Negligence in insurance: Case study on broker liability and business risks

In this case study, Jonathan Ray-Smith and Suzanne Loding consider Norman Hay Plc (in Members' Voluntary Liquidation) v Marsh Limited [2024] EWHC 1039 (Comm) — a case that explores when a broker's failure to arrange insurance constitutes negligence and whether such claims can be dismissed before trial.

For businesses that depend on insurance to mitigate risks, this case serves as a critical warning and a guide to legal recourse.

The case at a glance

The defendant appellant, Marsh Ltd ("Marsh"), had been instructed by the claimant, Norman Hay Ltd ("Norman Hay"), to arrange a global liability programme in respect of all of Norman Hay's subsidiary companies. However, Norman Hay argues that the policy put in place did not include non-owned auto cover, i.e. motor liability insurance cover where cars are hired by employees. An employee of one of Norman Hay's subsidiaries, IMP, was involved in a fatal road-traffic collision in Ohio involving a hire car, which did not fall within the scope of Marsh's global liability programme. The other party involved in the collision, Ms S, was seriously injured and brought a claim against, inter alia, IMP and Norman Hay. Before those proceedings were settled, Norman Hay sold its subsidiaries including IMP to a third party, Quaker, and made provision under the sale agreement to indemnify Quaker in respect of Ms S' claim against IMP by paying $8m USD into an escrow account. Eventually, that claim was settled out of Court by the payment of $5.5m from the escrow account, which reduced the amount received by Norman Hay for the sale of its subsidiaries.

It transpired that IMP did initially have worldwide non-auto cover, with a limit of $3m, but prior to the road traffic accident, Marsh had advised Norman Hay to cancel that policy when the global liability programme was put in place, without advising IMP or Norman Hay that cancelling the policy would reduce the scope of IMP's cover.

The claim

Norman Hay brought a claim against Marsh, alleging that it was under a duty to assess Norman Hay's insurance needs and failed to adequately observe that duty, including by recommending insurance cover to indemnify Norman Hay against liabilities arising from employees' use of hire cars in the USA. Norman Hay also alleged that, if such cover was not available, it could have taken other steps such as recommending that employees obtain such cover themselves or using private hire vehicles instead of hire cars. In essence, the question was the extent of the risk that Marsh as an insurance broker was obliged to identify and act upon.

Marsh alleged that it was not obliged as a broker to carry out a risk assessment or to recommend suitable products on the basis of any such risk assessment, and that non-owned auto cover is not included in liability policies in the UK as standard, so it was under no duty to advise upon it. Marsh also alleged that, since Norman Hay did not allege in its pleadings that it or IMP was liable to Ms S, Norman Hay had no claim against it, since a liability insurance policy can only be engaged if an insured is in fact liable to a third party. Marsh also argued that Norman Hay had suffered no loss, as its only loss was the reduction in value of its shareholding in its subsidiaries, which is irrecoverable by Norman Hay as against Marsh.

Why the court refused to strike out the claim

Marsh sought to strike out Norman Hay's claim, which was dismissed in the first instance on the basis that the judge, Picken J, considered that there was an important distinction to be drawn between claims made under a liability policy (where the insured would need to prove that it was actually liable to the third party), and claims where an insurance broker is alleged to have failed to arrange cover in the first place. He considered that this latter category of cases allowed for a broader factual inquiry as to what would have happened had the broker not been negligent, and rendered this case unsuitable to be decided on a summary basis. Marsh appealed this to the Court of Appeal.

The Court of Appeal's judgment: Key legal points

The Court of Appeal agreed with Picken J – assessing whether Marsh had in fact been negligent was not predicated on Norman Hay or IMP accepting liability where the allegation was that Marsh had failed to arrange a policy in the first place. The first question had to be what it is that the defendant ought to have done which it is said that it did not do. Such questions could only be answered following a factual enquiry into (i) the instructions given to Marsh, (ii) the responsibility that it undertook, and (iii) what a reasonable insurance broker ought to have done, by reference to expert evidence.

The Court of Appeal also noted that Norman Hay had not, to date, identified the terms of the putative policy which it alleges Marsh ought to have implemented, and observed that "[w]ithout knowing the terms of the putative policy, it is not possible to dismiss this claim summarily on the basis that in any event the policy would not have provided cover" [26]. Again, the Court drew a distinction between claims brought under an existing liability policy, and a claim against a broker for failing to arrange a hypothetical policy. The Court of Appeal observed that the Court's role was to assess (i) what the scope of cover in the hypothetical liability policy would have been if implemented; and (ii) on what basis, if any, the insurer might have resisted a claim on the basis of that hypothetical scope of cover. The recoverability of any loss from the broker in such circumstances is "a question of fact, to be assessed on loss of a chance principles" [30]. 

What the Court of Appeal is saying is that whether or not Norman Hay or IMP had accepted liability is largely irrelevant in this type of case – the question is what the hypothetical insurance policy would have covered if it had been taken out, and on what basis the insurer might have resisted paying out. If there was only ever 50% chance of a payout from the insurer, then the insured is only entitled to recover 50% of their losses from the broker. In circumstances where (if disputed) IMP's claim against an insurer could have been assigned to Norman Hay as its parent company, the Court of Appeal was also not persuaded that it was able, without more factual investigation, to conclude that Norman Hay's loss was irrecoverable on a summary basis. Marsh's appeal was therefore dismissed.

What this case means for businesses

This case further underlines the principle that the Court will not dismiss at an early stage any negligence claim that requires careful consideration of factual hypotheticals, as this will necessitate a thorough interrogation of the available evidence. It also underlines the key difference in treatment between claims involving failure to accept a claim made under an actual liability policy, and those involving allegations of a broker's negligent failure to arrange a liability policy, as both are subject to an entirely different approach.

This case highlights critical lessons for companies relying on insurance brokers:

1. Consider asking your broker to conduct a risk assessment before recommending coverage;
2. Always double-check proposed policy coverage;
3. If in doubt, seek legal advice;
4. Be clear about your risk coverage needs – don’t assume your broker will automatically identify every exposure;
5. Challenge changes to your policies – If a broker recommends cancelling a policy, ask for a full explanation of the implications;
6. Negligence claims against brokers can succeed – Even if a liability claim hasn’t been made against you, you may still have grounds to recover losses caused by a broker’s mistake which left you uninsured.

If your business has been impacted by negligent advice from an insurance broker, don’t wait to seek support. Contact us today and let our expert team guide you through your legal options.

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Jonathan Ray-Smith is a Partner who leads up Fieldfisher's professional negligence team and acts for a wide range of clients in negligence claims against solicitors, accountants and other professionals.

Suzanne Loding is a Senior Associate who specialises in commercial litigation, with particular expertise in negligence claims against professional advisers.