The decision in Channon v Ward is an important reminder for accountants and other professionals to ensure that their work falls within the confines of their professional indemnity insurance and does not stray beyond their usual role.

Background

Mr Channon was a chartered accountant and a director in a property development company. The defendant insurance broker had been arranging Mr Channon's professional indemnity insurance for many years. Between 2004 and 2007, Mr Channon persuaded several individuals to invest over £1 million in the company. Some of these investors were clients of his accountancy practice, some were not.

Following the 2008 global financial crisis, the company failed and became insolvent. There was no prospect of payment to the investors. The investors framed the proceedings against Mr Channon to allege he had given negligent advice in his capacity as a chartered accountant so as to gain access to his professional indemnity insurance cover.

Mr Channon denied having given any investment advice. The relevant documentation made it clear that Mr Channon's involvement was as a director of the property company, not as an accountant.

It was then discovered that the broker had negligently failed to arrange insurance cover. Mr Channon therefore issued proceedings against Mr Ward alleging that his negligence resulted in him having neither liability cover nor the support of insurers in defending the investors' claims.

Despite considering that their claims were meritless, Mr Channon settled with the investors and authorised the investors to pursue in his name both the action against Mr Ward and (because Mr Ward had failed to ensure he himself had insurance) "his claim for payment out of the FSCS in his name"; Mr Channon was bypassing his own lack of insurance and attempting to deflect the claim to be covered by the Financial Services Compensation Scheme (FSCS).

Judgment in default was entered against the broker but damages were assessed at nil on the basis that even if Mr Channon had had insurance, his insurers would not have met the investors' claims because he had not given any investment advice or been acting in his capacity as a chartered accountant. Mr Channon (in reality, the investors) appealed arguing that had insurance been in place, there was a significant prospect that the insurers would have sought and received legal advice which would have caused them to take a different course.

The Appeal

Dismissing the appeal, the Court of Appeal held that the attempt to persuade the court that the insurers would probably have taken legal advice was forlorn. The claim "stank" and in the view of the insurers' own insured (Mr Channon) it was a contrivance. The insurers would have recognised that the investors were shoehorning their claim against the property company into a professional negligence claim in order to tap into Mr Channon's professional indemnity cover. The insurers would thus have stoutly resisted the claim from the outset as a plain contrivance.

Comment

This was a lucky escape for the broker who had clearly been negligent in failing to arrange cover for Mr Channon. That the broker had also failed to arrange his own professional indemnity insurance was known to the investors who nevertheless persisted with the claim, through Mr Channon, with the strategy of making the broker bankrupt and then making a claim against the FSCS.

All too often, claimants look to their professional adviser's insurance cover where they have suffered a loss. The Court of Appeal's acknowledgement here that the claim against Mr Channon in his capacity as an accountant, rather than in his capacity as a property developer, was a blatant try-on to access the professional indemnity insurance cover is therefore refreshing. It is, however a reminder that in cases where accountants provide advice to clients wearing "two hats", it is important to delineate precisely which rile the professional is fulfilling in any given case. Clarity in the engagement letter can avoid dispute and cost later on.