Consumer insurance contracts law: Recent Irish legislation diverges from UK position
Out-Law Guide | 17 Dec 2009 | 10:26 am | 6 min. read
Dunlop Haywards Limited and others v Barbon Insurance Group Limited (formerly known as Erinaceous Insurance Services Limited) and others
In October 2004, Erinaceous bought the Hercules Group, which included Dunlop Haywards, a firm of property consultants. A significant part of Dunlop Haywards' business was commercial property valuation.
For the 2004/5 year, the Hercules Group had professional indemnity cover of £10 million for the group as a whole, with an excess layer of £10 million for Dunlop Haywards alone, reflecting the increased risk inherent in commercial valuation work.
For 2005/6, the finance director of the newly expanded group was given the responsibility of overseeing the implementation of a combined insurance programme. He instructed insurance brokers HPC to obtain a consolidated renewal of the professional indemnity cover for the 2005/6 year.
HPC appointed a placing broker. It was understood between them that cover would be on no worse terms than the current insurance unless agreed in advance in writing.
Initial quotes obtained for the excess layer were for Dunlop Haywards alone. There was a conflict of evidence over the precise instructions that were then given, but the placing broker subsequently obtained revised quotes for the commercial property management activities of the group as a whole.
The placing broker then prepared a report for HPC setting out renewal terms for the primary and excess layers. The quotes for the excess layer included a condition which stated, "Indemnity provided by this policy will be restricted to the Insured's Commercial Property Management activities".
The report was forwarded by HPC to the Erinaceous Group's finance director, together with HPC's summary of "the essential features", which emphasised the reduced premium cost. HPC's covering email drew specific attention to the summary, which "shows just how well the renewal has gone". Neither the summary nor the email referred to the restriction on cover.
The finance director read the email and the summary but not the renewal report before giving his instructions to renew.
The cover obtained as a result was in two layers - a primary layer of £10 million and an excess layer of £10 million excess of £10 million. The excess policy defined the insured as "Erinaceous Group PLC and as per primary policy" and contained a limiting condition which stated:
"It is hereby understood and agreed that… the indemnity provided by this Policy is limited to liability arising from the Assured's commercial Property Management activities only."
This condition also appeared on the excess slip and in the cover note produced by the placing broker.
Between March and April 2006, Dunlop Haywards received claims from lenders arising from alleged negligent or fraudulent valuations carried out by one of its directors.
The firm claimed on the group's professional indemnity insurance. The primary layer insurers paid out the full indemnity limit. The excess layer, however, rejected the claim on the grounds that the excess policy did not include cover for liabilities arising from property valuation.
Dunlop Haywards sued HPC and HPC sued the placing broker. The excess layer insurers were also joined as defendants to the action.
It was not disputed that HPC had been instructed to obtain excess cover which protected Dunlop Haywards on the same or equivalent terms as the previous year. HPC, however, argued that, as a matter of construction, the policy did in fact cover valuation work. If not, it should be rectified to do so. In any event, HPC said the insured had been contributorily negligent because the finance director had failed to notice the limiting condition in the renewal report.
The placing broker said it had carried out its instructions, which were to obtain excess insurance for the group as a whole limited to commercial property management activities.
On the evidence, the judge found that HPC instructed the placing broker to obtain excess layer insurance for the commercial property management activities of the group. HPC failed to appreciate at the time that this was an inappropriate way to describe property valuation.
Consequently, HPC failed to exercise reasonable skill and care in obtaining cover that included Dunlop Haywards' valuation work. It then failed to review the renewal report, the cover note and the policy properly or to draw the client's attention to the limiting condition.
The judge rejected the argument that "commercial property management activities" included property valuation. There is a clear distinction between the risks posed by property management and property valuation, one that is well recognised by the professional indemnity market.
There were also no grounds for rectification. In order to have the slip and the policy rectified, HPC would have to show that the parties had a common, continuing intention up until the time the documents were executed but that, by mistake, the documents did not reflect that intention.
On the evidence, the only common intention the judge could find was an intention to provide cover for commercial property management activities. The excess slip and policy document simply reflected the terms of the parties' agreement.
Had the finance director failed to meet a reasonable standard of care because he did not read the renewal report?
In most cases where an insurance broker has alleged its lay client was negligent because it failed to notice something in the documentation, the broker's claim for contributory negligence has failed. But courts have found contributory negligence in cases where the client is a sophisticated insurance buyer.
In this case, the judge said he would have been inclined to find some contributory negligence, were it not for the way in which HPC presented the renewal report. The covering email drew specific attention to HPC's summary, which in turn said it was summarising the essential features of the cover.
HPC did not, therefore, leave the financial director to work these matters out for himself. "On the contrary, the preparation of the summary reflects the perception of the broker that the financial director needed an executive summary of the most immediately significant features of the cover because he would not be expected to trawl through the detail of the [renewal report] to unearth such matters for himself".
The e mail concluded that HPC was "very confident that it covers all bases and at a very good deal for the group". In the judge's view, this was an important statement of reassurance upon which the finance director was intended - and entitled - to rely.
Even if the finance director had been at fault, the judge would have assessed the contributory negligence at zero.
As sub-broker, the placing broker owed a duty to HPC to exercise reasonable skill and care in fulfilling HPC's instructions. Those instructions included that the cover was to be on no worse terms than the current insurance unless agreed in advance in writing.
Although HPC had a direct relationship with the client (and was therefore best placed to ascertain the client's needs) the placing broker should have ensured the instructions were understood and, if necessary, asked for clarification.
On the facts, the judge found that the placing broker obtained the insurance that had been requested and had accurately reported the terms and conditions of the cover.
But he also concluded that a reasonably competent sub-broker would have appreciated that the instruction to obtain insurance for the commercial property management activities of the group represented a significant change in cover from the previous year. The potential detriment to Dunlop Haywards was such that a reasonably competent broker would have sought to question or clarify the instruction.
In failing to do so, the placing broker acted negligently and in breach of its specific instructions. Had the instructions been queried at any stage, or had written confirmation of the change been requested, the potential detriment would have become apparent.
On this basis, HPC's claim against the placing broker succeeded. The damages, however, were reduced by 80% to reflect HPC's contributory negligence.
Clients like executive summaries. But this case shows that they need to be drafted with as much care as the full report. It is perhaps ironic that, had the broker simply handed over the renewal report without further comment, the judge would probably have reached a different conclusion on contributory negligence.
In considering the standard of care owed by both brokers, the judge not only took common law into account, but also the FSA's high level principles and the more specific selling standards in the Insurance Conduct of Business Sourcebook (ICOB, as it then was).
The judge clearly saw the regulations as a benchmark against which to measure the brokers' conduct, even though this was a "large risk" and so many of the ICOB rules would not have had any direct application.
Consumer insurance contracts law: Recent Irish legislation diverges from UK position