EXPERT WITNESSES IN INSURANCE CASES 1: INVOLNERT MANAGEMENT

In Involnert Management Inc -v- AIS Insurance Services Limited [2015] EWHC 2225 (Comm) Mr Justice Leggatt considered the evidence of experts in a case between insurer and insured and, more particularly,between the insured and insurance broker.

THE CASE

The defendants avoided an insurance policy on a yacht damaged by fire. The insured had given the value of the yacht as €13m the defendant contended its true value was €7–8m.  The claimant brought an action against the insurers and also the claimant’s brokers.

KEY POINTS

  • The evidence in relation to valuation was scrutinised. The claimant’s evidence was found to be unhelpful. Similarly the defendant’s evidence was of limited use.
  • There is often little point in obtaining expert evidence in relation to the actions of insurance brokers.
  • The duties owed by brokers are well known and an issue of law.
  • There is a danger of experts giving evidence of “fact”.
THE EXPERTS ON THE VALUE OF THE YACHT
Expert evidence of market value
  1. The claimant and the Insurers each adduced evidence from an expert valuer as to the market value of the Galatea in May 2011. The claimant’s expert, Mr Pontifex, estimated the market value of the Yacht at that time at just under €10m. By contrast, the opinion of the Insurers’ expert, Mr Maclaurin, was that the market value fell within a range between €3.5m and €4.5m. For reasons which I will explain later, I do not think that it is in fact necessary to make any finding about the “true” market value of the Galatea in order to decide this case. If required to do so, however, I would find that the market value of the Yacht in 2011 was somewhat lower than the figure of €7m which Mr Polemis advised in his March 2011 email that the owner should be happy to get, and that a realistic figure would be €5-6m.
  2. I do not feel able to place any reliance on the opinion of Mr Pontifex. Mr Pontifex based his valuation primarily on his sense of the amount by which, after four years, a Riva 115 yacht could be expected to have depreciated as a percentage of the original purchase price. His opinion was that, if maintained in very good condition as he understood the Galatea to have been, the depreciation in value of such a yacht over that period would be of the order of 25%. Applying such a discount to the purchase price of €13m produced a value of approximately €9.75m.
  3. Mr Pontifex did not, however, point to any objective evidence to support his estimate of depreciation. Moreover, his method seemed to me to be flawed as it took no or no apparent account of market conditions. I accept the evidence of Mr Maclaurin, based on his many years of experience in working for one of the world’s largest yacht brokers, that the amount by which a yacht depreciates, and indeed whether it depreciates at all, in its first few years of use is heavily dependent on the state of the market at the relevant time. There is accordingly no such thing as a typical or expected rate of depreciation. Mr Pontifex also placed considerable weight on his view of Riva as at the “absolute top end” of the range of yacht manufacturers, a view which I felt was probably influenced by the fact that his company represents Riva in Greece and his natural pride in the Riva brand. His view on this point was not shared by Mr Maclaurin nor by any other witness – the general perception being that Riva is well regarded but not seen as being at the very top end.
  4. Mr Maclaurin’s valuation was based on a review of the asking prices of yachts broadly similar to the Galatea which were on the market for sale in 2011. He compiled a list of 13 such yachts. These included the “Iona G”, another Riva 115, built in 2008 with five cabins, which was advertised for sale in late 2011 at a price of €6.9m. (No sale was achieved and this yacht remains on the market with a lower asking price of €4.95m.) The average asking price of the 13 yachts was €5.68m, and Mr Maclaurin took the view that the asking price for the Galatea could sensibly have been set in a range of between €4.95m to €6.95m, depending on the owner’s appetite to achieve a quick sale. To arrive at his estimated sale price, he applied a discount of 30% to the average asking price. This reflected the average discount to the asking price agreed on sales of second hand yachts broked by his company between 2010 and 2012. Applying this discount produced a figure of approximately €4m. Mr Maclaurin estimated that the sale price for the Galatea would fall within a range of €0.5m on either side of this figure.
  5. Mr Maclaurin did not include in his list of broadly comparable yachts another Riva 115, the “Cleopatra”, which was built in 2009 (i.e. two years after the Galatea) and was on the market in 2011 with its list price on application. He had evidence, however, that the asking price for the Cleopatra was €9.8m and I cannot see that his view that this asking price was too high, which was the reason he gave, was a legitimate reason for excluding the Cleopatra from his analysis. The need to discount asking prices in estimating a sale price was already built into his approach and omitting the Cleopatra biased his sample. A further factor which seems to me likely to make his average asking price understated is his acknowledgement that the Riva brand is a higher quality yacht than some in his comparison table. Another bias occurred at the stage of calculating the 30% discount factor. Some 25% of the sales made in 2011 which were included in the calculation of this average were forced sales by banks – a type of sale which, as Mr Maclaurin accepted, was likely to depress the price and which was not apposite to a sale of the Galatea. It is not possible to quantify the overall effect of these biases, but it seems to me that they make Mr Maclaurin’s estimates too low.
  6. In making a judgment about the market value of the Yacht, two pieces of hard evidence are that the Galatea attracted little interest at the list price of €8m and that neither of the other (slightly newer) Riva 115 yachts marketed for sale in 2011 was sold, tending to suggest that their asking prices were also too high. I cannot regard the fact that the Galatea had four cabins and a sky lounge, whereas they each had five cabins, either as an advantage (as Mr Pontifex claimed) or a disadvantage (as Mr Maclaurin suggested); it seems to me that it must depend on the preference of the individual buyer. My sense of the matter, taking account of Mr Maclaurin’s evidence but making allowance for the factors I have indicated, is that a realistic estimate of the price for which the Galatea could have been sold or a comparable yacht purchased in 2011 is in the range of 10-30% below the price at which the Iona G was listed or the figure of €7m which Mr Polemis told Mr Galchev he should be happy to get. That puts the market value of the Yacht in the region of €5-6m.

