Facts
The claimants traded in army surplus stock. Contracts with the
Ministry of Defence and others provided that ownership in the goods
would not pass to the claimants until they had agreed an onward
sale. Until then, they held the goods as bailees.
Some contracts imposed liability on the claimants for stock
losses, others did not. When goods were sold, the proceeds were to
be divided according to the agreed terms.
The defendant brokers were instructed to obtain cover for goods
entrusted to the claimants. The insurance covered material
damage to "stock…in the property of the insured or held by the
insured in trust for which the insured is responsible".
A fire broke out at premises where the goods were stored. There
was no question of fault, but a great deal of stock was damaged.
The claimants claimed under the policy but insurers successfully
disputed most of the claim. The claimants sued their brokers for
failing to obtain appropriate cover.
Insuring bailed goods
A person is a bailee if he has possession of goods but ownership
remains with the owner (the bailor). A bailee can insure the goods
for their full value and, if they are destroyed or damaged, he can
recover under the policy, whether or not he is liable to the owner.
But he has to account to the owner for any insurance proceeds over
and above his own loss.
This position, however, can be altered by standard phrases in
the insurance policy that have been recognised by the court for
many years.
For instance, if the policy states it covers goods held "in
trust", it covers the full value of the goods. But if the policy
covers goods "in trust for which the insured is responsible", the
insurance only covers the bailee's liability in respect of the
goods, not the goods themselves. "Responsible" in this context
means "legally responsible".
In 2004, the Court of Appeal hearing the claimants' case against
insurers reluctantly decided it could not overturn wording that has
been in use since the mid-nineteenth century. The claimants could
only claim under the policy for those goods for which they were
legally liable to the owners. A petition for leave to appeal to the
House of Lords was rejected.
The claimants sued the broker on the grounds that, in breach of
its duty, it obtained insurance that included wording that provided
only limited cover. They claimed the amount which would have been
recoverable from insurers had the wider cover been obtained, plus
the legal costs incurred in the insurance litigation.
Judgment
The judge found the brokers liable.
A broker owes his client duties in contract and tort to exercise
all reasonable care and skill in advising them and obtaining
appropriate cover. The insurance should clearly meet the client's
requirements and, as far as reasonably possible, be such that the
client does not become embroiled in legal disputes.
To do this, the broker should explore with the client the nature
of his business. In this case, that included the terms under which
the claimants held the goods, since this could affect the cover. A
broker would need to consider those terms carefully before he could
recommend the narrower insurance wording.
There was some dispute over how much the broker was told about
the contracts. But a policy with the wider wording would have
covered all eventualities. There was no suggestion that such a
policy could not have been obtained or even that it would have cost
more.
Damages
A bailee insured under the wider wording can recover from
insurers the full value of the goods but he is obliged to account
to the owner in respect of the owner's interest.
In the judge's view, the same principle applied to any damages
recovered from a broker who had failed to obtain appropriate
insurance cover for bailed goods. The damages "replaced" the
insurance monies.
Damages were therefore assessed on what the claimants would
probably have recovered from insurers had the policy covered the
full value of the goods. The claimants were under a duty to account
to the owners for their share.
In addition, the claimants were awarded damages to cover their
legal costs in pursuing the unsuccessful insurance claim. These
included the petition for leave to appeal to the House of Lords,
since the legal point was arguable and the matter undoubtedly one
of public interest.
Commentary
In the absence of any authority, the judge followed general
principles in deciding that a bailee has the same duty to account
to the owners of the goods in respect of damages payable by a
broker who failed to obtain effective cover as it would have had in
respect of insurance proceeds. In either case, the bailee is not
overcompensated for its loss.
