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The manipulation of claims as a contrivance to PI policies – brokers' and accountants' negligence

Case summary of Channon (t/a Channon & Co) v Ward (t/a Ward & Associates) [2017] EWCA Civ 13

The Court of Appeal has handed down judgment in a broker's negligence claim, where the main legal arguments focused primarily on the scope of an accountant's PI policy. Channon v Ward [2017] EWCA Civ 13 looks at the scope of PI cover in respect of investment activities undertaken by an accountant, and also highlights the difficulty in which Insureds can sometimes find themselves by advancing a defence that undermines their PI cover. The judgment further serves as a useful reminder that no matter how grossly negligent a professional's conduct may be, unless loss is suffered claimants will be left empty handed and risk being the subject of an adverse costs order. 

Factual background

Rodney Channon, a chartered accountant and co-director of a property development company (MHP), obtained over £1m investment in MHP from various individuals, some but not all of whom were existing clients of his accountancy practice. The investment venture failed leaving MHP all but insolvent and the investors sought to sue Mr Channon.

On the assumption that Mr Channon had PI cover, the investors manufactured their claims to allege that Mr Channon had given negligent advice in his capacity as a chartered accountant. When Mr Channon however came to notify the investors' claims to his broker, Mr Ward, it transpired that he did not have PI cover due to Mr Ward's failure to procure the same. There was no question that by failing to place adequate cover, Mr Ward had breached his duty owed to Mr Ward.

Mr Channon sought to sue Mr Ward for negligence and at the same time continued to defend the investors' 'professional negligence claims'. In defence of the investors' claims. it was Mr Channon's contention that he had at all times made clear that he was acting as a Director of MHP and that the claims were misconceived and a contrivance. In Mr Channon's view, the claims were those of disappointed investors who had become victims of the unexpected downturn in the property market.

Despite his view that the investors' claims were without merit, Mr Channon entered into a settlement agreement with the investors on the basis that judgment be entered against him in favour of each of the investors, but in return he would also authorise the investors to pursue in his name both the action against Mr Ward and "his claim for payment out of the FSCS in his name". In other words, Mr Channon essentially bypassed his own lack of insurance and sought to deflect the claim to be covered by Mr Ward's PI policy and/or the FSCS.

Mr Channon obtained judgment in default against Mr Ward, but the First Instance judge assessed the damages at nill ([2015] EWHC 4256). The basis of that finding was that, even if Mr Ward had procured PI insurance, Mr Channon's insurers would have refused an indemnity as the investment advice did not arise from the conduct of professional business. Further, the (putative) insurer would have refused an indemnity on the basis of two exclusions namely (1) express or implied warranties relating to the financial return of investments and (2) trading lossess or liabilities. 

The appeal

Mr Channon appealed, arguing that the (putative) insurer would have obtained legal advice which would have caused it to accept the investors' claims not least to avoid reputational issues arising from declinature.

That argument was rejected by the Court of Appeal on the ground that it was speculative and forlorn. Tomlinson LJ  took the view that the putative insurer would not have considered it necessary to obtain legal advice because it would have been clear that the investors were "shoe-horning" their commercial claims against MHL into PI claims in order to take advantage of the perceived deep pockets of PI insurers.

Furthermore the two exclusions were considered sufficiently clear to avoid the need for external independent legal advice. 

Commentary

It is difficult to envisage a more straightforward case on breach of a professional duty than a broker's failure to procure PI insurance upon instruction. However, as this case demonstrates, proving breach is only half the battle. Claimants still have to demonstrate that that breach has caused loss.  In the absence of loss, a PI claim – however grave the breach - should fail.

This case also examines the application of the insuring clause in the ICEAW Minimum Terms. The Insuring Clause is triggered upon a "Claim for Civil Liability arising out of and/or in connection with the conduct of any Professional Business carried on by…..the Insured". In this case, the claims alleged that Civil Liability arose from Mr Channon's Professional Business. However, Mr Channon denied that that was the case. In the circumstances, by defending the claim on the basis that no Civil Liability arose from his Professional Business Mr Channon made a rod for his own back. If insurance had been in place, Mr Channon's defence would have undermined his PI cover.

How Insurers should approach a clearly manipulated contrivance claim was considered at First Instance when the High Court held that had the putative Insurer sought legal advice, they would have no doubt been advised to rely on the approach outlined by Devlin J in West Wake Price & Co Ching [1956] 3 All ER 821 at 828-

I do not think that the underwriters are bound by the way in which the claimant has chosen to formulate his claim. I think the underwriters can properly invite the court….to ascertain the true nature of the claim….

Further, reference was made to Thornton Springer v. NEM. [2000] 2 All ER 486, in which Coleman J concluded that the basic principle of liability insurance is that the required intrinsic character of the eventuality insured against, was the true liability of the assured rather than the alleged liability advanced by the claim.

Tomlinson LJ in the Court of Appeal did not refer explicitly to the High Court's reasoning and instead, and perhaps on the contrary, acknowledged that "the insurers had to bear in mind the allegation by the investors that Mr Channon had indeed been acting in the course of his professional practice". He further recognised at para 31(iv) that had the issue of whether Mr Channon was acting in the course of business been the sole issue for the putative insurer, it would probably have continued to provide assistance, whilst preserving its position as regards indemnity. Tomlinson LJ acknowledged that "although difficult to achieve, it was a path sometimes taken".

In summary, if the claim is plainly a contrivance  to satisfy the insuring clause Insurers are entitled to look at the true liability of the Insured rather than the alleged liability. There are however less clear-cut circumstances (and this will generally be when the Insured sides with the claimant) where Insurers may have an obligation to defend a claim even when it is suspected that there will ultimately be a finding that the claim does not arise from the conduct of Professional Business. In those scenarios Insurers will usually seek to reach an agreement with their Insureds in terms of the responsibility for and cost of defending any claim. If ultimately a Court decides that the claim does not arise from the conduct of Professional Business, the Insurer will be entitled to a refund of the costs expended in defending the claim. As all Insurers will however know, the success of any such recovery is not guaranteed.

Contact

For further information please contact Vikki Courtney, Senior Solicitor on +44 20 7220 5236 or at Vikki.Courtney@dwf.law

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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