Partner, Head of Financial services
Out-Law Guide | 17 May 2010 | 3:42 pm | 5 min. read
Nicholas G Jones v Environcom Limited and MS PLC t/a Miles Smith Insurance Brokers (third party)
Environcom recycled fridges. The process included removing the compressor to extract and destroy CFC chemicals. In most cases this was done with a spanner or screwdriver. Occasionally, where bolts were particularly stubborn, a plasma cutter was used.
Using a plasma cutter created a risk that sparks would ignite exposed insulation material. The risk was increased if pentane fridges were being recycled at the same time. Unlike CFC, pentane is not ozone-depleting but it is highly inflammable. About 50% of the fridges recycled on Environcom's premises were pentane fridges.
In September 2007, a serious fire broke out at the plant. Environcom claimed on its insurance, but the insurer denied cover, alleging it was entitled to avoid the policy for material non-disclosure regarding the use of plasma cutters. In addition, it claimed the insured had failed to disclose a series of other minor fires.
The insurer issued proceedings seeking a declaration of non-liability. Environcom counterclaimed, joining its broker to the action as a third party. In 2009, a settlement was reached under which the insurer agreed to pay Environcom £950,000 including costs. Environcom now pursued a claim against the broker for a further £6 million.
Environcom said the broker had acted negligently in failing to warn it properly of its duty to disclose material facts. The broker said it had given adequate written warning in the documents it provided to the insured.
Environcom had been insured against property damage and business interruption by the same insurer for some years. Its original 2004 proposal described the business as recycling white goods. No details of the actual process were sought or given.
The proposal form contained the usual declaration that the insured had not withheld any material facts and that the insurer would be entitled to void the insurance for non-disclosure or misrepresentation. A material fact was said to be something likely to influence acceptance or assessment of the proposal by the insurer.
Cover was granted subject to a satisfactory survey, which was obtained. The broker sent the policy documents to Environcom under a covering letter which reminded the insured of its duty to notify any material changes that might affect the cover.
In November 2004, the broker wrote again, enclosing renewal documents and reminding Environcom that it was under a continuing obligation to notify the insurer of any material alterations to the risk. "If you are aware of any fact which may affect underwriters' attitudes you should make it [known], whether it is specifically requested in the proposal form or not."
A further explanation was provided in January 2005 in the broker's revised terms of business. These stated that the proposer had a duty to disclose all facts that may influence the insurer in deciding whether to accept insurance, impose special terms or an increased premium and that the duty arose not only at inception but also applied to the submission and substantiation of all claims.
In October 2005 a fire shut down the fridge line. A claim was made on the insurance and investigated. Cover was renewed in 2006 but there followed a series of fridge line fires: two in December 2006 (one of which was the subject of another insurance claim) and another in March 2007.
The fires where no insurance claim was made were not disclosed. When renewal came around in May 2007, the insurer said it was not able to offer terms due to adverse claims experience. The broker did not tell the insured and managed to persuade the insurer to quote, albeit on very stringent terms. Nevertheless, Environcom accepted.
Meanwhile more fires occurred in May, June and September 2007, culminating in the major fire on 16th September.
The judge found the broker was in breach of its duty, but that the breach had not caused the insured any loss.
A broker must advise the client of its duty to disclose all material facts and explain the consequences of failing to do so. But it must also indicate the sort of matters which ought to be disclosed and take reasonable care to elicit discloseable matters which the client might not think necessary to mention.
In the judge's view, the broker's documents gave Environcom little or no help in understanding when disclosure was required, what might be material or what would be the consequences of non-disclosure. The obligation was described in the broker's terms of business in only the broadest terms. Similar warnings in invoices for premium would have been sent out only after the policy incepted.
"In any event, I am not persuaded that it is sufficient simply to rely upon written standard form explanations and warnings annexed to proposals or policy documents. The broker must satisfy himself that the position is in fact understood by his client and this will usually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal (particularly if a new person has become that client's representative)."
The judge, however, found that the broker did not have a duty to ask Environcom specifically whether it was using plasma cutters. The question would simply not have occurred to a reasonably competent broker. It remained the insured's task to identify detailed processes.
Even if the broker had asked whether any heat processes were involved, the judge was not sure this would have revealed the use of plasma cutters since, as far as Environcom was concerned, the cutters were purely incidental and used only occasionally.
But the broker should have made it absolutely clear that all outbreaks of fire were material and should be disclosed, however trivial. In any event, as part and parcel of its duty, it should have asked specifically at each renewal about any fires. Had this been done, the judge believed Environcom would have revealed the small but regular outbreaks and that this would, in turn, have exposed the use of plasma cutters.
The judge, however, was satisfied that the breach had not caused Environcom any loss. Had proper disclosure been made, the insured had no realistic chance of obtaining cover from this or any other insurer. The sort of changes in Environcom's operations that might have satisfied an insurer could not have been achieved within the time scale.
In any event, it appeared that Environcom was operating in breach of its waste management licence. Even if it had managed to obtain alternative cover, this material fact would not have been disclosed and the policy would have been avoidable.
The decision makes it clear that it is not enough for a broker to rely on generalised, written warnings about the duty of disclosure. The broker needs to make sure that the person dealing with insurance at the client company fully understands the duty, even if this sometimes feels like stating the obvious.
In this case, Environcom needed reminding at each renewal that even minor outbreaks of fire would be material to an insurer covering against fire risk. But the broker's duty did not extend to asking detailed questions about specialised processes or the specific tools used.
The judge placed particular emphasis on the understanding of the person actually dealing with the matter at the insured. If there is a change in personnel, it is part of the broker's duty to make sure the new person is properly briefed on the duty of disclosure and consequences of breach.
Partner, Head of Financial services