It has ordinarily been the case that, where a broker fails to arrange adequate insurance, their liability will be limited to any shortfall between the amount actually paid to their client, and the amount that client would have received, had sufficient cover been obtained. The High Court case of Arbory Group Ltd v West Craven Insurance Services Ltd has changed this, however, and with West Craven’s appeal having been compromised it is worth revisiting the principles that case established.
With a view to obtaining business interruption cover, Arbory Group Limited (Arbory), the parent company of a group of subsidiaries, which together with the parent company formed the business, retained West Craven Insurance Services Limited (WCIS). On 6 December 2001, the two parties met and filled out a proposal form. The proposal form included a question on gross profit, together with notes on how this should be calculated. WCIS failed to advise Arbory in this regard and Arbory failed to appreciate that the method of calculating insured gross profit, differed from that usually employed for business and accounting purposes. Had it been calculated with reference to the notes in the proposal form, Arbory’s gross profit would have been approximately £1 million. Adopting the method more commonly used by accountants, however, Arbory calculated this to be £250,000, the figure it entered on the proposal form.
Following a fire at its premises Arbory sought a recovery under the policy. It soon became clear, however, that as a result of WCIS’ negligence, Arbory was significantly underinsured for losses arising out of business interruption. In addition to claiming the difference between the amount it actually received for business interruption losses and what it would have received but for WCIS’ negligence, for which it was awarded £300,000, Arbory asserted that the underinsurance resulted in a loss of profit, which it claimed as well.
Loss of profits claim
Arbory asserted that, as a result of the shortfall in business interruption cover, it failed to earn the profits it would have done had it not been for the fire. It also contended that, given the purpose of business interruption cover, it was reasonably foreseeable that any failure to recover the amount claimed would adversely affect the ability of the business to continue trading.
Relying on two earlier Court of Appeal decisions, WCIS maintained that such a recovery was not permissible as it would constitute damages arising out of the delayed payment of the monies recoverable under the policy. WCIS further argued that Arbory should not be entitled to anything more than it would have been entitled to from the insurer, had the negligence not occurred.
In reaching its decision, the court followed the principles established in SAAMCO and posed three questions:
- did WCIS owe Arbory a duty in relation to the additional loss of profit;
- was a loss of profit reasonably foreseeable in a case of insufficient business interruption cover; and
- was the loss of profit attributable to the duty of WCIS?
In answer to these questions the judge concluded:
- the duty of the broker in this case where business interruption cover was required was to effect such cover that would enable the business of Arbory to recover to its pre-incident level of profitability;
- in the circumstances of this type of cover, it was reasonably foreseeable that failure to effect sufficient cover was liable to adversely affect the profitability of the business so insured; and
- this was not a case of seeking damages for the late payment of the monies Arbory was entitled to under the policy. The insurer had paid promptly.
The judge was satisfied that, had there been no underinsurance, a full payment would have been made at around the time that the payment was in fact received, and could see no good reason to restrict the claim against WCIS to the amount which would have been available under the policy, had the risk been placed correctly. Having reached this conclusion, the judge awarded Arbory an additional £311,844 for loss of profits.
This case’s treatment of negligence in business interruption cases is undoubtedly of significance, and is arguably controversial for a number of reasons. First, it distinguishes business interruption cover from other types of insurance on the basis that it is designed to prevent loss of profit. Second, it has extended brokers’ duty to guard against loss of profit when arranging such insurance, a move which is inconsistent with the courts’ established view that loss of profit claims against insurers for late or non-payment of losses are not permissible.
WCIS tried to reduce its liability by arguing contributory negligence against Arbory for not reading the explanatory notes contained in the proposal form, however, the court refused to make a deduction on that basis. The court was of the view that it had been for WCIS to advise in relation to the completion of the proposal form and it went so far as to say that it was not sufficient for WCIS to ensure that Arbory had read the notes relating to the method of calculating gross profit, but that it should also have gone through the figures, to check that they appeared correct.
As a result, it seems that in seeking to establish the loss suffered by a claimant, it is now necessary to consider whether the loss was caused by negligence and, if so, whether it was reasonably foreseeable. Where those criteria can be satisfied, it appears that there is no longer a principle restricting the level of damages a claimant can recover, and in the light of the parties’ decision to compromise WCIS’s appeal, we shall have to await further case law to find out whether this trend is set to continue.