London Market - August 2010

Non-Disclosure, Brokers Duty of Care, Causation

Nicolas G Jones v (1) Environcom Limited (2) Environcom England Limited and Miles Smith Insurance Brokers [2010] EWHC 759 (Comm)

Environcom Limited (“Environcom”) was in the business of recycling white goods, mainly refrigerators. Part of this recycling process involved the extraction of CFC chemicals which are used as a coolant in refrigerators, although more modern refrigerators use alternative chemicals to CFCs including pentane which is highly flammable.

The first stage of the refrigerator recycling process involves the removal of the compressors which contain the coolant chemicals. On occasions, when the nuts and bolts attaching the compressors to the bottom of the refrigerators are difficult to remove, they are cut off using plasma cutters. The plasma cutters heat metal to a high temperature, causing it to melt before a high velocity gas is applied which removes the melted part.

There was an inherent risk that when using plasma cutters, the sparks or molten metal could ignite pentane refrigerators.

In early 2004, Environcom approached Miles Smith Insurance Brokers (“MS”) to arrange insurance cover. During the initial discussions, Environcom’s business was described as being concerned with the recycling of ozone depleting substances and a plant for degassing CFCs. No mention was made of other chemical coolants nor the method or tools used to remove the compressors.

MS arranged coverage with Woodbrook which commenced on 24 May 2004. On the proposal form the business was described as, “Recycling White Goods” but no description of the recycling process was required. There was also a declaration which was signed by Environcom’s chairman which stated:

“I have not withheld any material facts. I understand that non-disclosure of a material fact will entitle the Underwriters to void the insurance.

(N.B A material fact is one likely to influence acceptance or assessment of this proposal by Underwriters)”

At Woodbrook’s request, a survey was carried out at Environcom’s premises.

In November 2004, Mr Hamilton (“Mr H”), an employee of Environcom, became responsible for the company’s insurance matters and approached MS for a summary of cover. Mr H also reported a break-in during which a generator and plasma cutter were stolen.

A few days later, MS wrote to Mr H to discuss the renewal of Environcom’s insurance policy. The letter focused on the need to update the description of the business to take account of any acquisitions or developments and included the following provision:

“Material Facts

You are under a continuing obligation to notify Insurers of any material alterations to risk, for example:

• Change in business activities / acquisitions or disposals
• Additional premises / Risks / Insurable Items”

On 27 October 2005, a fire broke out on the recycling line causing the line to be shut down. Woodbrook instructed a specialist forensic fire investigation firm which found that the fire was caused by the ignition of pentane, although the source of ignition was unclear.

The insurance policy was renewed annually. Several site visits and risk assessments were carried out over the years. None of these noted the use of plasma cutters. In March 2006, Environcom produced a description of the recycling process in which, the use of plasma cutters was not mentioned. There were several fires at the recycling plant although Environcom only reported the most serious of these, neglecting to report any fires that it did not make a claim in respect of.    

In May 2007 Woodbrook informed MS that it did not intend to renew Environcom’s policy due to the experience of adverse claims. MS eventually persuaded Woodbrook to renew the policy; however, this was on more onerous terms than previously offered.

There was another small fire on 6 September 2007 which Environcom did not report. This was followed by a more serious fire on 16 September 2007 for which Environcom made a claim under the policy. Woodbrook declined the claim on the grounds of material non-disclosure relating to the use of plasma cutters and small fires which had occurred. 

Woodbrook commenced proceeding seeking a declaration of non-liability.  Environcom counterclaimed for an indemnity under the policy and joined MS as a third party on the ground that they had acted negligently in the brokering of the policy.

In November 2009 there was a mediation during which the dispute between Environcom and Woodbrook was settled.

In the claim by Environcom against MS, Mr Justice David Steel held:

1. There was no dispute as to the broker’s duty, namely has a duty to:
   
   - advise clients of their duty to disclose all material circumstances;
   - explain the consequences for failing to disclose;
   - give an indication of what matters ought to be disclosed;
   - take reasonable care to elicit matters which the clients might not think are necessary to mention;
   - ensure that the policy is suitable for the clients' needs.
   
2. On the facts MS had breached its duty as it had failed ensure that Mr H understood the disclosure obligation and had provided no explanation of what might be material or the consequences of any failure to disclose.
   
3. Where an incomplete explanation is given by a broker to its client in relation to their obligations there is a higher standard of care on the broker when eliciting material information for disclosure.
   
4. However, even if MS had complied with its obligations the use of plasma cutters would probably have not been disclosed by Environcom, although the small fires probably would have been disclosed.  
   
5. If full disclosure had been made, the chances of Environcom obtaining insurance cover, or adequate insurance cover, or accepting the terms of that insurance cover, were remote.
   
6. Accordingly, despite the breach of duty by MS, Environcom’s claim was dismissed as not being causative and the loss claimed was not of the kind or type which MS ought fairly to accept liability..