All or nothing, or take a chance?
Graham Bartlett assesses the implications for the insurance sector arising from the recent case of Dalamd Limited v Butterworth Spengler Commercial Limited
The assessment of damages in professional negligence claims against insurance brokers was considered recently by the High Court in the case of Dalamd Limited v Butterworth Spengler Commercial Limited  EWHC 2558.
The claim arose out of a fire in October 2012. The insurers, who were not involved in the litigation, denied liability on the grounds that there had been non-disclosure of aspects of the insured’s financial history and that there was a breach of an external storage warranty (ESW) relating to storage of combustible material in close proximity to the buildings. The claim against the brokers was that they had failed to advise the insured about the need to give full disclosure and of the existence of the ESW.
The court found that the brokers had been negligent in failing to advise the insured on the need for full financial disclosure, but that they had advised them about the existence of the ECW and the consequences of a breach.
In contract law, damages are measured as being the sum necessary to place the innocent party in the position they would have attained had the contract been performed without the breach. The burden of proof is on the innocent party to prove their loss to the civil standard of the balance of probabilities (more likely than not).
Where there is some uncertainty about the outcome had the contract been performed without a breach, the court can award damages for the loss of that chance. In Chaplin v Hicks , an actor was awarded £100 damages after her agent breached their contract by failing to advise her of a forthcoming audition. The damages reflected the one-in-four chance that she would have got the part had she attended the audition.
“The burden of proof is on the innocent party to prove their loss to the civil standard of the balance of probabilities”
FACTS OF THE CASE
In Dalamd, it was accepted that had the brokers advised on the need for full financial disclosure, insurance would have been obtained but still containing an ESW. The brokers’ argument was that it was more likely than not that those insurers would have denied liability for the fire claim because of the breach of the ESW and therefore the claim against them failed because the insured had not suffered a loss caused by their negligence.
The insured’s argument was that it was not certain that the insurers would have relied on the breach of the ESW and that they might ultimately have been persuaded or required to meet the claim. The insured were therefore entitled to damages to reflect loss of the chance that the claim might have succeeded.
In accepting the brokers’ argument, the court followed the decision of the Court of Appeal in Fraser v Furman , also an insurance broker professional negligence case, which upheld an award of damages because it was highly improbable that an insurance company of high reputation would conceivably take a wholly unmeritorious point to deny liability (the reverse of the position in Dalamd).
Although this is an interesting application of the law, the principle remains a little uncertain. In Dalamd and in Fraser v Furman, the outcome of the performance of the contract without the breach was abundantly clear. In Dalamd, there was clear photographic evidence of the proximity of the combustible material to the walls of the building and no conceivable reason why the insurers might have been persuaded or required to meet the claim. Even if the court had assessed damages on the loss of chance approach, the chance of the claim succeeding was negligible. Where there is any real doubt as to the outcome of the claim, then the insurers are likely to be joined to the proceedings.
Graham Bartlett is a barrister at Trinity Chambers in Newcastle upon Tyne
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