Ramco Limited and another v Weller Russell & Laws Insurance Brokers Limited
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The claimants traded in army surplus stock. Contracts with the Ministry of Defence and others provided that ownership in the goods would not pass to the claimants until they had agreed an onward sale. Until then, they held the goods as bailees.
Some contracts imposed liability on the claimants for stock losses, others did not. When goods were sold, the proceeds were to be divided according to the agreed terms.
The defendant brokers were instructed to obtain cover for goods entrusted to the claimants. The insurance covered material damage to "stock…in the property of the insured or held by the insured in trust for which the insured is responsible".
A fire broke out at premises where the goods were stored. There was no question of fault, but a great deal of stock was damaged. The claimants claimed under the policy but insurers successfully disputed most of the claim. The claimants sued their brokers for failing to obtain appropriate cover.
Insuring bailed goods
A person is a bailee if he has possession of goods but ownership remains with the owner (the bailor). A bailee can insure the goods for their full value and, if they are destroyed or damaged, he can recover under the policy, whether or not he is liable to the owner. But he has to account to the owner for any insurance proceeds over and above his own loss.
This position, however, can be altered by standard phrases in the insurance policy that have been recognised by the court for many years.
For instance, if the policy states it covers goods held "in trust", it covers the full value of the goods. But if the policy covers goods "in trust for which the insured is responsible", the insurance only covers the bailee's liability in respect of the goods, not the goods themselves. "Responsible" in this context means "legally responsible".
In 2004, the Court of Appeal hearing the claimants' case against insurers reluctantly decided it could not overturn wording that has been in use since the mid-nineteenth century. The claimants could only claim under the policy for those goods for which they were legally liable to the owners. A petition for leave to appeal to the House of Lords was rejected.
The claimants sued the broker on the grounds that, in breach of its duty, it obtained insurance that included wording that provided only limited cover. They claimed the amount which would have been recoverable from insurers had the wider cover been obtained, plus the legal costs incurred in the insurance litigation.
The judge found the brokers liable.
A broker owes his client duties in contract and tort to exercise all reasonable care and skill in advising them and obtaining appropriate cover. The insurance should clearly meet the client's requirements and, as far as reasonably possible, be such that the client does not become embroiled in legal disputes.
To do this, the broker should explore with the client the nature of his business. In this case, that included the terms under which the claimants held the goods, since this could affect the cover. A broker would need to consider those terms carefully before he could recommend the narrower insurance wording.
There was some dispute over how much the broker was told about the contracts. But a policy with the wider wording would have covered all eventualities. There was no suggestion that such a policy could not have been obtained or even that it would have cost more.
A bailee insured under the wider wording can recover from insurers the full value of the goods but he is obliged to account to the owner in respect of the owner's interest.
In the judge's view, the same principle applied to any damages recovered from a broker who had failed to obtain appropriate insurance cover for bailed goods. The damages "replaced" the insurance monies.
Damages were therefore assessed on what the claimants would probably have recovered from insurers had the policy covered the full value of the goods. The claimants were under a duty to account to the owners for their share.
In addition, the claimants were awarded damages to cover their legal costs in pursuing the unsuccessful insurance claim. These included the petition for leave to appeal to the House of Lords, since the legal point was arguable and the matter undoubtedly one of public interest.
In the absence of any authority, the judge followed general principles in deciding that a bailee has the same duty to account to the owners of the goods in respect of damages payable by a broker who failed to obtain effective cover as it would have had in respect of insurance proceeds. In either case, the bailee is not overcompensated for its loss.