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Watch employer's insurance to avoid personal liability minefield

Readers of this journal will have read Andrea Whitehead's column (AJ 12.4.01) and may be wondering about the advisability of his planned nocturnal visits to replace his signature in the office files with the name of his employer, in the hope of avoiding personal liability.

Whitehead's concerns arose from a recent case, Merrett v Babb, in which Babb, a surveyor, carried out a valuation report on behalf of his employer's firm. The report was for a building society, and related to a house for which Merrett wanted a mortgage. Babb signed the report in person. After his employer became bankrupt and the firm's professional indemnity insurance was cancelled, Babb was found personally liable to Merrett for wrongly valuing the house.

Merrett had no idea who had prepared the report; the information sent to her by the building society omitted all references to Babb.

But as Lord Justice May observed: 'Prudent professional employees will want to ensure that they are covered personally by their employer's insurance and may need to take steps to obtain personal insurance if that cover does not continue after their employment ends.'

This is a difficult area of law. For a variety of reasons claimants often seek a remedy in tort, even where they thought they had a contract to rely on. For example, in Whitehead's case, clients will have a contract with his employers. But if his employers 'disappear' like Babb's, the next stop may be a claim in tort against employees. Such claimants will have to show they were owed a duty of care.Where the loss they have suffered is physical damage or injury, that hurdle will be low. But the courts think long and hard before imposing a duty in tort where the loss is economic, which it usually will be in the case of professional advice.

The courts have considered whether a duty is owed in a wide range of relationships, making distilling general principles difficult. In Williams v Natural Life Health Foods (1998), a limited company that granted franchises in health food shops gave the claimant financial projections. When the claimant's franchised shop was not profitable, the claimant sued a director personally in tort, the company having been wound up. The House of Lords decided that the director did not owe a duty of care to the claimant.

By contrast, last year Pamela Phelps claimed tuition fees and loss of future earnings on the grounds that a psychologist employed by Hillingdon Borough Council in London owed her a duty of care which had been breached. The House of Lords allowed her appeal.

Babb's case is one of a strand of cases relating to surveyors carrying out valuations. The usual contractual position is that surveyors are employed to value property for mortgage providers. But often those valuations are relied on by purchasers, and surveyors have been found to owe purchasers (with whom they have no contract) a duty of care. Important factors include that the valuer knew the purchaser was ultimately paying their fee, knew the valuation would be relied on by the purchaser in deciding whether to buy, and knew the purchaser might suffer loss if the valuation was done carelessly.

Babb's case came within those circumstances.

There is no simple answer as to whether in particular circumstances the court will find a duty of care was owed. Each case turns on its facts. In Smith v Bush, a surveyor case, Lord Griffiths reserved his position as to whether the conclusion that a duty was owed would have been reached had the valuation been of industrial property or an expensive house. In Merrett, Lord Justice May said that to expect a single short abstract formulation was 'reaching for the moon'.

Employers will usually be liable for their employees' actions, and provided the employer is insured, claimants will aim for the party with insurance. Potential difficulties arise when the employer's protection fails, and an employee has given advice in circumstances similar to those identified as important in the surveyor cases.

Protection for Whitehead does not necessarily lie in avoiding using his own name. He is better off concentrating on not going wrong in the first place, while keeping a wary eye on what insurance he is covered by.

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