Expert Who Surveys Wrong House Liable ?

If I employ a man to instal a new cold-water tank in my roof, and it leaks from the start, I can insist that he pay for the damage, including the cost of the proper completion of the job. If necessary, I can sue him, and do so on the basis not only of the contract that we made, but also in tort on the basis that he has been negligent.

As with tradesmen, so it is with professional people. If I employ an engineer to build a railway bridge, and the bridge collapses when the first train tries to use it, I will usually have a valid claim, and again it may be in tort or in contract, or a combination of both.

However, if the bridge collapse follows an earthquake, it may be more difficult and will depend inter alia on the location. Earthquakes are extremely rare in Ireland, but more common in, say, China,Turkey or California. A question that would have to be asked would be whether the engineer's design sufficiently catered for the risk of earthquake in the particular location.

Many, if not most, claims against professionals such as engineers, surveyors, or insurance brokers, are complicated by the necessity to assess what a competent performance of the professional assignment really is. Neither lawyers nor medical practitioners, for example, normally guarantee a particular outcome e.g. that a piece of litigation will be "won", that an X-ray will definitively establish the presence or absence of a tumour, or that a particular cancer will be permanently cured. The client has to pay for the work regardless of result, and generally can only complain if the work is conducted negligently.

Platform Funding Limited v. Bank of Scotland plc

Mr F's firm, Colleys (a division of HBOS), was instructed by lender A to value a property at 1, Bakers Yard. He was told to contact Mr H. (the borrower) to arrange the necessary inspection of the property. Mr H tricked Mr F into inspecting 5 Bakers Yard instead. Both houses were still in course of construction, but the latter was substantially more complete.

Mr F wrote his report and included the statement "I surveyed [1 Bakers Yard]".

Lender A did not provide the loan, but Lender B, having been given an identical report by Colleys, did so. The deceit was discovered in due course and the lender sought redress from Colleys. One might have imagined that resistance would be futile, but resist they did, and English Appeal Court judges came to different conclusions on what the result should be.

The claim made was straightforward: you were asked to value number 1, and you falsely told us that you had done, causing us loss. It is noteworthy that this, as presented, is a claim for breach of contract, not one of negligence. Colleys' defence was essentially that Mr F's obligation, contractual or otherwise, was to take reasonable care and he could not be said to have failed to do that in the circumstances.

The Court of Appeal by 2-1 held, in essence, that the issue of reasonable care was not relevant. There was an unqualified claim by Mr F to have inspected and valued the property which the contract required him to do, but he supplied a valuation of a different property instead, for which error there was no legally effective defence.

The decision is here. The judgment of Moore-Bick L.J. contains a very useful survey of the law, including detailed consideration of several cases.

Rix L.J. probably provided the most succinct summary of the majority view at paragraph 53

In sum, I agree with Moore-Bick LJ that in the normal retainer of a surveyor to inspect and value a property there is an inherent obligation to inspect and value the right property, such that inspection and valuation of a completely different property is a breach of contract, notwithstanding the surveyor's care.

Sir Anthony Clarke M.R. thought otherwise. He was most influenced by a precedent discussed by Moore-Bick L.J. viz.Midland Bank Plc v McQueen [1999] Lloyd's Rep PN 223 (not available on-line as far as I know) in which a solicitor had been deceived as to the identity of the person who signed a guarantee, but was held not liable, even though he certified that the document had been duly signed. He could not see that the instant case was distinguishable. His view in summary (expressed at paragraph 59) was that Mr F

... would be expected to take reasonable care to identify the house. Thus he would be expected to make reasonable enquiries, as for example here by asking [Mr H], whom he might well reasonably expect to be honest. However, absent an express term of the contract that he was undertaking an absolute obligation in respect of the whole or part of his instructions, or an implied term to that effect, I would hold that there was no breach of contract unless he failed to exercise reasonable skill and care.

The result seems right, just about, but I cannot escape the feeling that neither the majority nor the minority view is entirely satisfactory. That was not necessarily the judges' fault, as they were to a degree limited by the pleadings, the judgment at first instance, and the precedents available to them.

It does not seem sensible to regard reliance by a valuer on guidance of any kind from the prospective borrower as being sufficiently careful. On the other hand, it is difficult - "impossible" might be a better word - to distinguish Midland Bank v. McQueen and there will be those who cynically suggest that the only real difference between the cases is that McQueen was a lawyer. (They would be wrong: see the Zwebner decision discussed at paragraphs 22 & 23).

