Judge finds broker had explained policy and cover adequately

A High Court judge has found that insurance broker Giles was not negligent after it was sued for £17m by an underinsured client.

Waste company Eurokey Recycling was left devastated by a factory fire in May 2010. The settlment it received from its insurer was not enough to rebuild the premises and cover its business interruption. It alleged that Giles had given the insurer wrong information when it renewed Eurokey’s commercial combined policy.

But dismissing Eurokey’s £17m claim, Mr Justice Blair said that Giles had adequately explained the policy and the level of cover - and that Eurokey itself was the source of the incorrect information.

Insurance shortfall

Turnover at Eurokey had increased massively from just £3.2 million in 2005 to £16.8 million for the year ended August 2009, with a gross profit of £3.7 million.

The company’s bosses were predicting a turnover of £25m for 2010 and were anticipating gross profits of between £7m and £8m.

However, when the fire broke out, the company was insured by managing general agent Paladin on the basis that its projected turnover was just £11 million.

The sum insured by way of gross profit for business interruption was just £2.5m.

The value of stock and machinery in and around the burnt-out premises had also been under-stated.

There was no dispute that Eurokey was underinsured at the time of the claim. Paladin Underwriting Agency, which underwrote the cover on behalf of Montpelier Syndicate 5151 at Lloyd’s in return for premium of £40,000, swiftly raised the issue.

Paladin made a once-only offer of £1.5m to settle the entirety of Eurokey’s claim under the commercial combined policy.

Eurokey was told that, unless the offer was accepted, it would be withdrawn and that Paladin would seek to avoid the policy.

The company accepted the offer in July 2010 after taking legal advice from a QC, Blair told the High Court.

Eurokey argued that £1.5 million was only a fraction of the sum it would have been due had it been adequately insured.

Negligence claim

Eurokey made a number of allegations of negligence against its then broker Giles.

But the judge said today he was satisfied that the figures for turnover and business interruption had been provided to the broker by Eurokey’s then commercial director.

The incorrect figures had also been passed on to other prospective insurers by Eurokey itself when it was searching for cheaper insurance cover.

The judge also found that the wrong figures had been given to Giles for the stock and machinery.

The individual broker who advised Eurokey, a man with 35 years’ experience, had “no reason to suppose” that the cover provided was inadequate, the judge added.

The judge said the commercial director could not be criticised for failing to read in detail the documents provided to him by the brokers.

But he added: “Eurokey must take responsibility for the fact that the wrong turnover figures were given to Giles, which should have been obvious from the draft accounts which it had from March 20 2010, if nothing else.”

The court heard that, following the fire, Eurokey had negotiated alternative insurance through a new broker, which included £13m of business interruption cover for a premium of nearly £80,000.

A spokesman for Arthur J Gallagher, which bought Giles last year, said: “Arthur J. Gallagher is grateful for the judgment of Mr Justice Blair, who dismissed a negligence claim brought before the High Court by Eurokey Recycling Ltd against its former brokers, Giles Insurance Brokers Ltd.”

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