A recent ruling from the High Court of Justice (a trial level court) in London, highlights the serious consequences of professional negligence in insurance broking and clarifies how “other insurance” clauses interact with one another, offering major takeaways for brokers, insurers, and risk managers in the U.K. as well as the United States.
In a closely watched case, Deputy High Court Judge David Bailey K.C. held that Arthur J. Gallagher Insurance Brokers Ltd. (“Gallagher”) was liable to the Watford Community Housing Trust (“insured”) for failing to advise the insured to notify all relevant insurers of the a data breach or to make such notification itself. More significantly, the court found that Gallagher’s failure may have cost the insured up to £5M (about $6.6M) in potential additional coverage.
Data Breach and (Failure To) Notice
In March 2020, an employee of the insured accidentally emailed a spreadsheet containing sensitive personal information, including data on sexual orientation and ethnicity, of more than 3,500 tenants and employees. The breach sparked over 1,100 complaints and potential legal liability currently exceeding £6M (about $7.9M).
At the time, the insured held three insurance policies, each arranged by Gallagher:
- Cyber: £1M limit, underwritten by PEN/Lloyd’s syndicates
- Combined general liability (“Combined”): £5M limit, underwritten by QBE
- Professional liability (“PI”): £5M limit plus defense costs, underwritten by Hiscox.
Gallagher advised the insured to notify only the cyber insurance provider. By the time the combined and PI insurers were informed, the coverage periods and timeframe in which to provide timely notice had lapsed. Hiscox declined coverage, while QBE eventually provided indemnity for the loss.
Calculating Loss at Trial
While Gallagher admitted it acted in breach of contract and negligently, it argued that the insured suffered no financial loss. First, it argued that a literal reading of the text of the “other insurance” clauses in the policies leads to each policy acting as an excess policy, with no primary coverage available. In other words, the policies effectively canceled each other out. Second, Gallagher argued that the generally applicable rule of rateable contribution, dividing the shared coverage among each insurer’s own rateable proportion, would cap the insured’s available coverage at the highest limit from any one policy: £5M.
The court disagreed on both issues. Judge Bailey ruled that the overlapping coverage clauses did not nullify each other because the true construction of the “other insurance” clauses required a holding that the attempted exclusions fail when each seeks to deprive the insured of primary cover on account of their co-existence. Instead the three policies formed a horizontal stack of protection, entitling the insured to up to £11M in total coverage, not just £5M, as Gallagher claimed.
The court also reaffirmed a policyholder’s common-law right to choose how and in what order to claim indemnity under multiple policies, unless a rateable proportion clause, which divides liability among insurers, is included. None of these policies had such a clause.
The court emphasized that the policy must be interpreted through the eyes of a reasonable policy holder and in line with the commercial purposes of insurance contracts. The court ultimately held that the insured is entitled to pursue Gallagher for the £5M shortfall between the £6M already recovered and the full £11M in coverage it purchased.
Key Implications for U.S.-Based Insurance Professionals
This decision is instructive for U.S. insurance brokers and carriers, alike:
- Broker responsibility: A broker’s failure to properly advise on or carry out policy notifications can expose them to full indemnity liability, especially with overlapping policies.
- Policy clarity: The ruling highlights the importance of clear, consistent language in “other insurance” clauses, particularly where policies are intended to serve as primary versus excess coverage.
- Notification protocol: Brokers should review and enforce procedures for handling time-sensitive claims events, like data breaches, to ensure all relevant insurers are promptly notified.
- Legal precedent: While precedential only in U.K., the court’s well-reasoned opinion ably lays out the custom and practice of an industry, while born in London, echoes U.S. legal principles around duty of care and professional negligence.
What Comes Next
The decision could prompt insurers to revise “other insurance” clauses, either narrowing coverage or clearly outlining the order of payouts in multi-policy situations. Brokers, in turn, may implement stricter client guidance on how and when to notify all carriers providing potentially available coverage.
