Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd – claim for shortfall following settlement with insurers  EWHC 124 (Comm)
The insured, Ground Gilbey, was entitled to recover from its brokers, Jardines, the shortfall remaining after settling its claim for an indemnity from its insurers following a fire at Camden market. The fire had been caused by a liquefied petroleum gas (LPG) heater left on in one of the market stalls.
The fire risk posed by the use of LPG heaters was known to insurers and they added a survey condition as a new endorsement to the policy requiring completion of all risk improvements, one of which was the removal of the heaters. The brokers forwarded this risk improvement to the insured. At a later date, having realised that the heaters were still being used, insurers imposed a further risk improvement measure requiring the immediate removal of the heaters. The brokers did not send this to the insured or offer them any advice about non-compliance, but chose instead to try and obtain insurers’ agreement to the use of safer heaters.
Following the fire, the insured settled its claim against insurers for 70 per cent of its full value, relying on counsel’s advice. It sought the shortfall from the brokers. The judge’s principal findings are set out below.
The judge held that, because the brokers knew that the heaters were still being used, they should have done more than forward the original risk improvement measures. Had they advised that the insurance cover was at risk, the insured would have taken steps to comply with the risk improvement measures. He rejected the brokers’ argument that further advice from them would not have affected the stallholders’ behaviour.
Was the settlement reasonable?
Counsel had endorsed the settlement in light of the risk that insurers might successfully argue that non-compliance with the survey condition imposed on renewal requiring completion of all risk requirements discharged them from liability. The brokers argued that, on a proper construction of the survey condition, insurers would not have had a defence to liability. The judge thought the brokers’ arguments on this point were strong and agreed that the insured was motivated by a desire to reach an early settlement. However, the relevant test is not whether insurers would have had a good defence to the claim, but whether the settlement was reasonable in the circumstances. Although the settlement was towards the edge of the range which reasonable commercial people might have entered into, it was not unreasonable. The brokers were liable for the shortfall.
The insured settled its claim with insurers for £3.8 million and claimed a shortfall of £3.4 million from the brokers. The judge concluded that the correct approach was to work out what the insured would have recovered from insurers at the time had the brokers not been negligent and there had accordingly been no coverage problems. (A loss of chance analysis was not relevant since there were no alternative coverage issues which insurers might have raised.) The best evidence of this was what was put to counsel at the time, namely £5.6 million. The recoverable shortfall was, therefore, about £1.8 million.
Inadequate communications between brokers and insureds have been under scrutiny from the courts recently in cases such as Synergy Health (UK) Limited v CGU Insurance plc and Jones v Environcom. These cases differed somewhat on the need for brokers to give oral advice about the duty of disclosure and the effect of any non-disclosure or misrepresentation, but as the Jones decision has been appealed to the Court of Appeal, we can expect further guidance about the scope of this duty soon.
This case illustrates the principle that a broker's duty extends to ensuring that the insured should not be exposed to an unnecessary risk of legal disputes with its insurer (FNCB Ltd v Barnet Devanney (Harrow) Ltd). This duty continues after the risk has been placed so that, if the broker becomes aware of information that has a material and potentially deleterious effect on the cover, he must draw it to the insured’s attention and obtain his instructions (HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd).
Perhaps the most worrying aspect of the present decision from brokers’ standpoint is the judge’s approach to mitigation and quantum. Despite agreeing with the brokers’ arguments about whether insurers would have had a defence under the policy, the insured was allowed to recover the balance of its claim. In crude terms, once the broker is shown to have been causatively negligent, the insured gets the benefit of the doubt when it comes to assessing its claim. The only solution for a broker faced with such a claim is to involve itself in the settlement process, raising defences and endeavouring to ensure that the settlement reached has been fully tested. As this case shows, a passive approach can lead to an expensive outcome.