Arbory Group Ltd v West Craven Insurance Services (13 March 2007)
A company has successfully argued that it should be entitled to damages for loss of profit from failing to receive sufficient recovery under a business interuption policy as a consequence of the negligent advice of its brokers.
Arbory Group Ltd, (C), a parent company of a number of subsidiaries, wanted to insure its business against business interruption. Craven Insurance Services, (D), arranged business interruption insurance on C’s behalf as its broker.
The proposal form included a question regarding “insured gross profit”, which was accompanied by a series of notes explaining how this should be assessed. D did not advise and C’s managing director did not appreciate that the meaning of the term as set out in the proposal form differed from the common business method of assessing gross profit. Calculated in accordance with the guidance in the proposal form, the group’s gross profit would have been around £1 million. However, using the common business method of calculation, the insured entered £250,000 on the proposal form.
A fire caused significant disruption, following which it became evident that the company was significantly under insured for business interruption. C started proceedings against D and two heads of loss were claimed: the amount of the under insurance, and loss of profit. C claimed damages against D for negligent advice. D admitted breach of duty in respect of negligent advice but contended that (1) C was the wrong claimant because its subsidiaries were the entities which had suffered losses, not C as the parent company; (2) C was not entitled to loss of profits and C’s claim was in fact a claim for damages for the late payment of damages; (3) No loss was suffered by C or C’s managing director was at least guilty of contributory negligence for not reading and following the explanatory notes before entering into the insurance contract.
The court held:
- C was the appropriate claimant in this case because it was understood clearly at all times, including when the business interruption cover was obtained and the insurance claim settled, that C represented the totality of the business that was being conducted.
- C was entitled to claim damages for loss of profit. The duty of D was to ensure that sufficient business interruption cover was in place to enable the business of C as a whole to recover and to resume its pre-incident level of profitability at the earliest date. It was reasonably foreseeable that failure to effect sufficient cover was liable to affect the profitability of the business so insured adversely, if as a result of D's negligence insufficient business interruption insurance money was paid to enable the company to recover, as it should have in the event that proper cover had been effected. This was not a case of seeking damages for the late payment of damages. The insurer paid promptly under the business interruption policy. Grenfell J was satisfied that had there been no underinsurance, a full payment would have been made at around the same time as payment had been received by C.
- C’s managing director had read the form, read the notes and could not have understood the concept of “insured gross profit” without an explanation from D, therefore there should be no deduction for contributory negligence.