Mr Justice Blair's decision in Ground Gilbey and Another v Jardine Lloyd Thompson UK Ltd  EWHC 124 (Comm) is a cogent reminder to insurance brokers that they can expect little sympathy from the courts in cases where their clients have settled their insurance claims for a shortfall because the insurers had an "arguable" defence to the claim. Against that background, there are always a range of reasonable settlements which means that the broker can be left facing a more substantial shortfall claim than might otherwise have been the case. Plainly it is not sensible for brokers to leave the size of their exposure to chance and, in that regard, it is worth bearing in mind that some relatively simple practical steps can assist in mitigating the onerous nature of the Barnet Devanney principle.
In Ground Gilbey and Another v Jardine Lloyd Thompson UK Ltd, the owners of Camden market sought an indemnity from their insurers following a fire caused by a portable liquefied petroleum gas heater left on in one of the market stalls. The use of LPG heaters had been identified by insurers as a fire hazard on several occasions and had remained a source of some controversy because certain market stallholders persisted in using the heaters in breach of their tenancy agreements, notwithstanding efforts by the market management to curb the practice. Insurers, alive to the increased risk created by the heaters, had added as a new endorsement to the policy a survey condition requiring completion of all risk improvements, one of which was the removal of the heaters. Later, when it became apparent that the heaters were still being used, insurers imposed a further risk improvement measure requiring the immediate removal of the heaters. Jardines forwarded the first of the risk improvements to the insured, warning that the heaters should be removed immediately, but did not inform the insured of the second or offer any advice as to the consequence of non-compliance. Instead the brokers sought to resolve the issue of the heaters by seeking insurers' agreement to the use of safer heaters. The fire took place before any resolution on this issue was reached.
Following the fire, the insured settled the insurance claim for 70% of its full value. Counsel endorsed the settlement in light of the risk that insurers might successfully argue that non-compliance with the survey condition discharged them from liability. It is clear, however, that other factors also influenced his opinion, including the fact that it would have been a financial disaster for the market to have litigated and lost and, further, that the delays and the substantial cost of litigation would have been crippling.
The insured argued that, as a result of Jardines' negligence in failing to advise them that ongoing use of the heaters placed the cover at risk, they recovered less from insurers than they would otherwise have done. Jardines responded that they had, in fact, communicated the substance of the risk improvement measures that were required and even if they had they offered further advice on the implications of non-compliance, it would not have made any difference to the stallholders' conduct. Jardines argued further that the insured had concluded an unreasonable settlement because, on a proper construction of the survey condition, insurers would not have had a defence to liability.
The claim against Jardines was argued before Mr Justice Blair. He held that, because the brokers knew that heaters were being used, they should have appreciated that the policy no longer clearly and indisputably met the insured's requirements. In those circumstances, the brokers should have done more than forward the terms of the original risk improvement measures. They should instead have advised that the insurance cover was at risk unless the heaters were removed or a safer substitute agreed. Mr Justice Blair also accepted the insured's evidence that, had the importance of the matter been highlighted to them at the time, they would have taken more stringent steps to comply with the risk improvement measures. As to the suggestion that the settlement with insurers was unreasonable, Mr Justice Blair considered that Jardines' arguments on the construction of the survey condition were "strong ones" and acknowledged that the insured was motivated in part by the desire to reach an early settlement. Notwithstanding those issues, he did not consider the insured's settlement to be unreasonable. He explained that the relevant test was not whether the insurers, objectively speaking, had a good defence to the claim. Rather, it was whether, in all the circumstances, the settlement was a reasonable one. As it was "at least arguable" that the insured's cover had been prejudiced, the insured's rights at the relevant time were "uncertain or doubtful". Moreover, the settlement had been endorsed by the insured's lawyers. On that basis, and notwithstanding that the settlement was "towards the edge of the range which reasonable commercial people might have entered into", Jardines were found liable for the shortfall.
The notion that an insurance broker's duty extends, as Mr Justice Blair put it, to ensuring that the insured does not find himself with "doubtful or uncertain rights" when he should have had a "clear, unequivocal right" is not a new one. It was first (and controversially) recognised in FNCB Ltd v Barnet Devanney (Harrow) Ltd  2 All ER (Comm) 233 and has subsequently been applied in a number of cases where disputes have arisen as to the construction of the policy wording or the scope of the cover placed. It is no surprise that similar principles apply to events which take place during the currency of the policy.
Of greater concern is what these principles mean for insurance brokers as they strive to operate in a world where business risks and indeed insurance products are becoming increasingly complex. Although, as Mr Justice Blair noted in his judgment, "the risk of litigation can never be wholly avoided and a broker is not in breach of duty in consequence alone of insurers putting forward a spurious construction of the cover", major claims where coverage is "clear and unequivocal" are rare – particularly in cases involving complex or untested scenarios. The position is compounded where insurers take arguable, but ultimately weak, policy points as part of a negotiating tactic. On its face, it may seem that there is little to be achieved by brokers pointing these risks out to an insured. However, it is far easier to assert with the benefit of hindsight that, if particular advice had been given at the time, a coverage dispute would not have emerged. How then can brokers best protect their positions?
The first point to make is to minimise the prospect of the breach of duty occurring in the first place. Although this may be easier said than done, one thing that might assist is to identify the areas which are often the source of disputes and explain the risks involved. For example:
- the risks associated with material non-disclosure;
- limitations to the scope of the cover, with particular reference to points which frequently give rise to disputes (for example aggregation provisions, key risks which fall outwith the scope of the cover, the operation of policy exclusions and any unusual or bespoke terms);
- the need for compliance with policy terms and conditions and the risks associated with non-compliance;
- any issues which insurers have identified as important (such as the risk improvement measures in the Jardines case) and their potential implications for the cover; and
- the steps taken in light of any risks which the insured has identified as important.
- If issues are raised in advance, any debate as to the cause of an insured's loss will be less speculative.
A further point worth highlighting is the disadvantage to brokers of taking a passive approach to disputes between insurer and insured. From a commercial and strategic standpoint alone, one would expect it to be in the broker's interests to fight his client's corner. Equally, however, when the question of settlement arises (as it inevitably does) a broker who maintains an involvement in the dispute is able (and well placed) to express views, offer arguments and ultimately record the extent to which any settlement is properly attributable to matters for which the broker cannot be responsible. A disinterested broker always runs the risk that a settlement endorsed by a lawyer (who may be cautious, commercially minded or sometimes even wrong) will prima facie be considered reasonable.