Edwin Coe LLP recently acted for the successful Claimant, Infinity Reliance Limited (“Infinity”), in the Circuit Commercial Court case of Infinity Reliance Limited (trading as My 1st Years) v Heath Crawford Limited  EWHC 3022 (Comm) in which Infinity was awarded significant damages against Heath Crawford Limited (“HC”), its former insurance broker, for losses arising from HC’s negligent advice.
The Claimant (Infinity) is an online retailer, trading as My 1st Years, selling personalised gifts for babies and children. The personalisation of its products makes its logistics requirements unique as, once an order is placed, the goods need to be brought from storage and personalised before they can be picked and packed for distribution. In 2021, Infinity was using a space in Northampton, owned and operated by a logistics company called Cygnia. Infinity, along with many online retailers, had thrived during Covid lockdowns and in April 2021, as lockdowns looked to be ending for good, there was uncertainty as to how that growth would develop.
In May 2021, a fire rendered the Cygnia premises unusable, and Infinity’s business was interrupted until it was able to relocate. It lost many millions in sales and spent more than £2million fitting out new premises. Infinity had cover, including BI cover, under an Aviva commercial combined policy (the Policy), placed by HC. HC had been Infinity’s insurance broker since late 2018 and the Policy had been renewed in November 2020.
Upon renewal, Infinity’s BI insurance was based on a forecast gross profit of £24.9 million over two years. It had based its calculation on advice given by HC in the form of a document titled “How to Calculate Gross Profit” (the “BI document”). Unfortunately, the BI Document outlined a definition for variable expenses which differed from that in the Policy. Given the Policy terms, the correct figure would have been around £33 million. Infinity was thereby underinsured (by 26%) and in settling the claim Aviva applied average. Infinity recovered 74% of its loss, being £9.25 million instead of £12.17 million.
Infinity had further issues in relocating as the logistics equipment it relied upon was owned by Cygnia. When relocating, it could not find similar premises with the benefit of a third party logistics company that supplied the necessary racking and software to support the operation of its business, and instead had to spend heavily to install equivalent equipment at replacement premises. These costs were not fully insured either.
Infinity brought a claim against Heath Crawford in negligence for the shortfall on the basis that, if it had given proper advice, Infinity would have been fully insured for the loss. The three specific complaints were:
- Heath Crawford provided Infinity with a document describing how to calculate the sum insured. But the document was misleading and led to Infinity buying insufficient BI cover.
- Heath Crawford should have recommended a different type of BI cover (declaration linked cover) which would have produced a full recovery.
- Heath Crawford should have realised that Infinity needed additional cover for costs it would incur to fit out alterative warehouse space following fire or similar event, which put Cygnia’s warehouse out of action.
In submissions, Heath Crawford
- Accepted the misleading guidance was a cause of the loss but subject to contribution from Infinity in wrongly executing the calculation.
- Denied the absence of recommending declaration linked cover was causative of the loss as it submitted the Infinity would not have accepted the recommendation.
- Denied that any failure to consider fit out costs had led to any loss.
What did the court find?
Mr Paul Stanley KC, sitting as a Deputy High Court Judge, found that Heath Crawford was in breach of duty in respect of all three complaints namely:
Calculation of sum insured:
The court agreed with Heath Crawford’s acceptance that it had breached its duty of reasonable care by providing generic information which was not applicable to the actual policy wording in effect. It found the breach was serious, stating it went beyond mere omission and consisted of a positive provision of inaccurate and misleading guidance.
On causation it found that had the guidance given by Heath Crawford included the same definition for ‘variable expense’ as appeared in the Policy, Infinity would have calculated a higher figure to its gross profit estimate and been fully insured.
Declaration Linked BI insurance:
The court agreed with both broking experts that a reasonably competent broker would have recommended declaration linked cover to a client in Infinity’s position. It accepted that Infinity’s financial director in 2018 stated it did not want variable premiums however found that Heath Crawford did not do enough to satisfy itself that Infinity’s financial director understood the disadvantageous consequences of her decision, including the risk that underinsurance would lead to every claim being reduced by average. It also found that Heath Crawford was wrong to have relied on this expression by Infinity’s financial broker in 2018 as a ‘policy’ of the company going forward. It should have explored the topic afresh at renewal in 2019 and again in 2020 especially given the changing circumstances including, a change in personnel of the financial director (in this regard, the court applied Eurokey Recycling Ltd v Giles Insurance Brokers Ltd  EWHC 2989 (Comm)), and the variability Covid caused for online retail businesses such as Infinity.
The court was satisfied that had Heath Crawford raised the option, and benefits, of declaration linked cover in 2020, Infinity would have obtained it.
The court found Heath Crawford had failed to obtain and maintain a detailed understanding of its client’s business. The judge stated that “[t]he broker is not expected to second guess or audit the information it is given. But it is necessary to follow up reasonably obvious gaps or uncertainties”. Specifically, the court found that HC should have, and never did, ask: How will you cope if there is a major problem at the warehouse? The court found that Heath Crawford was aware of the reliance Infinity had on the Cygnia warehouse and that a reasonably competent broker would have seen it as an obvious risk that required further investigation.
The court found that question that should have been asked would have revealed a potential gap in coverage which Infinity could have looked to fill. It found that this gap would have been filled with additional increased cost of work cover under the BI policy in a sum sufficient to cover the equipment Cygnia owned.
However, the court ultimately found that this breach caused any measurable financial loss beyond that already caused by the other breaches.
The court concluded as a matter of fact that Infinity had only partly followed Heath Crawford’s guidance in so far as it had not applied its own calculations for forecast growth and instead used the BI Document’s generic example of a 10% increase each year. This informed the court’s conclusion that Infinity did have a degree of ‘fault’ in its resultant underinsurance.
It was satisfied that Heath Crawford’s breaches were the more significant and that, but for those breaches, Infinity’s loss would not have occurred. However, it was also confident that the loss would not have occurred if Infinity had properly applied an actual growth forecast, as opposed to the arbitrary 10%, even starting from the wrong gross profit figure. The court held that each mistake was a sufficient cause of the loss and that avoiding either mistake would have mitigated or eliminated the effect of the other.
The court held that the damages awarded should be reduced by 20% to account for Infinity’s ‘fault’. It noted that it would have reduced by 40%, had it only been considering the first complaint, but the additional breach in regard to the absence of a declaration link recommendation warranted Heath Crawford being allocated further responsibility.
Practical implications of the case.
This case serves as a salutory reminder of the care that should be taken when approaching estimates for future gross profit for the purpose of BI insurance and highlights the serious consideration that should be given to arranging declaration linked cover, which is likely to be superior in many (if not most) cases as such cover mitigates the risk of error in estimating the gross profit sum insured, usually for only a very modest increase in the premium.
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