Causation in Professional Indemnity: is "but for" ever enough?

In an important judgment for professionals in all fields and their Insurers, the Court of Appeal yesterday applied Saamco principles to losses caused by the downturn in fortunes of Equitable Life and reached some very clear conclusions.

Mr Andrews had been company secretary at Ladbrokes Plc for many years. He amassed a pension pot of nearly £2m and, in 1994, approached Barnett Waddingham for assistance before deciding what to do on his retirement. In the event he split his fund between two products from Equitable Life:

• an annuity linked to the retail prices index

• a with profits annuity

It was the with profits annuity about which Mr Andrews complained; he alleged that he was negligently advised by Barnett Waddingham in relation to the application of the Policyholders Protection Act 1975 ("PPA 1975") to with profits policies; he said that, if he had been properly advised, he would not have touched the with profits annuity "with a barge pole" and would, instead, have taken a 5% fixed escalating annuity instead.

Whilst he had not suffered any loss at the time of trial, it was accepted that, due to the problems experienced by Equitable Life, the performance of his with profits annuity (with the loss of terminal bonuses) would suffer, and that the 5% escalating annuity would produce a much better performance; he succeeded at trial and was awarded damages in excess of £1m, being the agreed quantum of the difference in performance for the future between the with profits and 5% fixed escalating annuities.

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In an important judgment for professionals in all fields and their Insurers, the Court of Appeal yesterday applied Saamco principles to losses caused by the downturn in fortunes of Equitable Life and reached some very clear conclusions.

Mr Andrews had been company secretary at Ladbrokes Plc for many years. He amassed a pension pot of nearly £2m and, in 1994, approached Barnett Waddingham for assistance before deciding what to do on his retirement. In the event he split his fund between two products from Equitable Life:

• an annuity linked to the retail prices index

• a with profits annuity

It was the with profits annuity about which Mr Andrews complained; he alleged that he was negligently advised by Barnett Waddingham in relation to the application of the Policyholders Protection Act 1975 ("PPA 1975") to with profits policies; he said that, if he had been properly advised, he would not have touched the with profits annuity "with a barge pole" and would, instead, have taken a 5% fixed escalating annuity instead.

Whilst he had not suffered any loss at the time of trial, it was accepted that, due to the problems experienced by Equitable Life, the performance of his with profits annuity (with the loss of terminal bonuses) would suffer, and that the 5% escalating annuity would produce a much better performance; he succeeded at trial and was awarded damages in excess of £1m, being the agreed quantum of the difference in performance for the future between the with profits and 5% fixed escalating annuities.

The only negligence alleged by Mr Andrews was advice as to the application of the PPA 1975 and the findings of negligence in that respect were not challenged on appeal. In essence, however, the PPA 1975 (now known as the Financial Services Compensation Scheme) would only come into effect to avail Mr Andrews, and other policyholders of Equitable Life, were Equitable Life to become insolvent; there was no suggestion that Equitable Life was, or was ever likely to become, insolvent; accordingly, Mr Andrews was no worse off than he would have been if the advice which he had been given had been correct with regard to his position under the PPA 1975.

Barnett Waddingham were found to have recommended a with profits annuity to Mr Andrews; it must be remembered, however, that the relevant advice was given when Equitable Life’s problems were still some distance in the future and there was never any allegation that the advice to do so was negligent; nor was there any finding that Barnett Waddingham had assumed a duty to protect Mr Andrews from the possibility that Equitable Life would have financial difficulties.

Notwithstanding these factors, the Trial Judge found that the loss suffered by Mr Andrews was "inextricably linked to the negligently given information" (i.e. in respect of the PPA 1975).

Barnett Waddingham appealed on causation grounds on the basis that the principles in Saamco had been misapplied by the Trial Judge; they argued:

• That it was not sufficient for Mr Andrews to satisfy the "but for" test alone i.e. by proving that without the negligent advice from Barnett Waddingham about the PPA 1975 he would not have purchased a with profits annuity.

• That on a proper application of Saamco, Barnett Waddingham could only properly be held liable for loss of the type against which their advice was intended to provide protection (i.e. related to the negligent advice in respect of the PPA 1975); there has not been any such loss, nor was there ever expected to be any.

• That, again in accordance with Saamco, for Barnett Waddingham to be liable for losses arising from the financial problems at Equitable Life, the advice to buy a with profits annuity would have had to have been negligent; it was not alleged, or found, to be so.

• Restated the analysis explained by Lord Hoffman in Saamco that a Claimant must not only show that a duty of care was owed to him and that it has been breached, but also that it was a duty in respect of the kind of loss which was suffered.

• In this case, the loss suffered by Mr Andrews was unconnected to the fact that the PPA 1975 did not apply to his with profits annuity as he was advised it did.

• Adopting the approach of Lord Millett in Aneco Reinsurance Underwriting Limited v. Johnson & Higgins Limited the correct measure of damages was the difference between the loss sustained by acquiring the with profits policy annuity and the loss which would have been sustained if the PPA 1975 applied to the with profits annuity as Mr Andrews was advised it did i.e. nil because Equitable Life was not insolvent.

• The Trial Judge’s reasoning had run directly contrary to Saamco and Aneco; the fact that Mr Andrews would not have taken out the with profits annuity but for the negligent advice "is a necessary but not a sufficient condition of liability".

• Mr Andrews was in the same position as the mountaineer in the example given by Lord Hoffman in Saamco who received negligent advice about the condition of his knee; he was provided with incomplete information about the PPA 1975 but he neither alleged, nor was found, to have been negligently advised to take out a with-profits annuity with Equitable Life.

The Court of Appeal unanimously found in favour of Barnett Waddingham (for whom CMS Cameron McKenna LLP acted) on causation grounds and set aside the judgment; leave to appeal to the House of Lords has been refused and, therefore, this case should stand as a very clear, and therefore, useful authority as to practical application of Saamco principles for both professional indemnity underwriters and the firms which they insure.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 22/02/2006.