

Consequently, a different causation burden will apply in the United Kingdom depending on whether the broker’s negligence resulted in no policy being put in place or an inferior or inappropriate policy. A claimant in the United Kingdom will have a lower causation burden (loss of chance) if the broker’s negligence led to it failing to place any insurance cover for the relevant risk, but a higher causation burden (balance of probabilities) where cover was placed but was inadequate in some respect.

A claimant need only establish that on the evidence there is a real and distinct, rather than merely negligible, prospect of indemnity from an insurer where the loss of a chance approach applies. By comparison, a claimant must show that it is more likely than not that the insurer would have accepted the claim or otherwise indemnified the claimant under an existing policy.

The Court of Appeal was clear that it was relying on existing loss of chance principles in other professional negligence contexts, such as unsuccessful litigation as a result of a solicitor’s negligence. Those authorities provide that, where the issue is what would have happened but for the professional negligence, the claimant should not be required to establish on the balance of probabilities what third parties would have done.

New Zealand approach

The New Zealand courts may take a different approach to the causation burden, at least at first instance. The application of the loss of a chance approach is narrower in New Zealand than the United Kingdom. In Strack v Grey the New Zealand Court of Appeal took the view that loss of a chance should only apply where the third party’s decision is unknowable, so that the outcome cannot be determined. That is, it is incapable of proof given unlimited time, resources and evidence. How a putative insurer would have responded to a claim under a hypothetical policy is not incapable of proof. Evidence can be called from insurers in the market to establish what they would have done.

The New Zealand courts will likely still be willing to consider how a putative insurer would have responded to a claim under a hypothetical policy outside of the insurers’ pure contractual rights, but on the balance of probabilities.

Despite the possible divergence in approaches here, it seems clear that it will be difficult for brokers to succeed in a strike out in these circumstances.

Footnote:
[1] Dalamd Ltd v Butterworth Spengler Commercial Ltd [2018] EWHC 2558 (Comm), [2019] PNLR 6.