Apportioning liability

In some markets, there will be more than one broker involved in distribution: a producing broker interacting with the client and a placing broker interacting with insurers to place the risk. Each owes similar, though not identical, duties. The producing broker owes duties to the insured while the placing broker owes them to the producing broker.

What happens where the insured does not receive the cover it intended or, worse still, insurers are entitled to decline cover? Is liability split between the brokers equally, or does some other apportionment apply? The recent case of Dunlop Hayward v Barbon has provided guidance on how a court can approach this thorny issue.

Background

DH was a property management company with a valuation practice that required £20m of professional indemnity cover in two layers of £10m. The company made clear to its producing broker that cover was required in respect of all of its activities - including valuation.

DH's insurance requirements were lost in translation between the producing and placing brokers. The producer issued instructions that cover was required on the excess layer for "commercial property management" activities, an inapt shorthand phrase (described as the "limiting condition") that the court found did not include valuation activities. DH was therefore uninsured at an excess level for a series of major valuation claims due to the producing broker's fault in incorrectly describing the scope of cover required.

The placing broker did not alert the producer to the effect of the limiting condition on the cover obtained and had also assumed an obligation (outside its terms of business arrangement) to obtain cover on no worse terms than expiring.

In deciding who was responsible for the lost cover, the court analysed the duties owed by each broker, whether or not such duties had been breached and the "causative potency" of the breach (whether or not the specific breach of duty actually caused the loss suffered).

The common law duties overlap to an extent but, as the table shows, have important distinctions. The court also considered the Icob obligations, particularly insofar as the producing broker was concerned.

As the major fault in this case arose from a misunderstanding of the client's requirements, it was unsurprising that the producing broker was held primarily liable. The placing broker's breach was in failing to warn the producing broker of the risk that the cover obtained may not meet the client's requirements or to seek clarification of what were clear, albeit unusual, instructions to obtain cover in respect of "commercial property management" activities only. The court apportioned liability as 80% to the producing broker and 20% to the placing broker; the producer's faults were four times more 'causally potent' than those of the placing broker.