A broker’s error can leave their client un-insured or under-insured which may be inconvenient, distressing and potentially embarrassing. Against that background individuals who bring claims against their broker often seek compensation for that embarrassment, distress and/or inconvenience. We take a look at the circumstances in which a claimant can recover these sorts of non-financial losses, contrasting the approach of the courts with the Financial Ombudsman Service (FOS).
Financial losses: if a broker is held liable to its client for negligence or breach of contract, the court will award damages to place the client in the position they would have been in had the alleged breach of duty and/or contract not occurred. For example, if as a result of the broker's negligence a client is prosecuted and convicted of driving whilst uninsured, the financial losses (the amount of the fine and the costs of the driver’s own defence, for example) are recoverable as damages against the broker.
Inconvenience: if the client were also disqualified from driving (which is unlikely but could, for example, occur under the penalty points system) then they may be entitled to general damages for the actual inconvenience caused by the disqualification, such as the need to use public transport or taxis instead of being able to use their own car.
Distress/anxiety: however, where as a result of the broker's negligence the client suffers distress or anxiety, as opposed to inconvenience, they should not usually recover general damages for that distress or anxiety. Such awards should be very rare, because damages for distress are only recoverable if the subject matter of the contract or duty of care is to provide peace of mind or freedom from distress (as confirmed in the Court of Appeal decision of Watts v Morrow (1991)). Insurance brokers are generally only retained to obtain cover to protect against contingencies. There may be exceptions to this general rule as all cases are fact sensitive, but in principle brokers and their insurers should resist these heads of loss in litigated claims.
This approach can be contrasted with the more liberal approach taken by FOS. That difference in approach is also enshrined in the Financial Conduct Authority (FCA) Handbook since that expressly permits FOS to award compensation even if a court would not.
The view adopted by FOS is that “as well as looking at whether someone has lost out financially as a result of a business’s mistake, it’s important to recognise the emotional or practical impact”. This “non-financial” impact could include:
- Distress – including embarrassment, anxiety, disappointment, loss of expectation, upset and stress. There may be some overlap with pain and suffering (see below) – for example, if the distress made someone ill.
- Inconvenience – including the time someone has spent and/or effort they’ve had to go to as a result of a broker’s mistake.
- Pain and suffering – including physical or mental suffering arising from what a broker has done.
- Damage to reputation – where someone’s personal reputation has been negatively affected as a direct result of a broker’s actions.
To award compensation, FOS needs to see that a broker’s actions caused more than just a minor inconvenience or upset to the client. Compensation should reflect the impact on the individual people involved. FOS does not accumulate awards for each individual error but will look at the totality of everything that occurred before taking a step back to decide what is “fair compensation overall”.
The power to make this kind of award comes from the Financial Services and Markets Act 2000 and the FCA Handbook which permit FOS to make awards of compensation which are fair and reasonable and are a proportionate reflection of the impact a broker’s actions (or inaction) had on their customer. In different cases where the broker made the same mistake, FOS could award different amounts – because the mistake had a different impact on those individual customers. For brokers and their insurers, the outcome of a complaint to FOS is notoriously unpredictable but it is rare to see awards for non-financial losses of more than £500-£1,000.
Any client seeking non-financial losses from brokers will have a far better chance of recovery if the complaint is referred to FOS, rather than litigated, and the cost and timescales of dealing with FOS make it a far more attractive option for private individuals. We see many inflated and exaggerated claims for distress and inconvenience that would probably not be successful if pursued via the courts. Whilst FOS is an unpredictable arbiter, however, awards of this type are generally modest and come without a risk of adverse costs, so brokers and their insurers should resist any temptation to over-settle such claims before FOS has considered the complaint.
On the other hand, in most litigated cases, brokers and insurers have a strong basis for robustly resisting claims for distress and embarrassment whilst remembering that damages for inconvenience may well be recoverable if the claimant can make the circumstances fit.