England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No. HC09C01681 Royal Courts of Justice Strand, London WC2A 2LL
		26 January 2010

MASTER BRAGGE:

1. The application that is before me, which is an application to strike out Mr Crowson's claim, raises an interesting point relating to insurance brokers. In particular, it rises the question of whether a person who is not in a contractual relationship with the broker nonetheless has rights of action in tort and/or contract where the insurance to be arranged is also for his benefit.
2. I refer first to the unamended particulars of claim. It is sufficient to say that Mr Crowson was the managing director of Hughes Brickwork Limited (HBL) and as a result of that company moving its banking to HSBC an introduction was effected to HSBC Insurance Brokers Limited (the Defendant) with the result that it was agreed that it would put into effect insurance policies to provide cover in respect of all risks that were covered under policies arranged by HBL's previous brokers. It is Mr Crowson's case that HBL's previous brokers had put in place a directors and officers liability insurance policy with the effect that he and others were entitled to the benefit of that policy, as well as HBL. The allegation is that the Defendant failed to make any arrangement to renew or replace the directors and officers policy. It is alleged in paragraph 14 of the particulars of claim that the failure by the Defendant to ensure that a directors and officers policy was put in place was the result of the Defendant's negligence. One of the particulars of negligence (paragraph 14.6) is to the effect that the Defendant failed to take such steps to protect the interest of HBL and its directors and officers as would have been taken by a reasonably competent commercial insurance broker. Earlier and in paragraph 7, it is pleaded that the Defendant owed Mr Crowson as a director of HBL various duties at common law.
3. At the hearing a draft amended particulars of claim was produced to the court and the substance of the amendment is at paragraph 7(A) and (B). 7(A) is in terms that it was a term of the contract between the Defendant and HBL that the Defendant would effect a directors and officers policy and that that term conferred a benefit on Mr Crowson within the meaning of section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999, such that Mr Crowson is a person who has a right to enforce the contract. 7(B) is in terms that Mr Crowson acted on his own behalf and as an agent for the other directors and officers or HBL in instructing the Defendant to effect a directors and officers liability insurance policy and so he is a party to the contract and entitled to enforce it. Accordingly, the claim is made in negligence and in breach of contract.
4. The Defendant's position is straight forward and is based on the argument that it was not in a contractual relationship with Mr Crowson and that the only contract was with HBL. Moreover, it is the Defendant's position that it did not owe Mr Crowson a duty of care at common law in any event and that there is no legally recognisable cause of action against it at the instance of Mr Crowson.
5. I was referred by counsel for the Defendant to a number of authorities starting with Verderame -v- Commercial Union Assurance Co [1995| PNLR 612. The claimant and his wife were the directors of a company and the brokers effected insurance in the name of the claimant not the company. Later, the company's stock was stolen and the insurance company denied liability on the ground that the stock was owned by the company and the claimants had no insurable interest. The claimants brought proceedings against the insurers and the brokers seeking damages; they alleged that the defendants were agents of the company but owed a duty of care in tort to the claimants in arranging the insurance. It was held that the brokers owed no duty of care to the claimants in effecting the insurance. The Court of Appeal found a number of insuperable objections to the claim against the brokers succeeding and in particular the directors were seeking to go behind the corporate status of the company. Balcombe LJ said at page 622 that there is no recognised category where a duty such as was claimed by the directors to be owed to them by the brokers had been held to exist and to do so would be unjustifiable in relation to the damage claimed for loss of future emoluments (loss of business). Balcome LJ concluded (p.623) that the claim was unsustainable if made in contract. Nourse LJ. in a short judgment, observed "that it being accepted that there was a contract between the Brokers and the company alone, the proposition that the brokers also come under a duty of care is in tort to the directors was not only novel but to startling".
6. I was also referred to Texas Homecare Ltd -v- Royal Bank of Canada Trust [1996] CLC 776. This was a claim against, among others, brokers claiming it was a term of certain agreements that the insurance was to be placed with an insurance broker of AA status or equalivant. The court held that the claimant did not have a direct cause of action against the defendant, even though its role in the "cash-back" scheme vastly exceeded that of pure a broker and that that was because there was no contract between them and the claimant. The broker had not assumed responsibility to the claimant for the status of the insurance (judgment p.794).
7. It is submitted to me that as a matter of principle where a company has instructed insurance brokers to procure insurance, and where it is alleged that the brokers have breached the retainer and/or duty of care owed to the company, including in respect of a director and officers insurance policy, it would be wrong in principle to allow a director to circumvent the contractual relationship and bring a claim in his own name against the broker, because any claim the director may have lies against the company.
8. It appears to me. having heard argument, notwithstanding these authorities that it is at least arguable for the purposes of a strike out application that a broker can be liable in tort to a person other than the person who appointed him as broker in two situations. First, when the broker is instructed to arrange insurance both for that person and others, and secondly where the policy is intended to benefit a third party. For present purposes it is to be accepted that the Defendant knew that Mr Crowson was the managing director and that the directors, including the managing director, required a directors and officers insurance policy to be in place. The Defendant is to be taken to know that such a policy would be for the benefit not only of the company but its directors and offices. This is a situation where a broker is instructed by one person to arrange insurance, for that person and for others. The question to be asked, as it appears to me, is whether the broker is to be taken to have assumed responsibility to such a director and, of course, this is a case where there is direct contact between the broker and Mr Crowson.
9. The problem is posed in Simpson on Professional Negligence and Liability and is dealt with commencing at paragraph 10.55. To whom does the broker owe a duty of care in fulfilling its instructions? Were the brokers instructed to arrange insurance not only for the insured but also for others? The editors are of the view (as set out in paragraph 10.56) that in cases where a broker is instructed to arrange insurance not only for a particular insured but also for others that all insureds can properly be regarded as the broker's clients: the insured who directly instructed the broker and the other insureds because the party giving the direct instructions was acting as their agent, either with express or implied authority to give such instructions or upon the instructions subsequently being ratified by the principal. It is suggested that duties would be owed both in contract and in tort. Reference is made to Punjab National Bank -v- De Boinville [1992] 1 WLR 1138 in which the Court of Appeal held that it was a justifiable increment to hold that an insurance broker owes a duty of care to a specific person, not being a client, whom he knows is to become an assignee of an insurance policy, at all events where to the broker's knowledge that person was actively participating in giving instructions for the insurance. (Staughton LJ at 1153 at H to 1154 at A-B). Reference is here made to Ross -v- Caunters [1980] Ch 197. At paragraph 10.60 the editors deal with the situation where the broker arranges insurance in which he knows that some identified person has or will have an interest, even though that person is not to be an insured under the insurance. Reference is again made to the Punjab National Bank case.
10. I have already referred to the proposed amended pleading in contract and it appears to me that where a person instructs a broker to effect insurance for his own benefit, and the benefit of others, he is at least arguably acting as an agent of the others and therefore there will be a contract between the broker and those others for whose benefit the policy is effected. It is to be remembered that on the facts to be assumed at this stage. Mr Crowson gave the instructions both on behalf of himself and on behalf of HBL. It will be recalled that amended paragraph 7B is in terms "Further or in the alternative either the Claimant acted also on his own behalf, and as a agent for the other directors and officers, or HBL acted as the agent of the directors and officers of the company in instructing the Defendant to effect a Directors and Officers Liability insurance policy".
11. If I am wrong in that conclusion then it seems to me that in any event the situation here comes within the Contract (Rights of Third Parties) Act 1999 such as to give Mr Crowson the right to enforce the contract. Section 1 of the Act is in the following terms:-