Conclusion

Those who rely on professional opinions such as those discussed above will have to be very clear as to who will be left "carrying the can", not only in cases of fraud, but in circumstances of honest and not incompetent mistake. Professional experts will amend their opinions to exclude exposure to potential liability if they can. Will their clients' insurance cover the area not covered by the liability of the professional ? Can professionals be expected to check every possible area of mistake or deceit ?

Insurance Companies and Advice

Along with many others who know the industry, David Rossmiller is upset about a Bloomberg story. He protests:

It's not up to your insurance company to make sure you have enough liability insurance to protect your assets if you hit someone with your car, or to make sure you buy enough property coverage to replace your jewelry, or to sit down at your table and make sure you understand you are not covered for earthquakes or floods. First, the law presumes that you the consumer know how much insurance you need, and if you don't get it, that responsibility is yours. Second, this is the theory of a standard-form contract -- the market eliminates the transaction costs of having to negotiate with every person in the world. In return for these savings, it is legally presumed you have read and understood the contract, whether you did or not.... So what's the problem ? The contract said what they would get, they just didn't read it.

Well, I can think of a number of problems with those protests:

• The process of dis-intermediation is now so advanced that, arguably, insurers cannot pretend that the policyholder is not in fact relying on them to do what the broker used to do i.e. advise on levels of cover;
• The insurer's duty of good faith arguably bolsters the latter argument;
• As lawyers, we often forget how arcane is even the simplest standard-form contract of insurance. Interpretation by an expert is the only reliable one;
• In theory, standard-form contracts and dis-intermediation benefit the consumer as well as the provider. In practice, the distribution of the benefits is very uneven, and the only casualties are found among consumers.

Are You Sure That You Don't Have Cancer ?

"Life is a congenital condition", someone once said,"and it is terminal". If this were taken to a logical extreme, health and life insurance would become impossible. Sometimes, though, insurers like to test the logic.

Imagine it: you are in good health as far as you know, confirmed by the recent opinion of your own GP, and someone persuades you, as they do, that you need to buy some life insurance. So, you fill in the forms as diligently and honestly as you can, and the insurance company asks you to undergo a medical examination, which turns up nothing adverse. The policy is issued, but within weeks you have abdominal pains and before long you die of advanced pancreatic cancer.

"Wow, here is a great insurance coverage story" says Boston lawyer Stephen D. Rosenberg(from whom I learned of this case), and who would disagree ?

The life insurance policy contained a term - described as a condition precedent - under which the coverage only applied if the policyholder was in good health at the time of issuance. It was not in dispute that a)the policyholder did not know of his cancer and b) the cancer must have been present at the time of issuance. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

Mr Rosenberg hits it right on the head:

... what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill ?

The Massachusetts court agreed, but apparently had to discard precedent to do so, which is strange. It apparently invoked the "legitimate expectations of the insured" to do so, which is stranger still to a common-lawyer on this side of the Atlantic: over here, "legitimate expectations" has no place in contract law.

I doubt if the insurer would have succeeded over here, either, but to get the legal analysis right might pose problems.

Suggestions welcome !

Norwich Union Initiative

I am not quite sure what to make of this.

Money Marketing reported last week that Norwich Union was writing to 5,000 holders of critical illness policies inviting them to rectify any failures of disclosure that they may have made when proposing for the policies.

On the one hand, as the insurer's spokesman said, those who deliberately with-held material information probably do not have any valid cover, and it has to be seen as a kindly gesture to offer them an opportunity to retrieve the situation.

On the other hand, some perfectly upright policyholders may be needlessly upset. Also - forgive my cynicism - I wonder how many will respond by volunteering information which was not with-held as a result of a failure of utmost good faith, but because the proposal form did not ask a clear enough question. Even more cynically, I suggest that some may give information which they did not have when they were proposing for the policy.

Dangerous Medical Records

The April/May issue of Ombudsman News, the bulletin from the UK's Financial Ombudsman Service ("FOS"), contains a case summary (ref. 61/04) of particular interest to me.

A claimant ("Mr L") under a critical illness policy was accused of reckless non-disclosure. Among other things, he had declared that he had not smoked in the 12 months prior to proposing for the policy (although he had been an occasional smoker of cigars just prior to that), whereas the insurer alleged that its investigations showed that he regularly smoked one cigar a day at the start of the 12-month period in question.

It turned out that the insurer's information came from Mr L's own medical records. However, his GP revealed to the FOS

that the computer system on which he entered details of patients' tobacco consumption was unable to record a minimum consumption of less than one cigar or cigarette per day

(emphasis added)

Before going any further, let me send my congratulations to the anonymous FOS case officer who got to the bottom of that story. More than one of his or her colleagues would have assumed that the medical records were more reliable than the policyholder, and would have quickly closed the case by rejecting the complaint.

