article
Duty bound
4 May 2010
The recent Commercial Court decision of Nicholas G Jones v
Environcom Limited and another [2010] re-visits the question of
what duties a broker owes to its client in terms of their
disclosure obligations.
Before looking at a decision it is worthwhile looking at the
duties and responsibilities which a broker owes.
“Every agent acting for reward is bound to exercise such
skill, care and diligence in the performance of his undertaking as
is usual or necessary in or for proper conduct of his profession or
business in which he is employed.”
Therefore pre-placement the broker should do the following:
- Identify client’s needs and ensure that the policy meets those
needs.
- Ensure that the proposal form is correctly completed.
- Review and explain the terms of any quotations received.
- Ensure that the policy accurately reflects what was agreed with
the Underwriters.
Further and specifically in relation to the client’s disclosure
obligations a broker has a duty to explain to his client:
- The duty to disclose all material facts.
- The consequences of not doing so.
- The categories of matters which ought to be disclosed as being
material.
In this respect reference can be made to ICOB 4.
In this case Environcom Limited re-cycled waste electrical goods
and as part of that process used plasma cutters at very high
temperatures. The use of plasma cutters can increase the fire
risk.
Between 2004 and 2008 different Lloyd’s syndicates provided
insurance cover. During the first couple of years of cover there
were a couple of fires at the insured’s premises. As a result the
broker, Miles Smith found it hard to place insurance on behalf of
Environcom and renewal was eventually agreed on different
terms.
In September 2007 there was a fire at Environcom’s premises
which destroyed all of their plant and machinery and where the
premises also had to be demolished. Environcom made a claim under
the terms of its property insurance. The insurers sought to avoid
the policy on the grounds that there had been material non
disclosure; that is in relation to the previous fires and also the
use of plasma guns.
The insurers issued proceedings seeking a declaration of non
liability. Environcom sought an indemnity under the terms of its
policy of insurance and also brought into the proceedings their
broker alleging negligence.
The case put forward by Environcom was that their broker was
under a duty to ask about:
- The use of plasma guns;
- Processes involving heat;
- Hazardous processes;
- Fires.
Mr Justice Steel found that the brokers had no duty to enquire
about the use of plasma guns or even hot work stating “It is
important to avoid hindsight in this context now that the dangers
involved in the use of plasma cutters….is only too apparent. Indeed
it has to be remembered that there would be a whole range of topics
on which brokers might properly regard it as appropriate to ask
questions and it would be unrealistic to focus on the one element
which thereafter emerges as the rogue element”.
Further that given that this was a highly technical field of
work that the brokers could not be expected to understand more than
the “general industrial process”. In addition given that Environcom
did not regard the use of the guns as being hazardous, the court
took the view that even if the broker had asked about hazardous
processes then it may well have led to an uninformative answer.
So far as fires were concerned, it was accepted in evidence that
the broker had not advised Environcom that fires were disclosable.
The view of the court was that the broker should have advised that
all outbreaks of fire were material and should be disclosed. In
addition the court held that the broker ought to have asked
specifically about the outbreaks of fire at the time of renewal. Mr
Justice Steel felt that if appropriate questions had been asked
then a frank response would have been received.
However that was not the end of the matter. The court then had
to go on to consider “what, if full disclosure had been made,
the chances would have been of Environcom obtaining insurance cover
and on what terms”. It was accepted by Environcom that they
would have had to have adopted a proactive role in obtaining any
offer of cover and that a series of risk improvements would have
needed to have been carried out for the 2007/08 year.
Mr Justice Steel felt that Environcom would have been able to
offer the fire risk improvements. Even if Environcom had been in a
position to offer that package he found that they would still have
been in severe difficulties in being able to secure terms. No
direct evidence was presented to the court in relation to their
then insurer and Mr Justice Steel held that the circumstantial
evidence would suggest that terms would not be offered. So far as
other underwriters were concerned he felt that the position was no
better.
In those circumstances although the broker was held to be in
breach of duty, Environcom’s claim was dismissed as any negligence
on the part of the broker did not cause any loss as Environcom was
effectively uninsurable.
What conclusions can be drawn from this case? This is an unusual
case and stems primarily from the type of market that the insured
operated in. This allowed the broker to succeed on a causation
argument that perhaps would not always be available. One would
normally expect that if a broker has failed to advise properly then
an available market would still have been available. Therefore a
claimant would be able to show the risk could have been placed and
that there was a causative link entitling the claimant to make a
claim for damages. That was not the case here.
However it is interesting to note that Mr Justice Steel did not
believe that it was the broker’s job to make exceptionally
technical enquiries into an insured’s business. It simply would not
occur to a reasonably competent broker to ask if plasma guns were
being used in the course of the business and this remains the case
even where surveys are carried out, as happened in this case.
Therefore it is important to keep in mind that the duty to make
full disclosure still rests very firmly with the insured.
This article was first published in Brokers
Monthly
save to PDF