Court of Appeal held by a majority that a lender can recover its full loss on a refinance loan, not just the amount by which the second loan exceeds the first

In Tiuta International v De Villiers Chartered Surveyors the UK Court of Appeal considered the application of the "but for" causation test in a lender claim against valuers involving an alleged refinance loan. The court's interpretation means the surveyor could be liable to the lender for the entire loss flowing from the second valuation, including in respect of monies used to redeem the previous loan.

In February 2011 Tiuta provided a loan on the basis of De Villiers' valuation of a property, which it revalued in November/December 2011. In reliance on this second valuation, Tiuta made a new loan, assumed for the purposes of the appeal to be a refinance facility fully redeeming the first loan and providing funds on top. Tiuta claimed De Villiers' second valuation was negligent and sought to recover its shortfall following the sale of the property.

At first instance, applying the "but for" test, the court found had the second valuation been non-negligent and the second loan not proceeded, Tiuta would still have been exposed to the debt arising from the February loan and the losses therefore had to be limited to the amount by which the second loan exceeded the first. Tiuta could seek to amend its claim, as the value of any lost claim in relation to the first valuation could be relevant to the extent of the loss caused by a negligent second valuation. That a claim in relation to the first valuation was lost by the redemption of the first loan followed from Preferred Mortgages v Bradford & Bingley Estate Agencies.

The Court of Appeal held by a majority that a lender can recover its full loss on a refinance loan, not just the amount by which the second loan exceeds the first. Applying the "but for" test, it held that absent a negligent second valuation, Tiuta would not have entertained the refinance facility and would still have had a potential claim against the valuer in respect of the first loan. De Villiers had taken on a duty to value the property as a whole in accordance with its instructions and had not sought to limit its potential exposure.

Tiuta avoids claims being lost in a "black hole" arising from Preferred Mortgages. Pleading a loss of a chance of a successful claim in relation to the first loan may depend on whether the first valuation was negligent.

While the decision has caused a stir among valuers and their insurers, it turns on specific facts. It will not apply, for example, in cases involving multiple lenders. It was also based on assumptions, including that the second loan operated to redeem the first, and it remains to be seen how the case plays out on the true facts at trial.

From the viewpoint of underwriters, causation issues are not really any different from other legal aspects of a claim such as contributory negligence or a SAAMCo "cap". These do not concern the valuer at the point of providing a market valuation, when he is not concerned with (or even necessarily aware of) the lender's knowledge of security or any other aspects of the lender's underwriting. All the valuer will usually be concerned with is providing a market valuation and, ultimately, that is what its insurance cover relates to.

Valuers will now be encouraged to ensure any terms of business limit their liability in a refinance situation.

Article first published in Insurance Day