By coincidence, a case in which I am currently advising raises similar concerns. The policyholder is accused of non-disclosure and I have just received copies of the evidence on which the insurer relies. All of that evidence consists of extracts from the "policyholder's own" medical records. (I put those words in quotation marks because, as is almost invariably the case, the policyholder had never seen these records before.) Some of the most crucial material is contained in a letter written by a specialist to the GP. The letter purports to briefly summarise the policyholder's recent history before going on to record the medical findings. It's unclear where the "history" is supposed to have come from, as it is inconsistent with other records. Despite that, it is what the insurer has chosen to "hang its hat on".

One wonders how often this happens without being discovered.

Drinking Problem ? Tell Your Insurer

This is what utmost good faith requires, at least in British Columbia.

Michael Thomas of Vancouver firm Harper Grey summarises the factual background thus:

The Insured was a 52 year-old woman who had a long-standing problem with alcohol, but had never been diagnosed as being an alcoholic. She purchased a policy of travel insurance from the Insurer prior to travelling from her home in Vancouver to Denver, USA. At the time she purchased the policy, the Insured made a declaration that she was "in good health" and knew of "no reason to seek medical attention…".

The evidence adduced by the Insurer at trial showed that the Insured had been hospitalised the night prior to making the declaration after she had taken a prescription narcotic while in a state of a gross intoxication. The Insurer denied the Insured’s claim on the basis that she had failed to properly disclose the state of her health at the time the policy was purchased.

On those facts, the decision that the policyholder had failed to make full disclosure is understandable, even if not necessarily immune to criticism.

Note: Michael Thomas's RSS feed is accessible here

Direct Debit Progress

I asked for help on Tuesday and almost immediately received an e-mail from Michael O'Neill of the Irish Payments Services Organisation. Yesterday we spoke by telephone, which led to my

(a) learning something useful and

(b) being corrected.

As to the latter, Michael tells me that I am wrong: the DDG is not a "no-quibble" situation. That continues to pose problems for me, but I will not go into those now.

More importantly, I learned from Michael that the EU has enacted a Directive (7665/2007) the effect of which will be to render the DDG into what I thought it already was. For up to 8 weeks after a debit leaves a customer's account, s/he will be able to recall it without having to give any reason.

Disappointingly, it will be near the end of 2009 before this becomes the case:

come on, you bankers ! Give it to us now !

The Direct Debit Guarantee ("DDG")

I am currently working on an article about this, and I could do with some help.

Having been employed as a banker when the direct debit scheme was introduced , I thought that I knew what the DDG was. It looks like I was wrong. ( I was only a novice law student then).

Far from being a "no-quibble" assurance to bank customers that they were guaranteed an immediate refund of any individual debit that they wished to challenge, the actual position is, as I currently understand it, a bit of a "con". The guarantee does offer an immediate refund, but only if an error has occurred. To be fair, it seems that many bankers will in practice not seek to be satisfied that an error has occurred, but many others do.

Given the wording of the DDG, it does not seem unreasonable to me that they should require some evidence that an error has really occurred. However, to the extent that they do, it will inevitably make the "immediate" refund impossible at least as often as not.

Or am I wrong ?

Insurance law resources

I have today opened here a page for links to websites that regularly provide new and useful material on insurance law.

Riyad Bank v Ahli United Bank: Scope of Duty of Care

This is a really significant decision of the English Court of Appeal issued last week. It develops and clarifies the reasoning in Henderson v Merrett [1995] 2 A.C.145, and is the latest in the line starting with Hedley Byrne and continuing through Caparo v Dickman. I was not surprised to see Buxton L.J. say that "we were told that the issues raised by this case [on duty of care]were of some general interest in commercial circles. "

To condense a detailed series of judgments into one paragraph is unfair, unwise and ultimately misleading but for the purpose of this short note, the following may be found helpful pending a full reading:

"... in a case where there have been and have been expected to be direct dealings between adviser and advisee, a contract that causes the adviser to pass his advice through a third party [will not necessarily] as a matter of law protect the adviser from liability to the advisee. All will depend on the particular circumstances ..."

Riyad Bank & Ors v Ahli United Bank (UK) Plc [2006] EWCA Civ 780 is available on www.bailii.org. Thanks again to CMS Cameron McKenna (www.lawnow.com) for the "heads-up".