07 Feb 2017

The Court of Appeal's decision in Channon (t/a Channon and Co) v Ward (t/a Ward Associates) [2017] EWCA Civ 13 looks at the extent to which investment activities undertaken by an accountant were covered by the professional indemnity policy wording. It also provides a useful reminder that negligence by a professional does not necessarily lead to an award of damages.  

Facts

The claimant chartered accountant was also a director of a property development company. He persuaded several investors (including some clients of his accountancy practice) to invest over £1m in the property development business. When the latter became insolvent, the investors sued the claimant for providing negligent investment advice, in the hope that his professional indemnity insurers would step in.  

However, the claimant's insurance broker had failed to procure professional indemnity cover for the claimant since 2007. The claimant therefore issued proceedings in negligence against the broker.  

Following judgment in default, the judge assessed the damages against the defendant broker at nil. The basis of this finding was that, even if the broker had procured professional indemnity insurance, the claimant’s insurers would have refused an indemnity as the claimant had not provided investment advice and had not been acting in his capacity as a chartered accountant. In any event, the judge held that the hypothetical insurer could rely on two relevant exclusions in the policy wording which would have been place, namely exclusions arising from (1) express or implied warranties relating to the financial return of investments and (2) trading losses or liabilities incurred by any business managed by the claimant.

The appeal

The claimant appealed, arguing that there was a significant prospect his insurers would have sought legal advice on the indemnity issue which would have caused them to accept the investor claims, in particular to avoid reputational problems arising from refusal of cover.

However, the Court of Appeal dismissed this argument as hopeless and purely speculative. It concluded that there would have been no need for insurers to seek legal advice as it would be clear that the investors were "shoe-horning" their commercial claims against the property development company into professional negligence claims in order to take advantage of the claimant's professional indemnity cover (had it existed). The true nature of the investors' dispute related to advice or encouragement the claimant had given in his capacity as director of the property development company and not as professional advice in the course of his accountancy practice. 

In addition, the two exclusions were considered sufficiently clear to avoid the need for external independent legal advice.

Comment

This case provides a classic example of abject failure by an insurance broker to procure professional indemnity cover and of potential 'blurring of the lines' by the claimant accountant in his dealings with his clients. In such circumstances, one would expect findings against one or both professionals. However, both walked away unscathed. In the broker's case, the court found that failure to procure insurance over several years had not caused loss as the investor claims would not have been covered by a professional indemnity policy in any event.  In the accountant's case, the court's findings could easily have 'gone the other way'. However, the claimant was able to point to numerous statements in the documentation evidencing loan agreements which indicated that his involvement in transactions was as a director of the property development company and not as a chartered accountant. In addition, the investors had been advised by the claimant to seek independent professional advice before investing and some had done so.

The moral of this story is that, just occasionally, a combination of factors allows professionals and their insurers to avoid financial exposure in the face of clear acts of negligence.  However, such a lucky escape is a rarity.