"1. - Right of third party to enforce contractual term.

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

(3) The Third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

(4) This section does not confer a right on a third party to enforce a term of a contract otherwise then subject to and in accordance with any other relevant terms of the contract".

12. It appears to me that it is well arguable that the Act applies on the basis that if Mr Crowson is not a party to a contract (a third party) he can enforce a term of the contract because that is one which confers a benefit on him, namely insurance as a director. Further he would be a member of a class or answers to a particular description within section 1(3). It follows that in my assessment the application to strike out must be unsuccessful. There seems to me to be at least arguable cases both in contract and in tort that are available to Mr Crowson. On that basis, it cannot be said the statement of case, including the draft amended particulars of claim, disclose no reasonable grounds for brining the claim. It appears to me that the decision in Verderame is not determinative of the particular pleaded situation in the instant case. Verderame was concerned with a situation where the owner of the stock was the company and that case did have present the agency situation pleaded in paragraph 7B. Moreover, in the Verderame situation it is difficult to see how Mr Verderame and his wife could have argued that the contract had a term which purported to confer a benefit on them within the 1999 Act. It seems to me that in fact the argument advanced by counsel for Mr Crowson is consistent with the principle of duty of care explained by Sir Robert Megarry V-C in Ross -v- Caunters [1979] 3 WLR 605 at 613-614.