EXPERT EVIDENCE ON THE ACTIONS OF THE INSURANCE BROKERS

The judge then went on to consider the evidence of the experts in relation to broking evidence:

“Expert broking evidence
  1. The claimant, AIS and OAMPS each adduced expert evidence on broking issues. The claimant’s expert was Mr Nigel Miller. As already mentioned, AIS instructed Mr Nicolas Apostolopoulos, a marine insurance broker based in Greece. The expert instructed by OAMPS was Mr Stephen Marriner.
  2. Without any disrespect to these witnesses, all of whom are clearly very experienced brokers, I am doubtful of the value of much of the evidence from broking experts which was adduced in this case and is typically adduced in cases of this kind. It is common place, and this case was no exception, for broking experts to be asked to give their opinions on whether the defendant brokers owed duties to do the various things which they were allegedly negligent in failing to do. The general duties of insurance brokers have, however, been considered by the courts in many cases and, to a substantial extent, have become a matter of law. There is thus a danger that the evidence of an insurance broker called as an expert witness will involve expressing opinions about the broker’s understanding of the law. That is exemplified in the present case by some evidence which Mr Miller gave of his understanding of a broker’s duty to warn the assured about its obligation to disclose material facts which, as he explained, derived from advice which had been drilled into him at the company for whom he used to work by a firm of solicitors.
  3. Certainly there are circumstances in which the question whether a broker owes a duty to do something which he has not been expressly asked to do depends at least in part upon the scope of the responsibilities which a broker ordinarily expects and is expected to perform. Areas where such evidence is potentially relevant in this case include the issues of whether or when a broker instructed to arrange insurance of a yacht has a duty to question the value of the yacht given to him by the owner or manager and what responsibilities, if any, a broker has following a loss to offer advice about the requirements for making a claim under the policy.
  4. Once the relevant general principle or accepted practice has been identified, however, the question becomes one of its application to the circumstances of the particular case. This is frequently a fact-sensitive exercise. For example, what matters a broker has a duty to explain to the client or is entitled to assume or accept without question is likely to depend on the level of knowledge and sophistication of the client or of the individual(s) giving instructions on the client’s behalf, as reasonably perceived by the broker. At this level of specificity, there will necessarily be no practice that all competent brokers in the particular situation normally follow. There is a danger that a broking expert who addresses such issues will stray into commenting on the evidence, which is not the function of an expert witness. Even if that danger is avoided and the witness keeps to the expert’s proper role of expressing opinions on the basis of assumed facts, such opinions are often of limited assistance to the court. The facts assumed by the expert may not match the facts found and in any case cannot reflect the granularity of the evidence. Nor is the application of the relevant standard of care to the individual facts usually an exercise which the broker’s professional experience gives him a special skill in performing.
  5. I make these observations partly to emphasise that I do not think it should be automatically assumed that in every case where an allegation of negligence is made against an insurance broker expert evidence is reasonably required to resolve the proceedings; and where expert evidence is necessary, careful thought always needs to be given to its legitimate and useful scope. That said, although the reports of the three broking experts in the present case contained a fair amount of discursive and irrelevant material, their cross-examination was efficiently conducted. It was, however, a major refrain of the submissions made by counsel for AIS that there was no expert evidence to support the claimant’s allegations. There are indeed instances, which I mention below, where the absence of any supporting expert evidence in my view undermines allegations made by the claimant about the scope of the duty owed by AIS. The mere fact, however, that an allegation of negligence was not supported by the opinion of a broking expert that the relevant act or omission fell below the standard expected of a competent and careful insurance broker is not a deficiency in the claimant’s case.”

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