The manipulation of claims as a contrivance to PI policies – brokers' and accountants' negligence
Case summary of Channon (t/a Channon & Co) v Ward (t/a Ward & Associates)  EWCA Civ 13
The Court of Appeal has handed down judgment in a broker's negligence claim, where the main legal arguments focused primarily on the scope of an accountant's PI policy. Channon v Ward  EWCA Civ 13 looks at the scope of PI cover in respect of investment activities undertaken by an accountant, and also highlights the difficulty in which Insureds can sometimes find themselves by advancing a defence that undermines their PI cover. The judgment further serves as a useful reminder that no matter how grossly negligent a professional's conduct may be, unless loss is suffered claimants will be left empty handed and risk being the subject of an adverse costs order.
Rodney Channon, a chartered accountant and co-director of a property development company (MHP), obtained over £1m investment in MHP from various individuals, some but not all of whom were existing clients of his accountancy practice. The investment venture failed leaving MHP all but insolvent and the investors sought to sue Mr Channon.
On the assumption that Mr Channon had PI cover, the investors manufactured their claims to allege that Mr Channon had given negligent advice in his capacity as a chartered accountant. When Mr Channon however came to notify the investors' claims to his broker, Mr Ward, it transpired that he did not have PI cover due to Mr Ward's failure to procure the same. There was no question that by failing to place adequate cover, Mr Ward had breached his duty owed to Mr Ward.
Mr Channon sought to sue Mr Ward for negligence and at the same time continued to defend the investors' 'professional negligence claims'. In defence of the investors' claims. it was Mr Channon's contention that he had at all times made clear that he was acting as a Director of MHP and that the claims were misconceived and a contrivance. In Mr Channon's view, the claims were those of disappointed investors who had become victims of the unexpected downturn in the property market.
Despite his view that the investors' claims were without merit, Mr Channon entered into a settlement agreement with the investors on the basis that judgment be entered against him in favour of each of the investors, but in return he would also authorise the investors to pursue in his name both the action against Mr Ward and "his claim for payment out of the FSCS in his name". In other words, Mr Channon essentially bypassed his own lack of insurance and sought to deflect the claim to be covered by Mr Ward's PI policy and/or the FSCS.
Mr Channon obtained judgment in default against Mr Ward, but the First Instance judge assessed the damages at nill ( EWHC 4256). The basis of that finding was that, even if Mr Ward had procured PI insurance, Mr Channon's insurers would have refused an indemnity as the investment advice did not arise from the conduct of professional business. Further, the (putative) insurer would have refused an indemnity on the basis of two exclusions namely (1) express or implied warranties relating to the financial return of investments and (2) trading lossess or liabilities.
Mr Channon appealed, arguing that the (putative) insurer would have obtained legal advice which would have caused it to accept the investors' claims not least to avoid reputational issues arising from declinature.
That argument was rejected by the Court of Appeal on the ground that it was speculative and forlorn. Tomlinson LJ took the view that the putative insurer would not have considered it necessary to obtain legal advice because it would have been clear that the investors were "shoe-horning" their commercial claims against MHL into PI claims in order to take advantage of the perceived deep pockets of PI insurers.
Furthermore the two exclusions were considered sufficiently clear to avoid the need for external independent legal advice.
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