JONES V ENVIRONCOM LTD

Published October 2011

Facts

Environcom was engaged in the business of electrical waste recycling. Their insurance broker, Miles Smith Insurance Brokers (Miles Smith), placed various policies for them with Woodbrook (underwriting agents), including commercial combined insurance covering property and business interruption risks.

Following a serious fire caused by the use of inflammable plasma guns at their premises in September 2007, Environcom made a claim on the insurance policy. Woodbrook declined the claim on the basis that it had elected to avoid the policy for material non-disclosure. The non-disclosure related to the fact that Environcom used plasma guns as part of the process of de-manufacturing fridges and there had been a series of other previous fires (in addition to two fires which had previously led to claims on the insurance policy).

In February 2008 Woodbrook commenced proceedings seeking a declaration of non-liability. Environcom counterclaimed for an indemnity under the policy. Environcom subsequently joined Miles Smith as a third party, alleging that they had been negligent in explaining Environcom's disclosure obligations when broking the policy.

In November 2009, Environcom settled its dispute with Woodbrook for less than the full value of the claim. The proceedings continued in relation to the claim by Environcom against Miles Smith for the difference.

It was undisputed that Miles Smith had a duty to explain the obligation of disclosure to Environcom. The dispute focussed on what would have happened if the obligation had been explained and whether or not Environcom would have been able to purchase the insurance if full disclosure had been given.

The court at first instance dismissed Environcom's claim against Miles Smith. Whilst Miles Smith's duty did not extend to inquiring specifically about the use of plasma guns, they were obliged to make clear that previous fires at the premises were disclosable to the insurer. Had Miles Smith enquired about the fires they would have received a full and frank explanation, which would have led to the emergence of the use of the plasma guns.

However, the court concluded that the breaches had not caused Environcom's loss. Had the information been disclosed, Environcom would likely have found themselves unable to obtain cover either from Woodbrook or from any other group of underwriters. If cover had been obtained it would have been on the condition that the plasma guns were not used and so no fire would have taken place.

Environcom appealed.

Decision

The appeal was dismissed, on a technical procedural ground. At the original trial the focus of Environcom's arguments had been on the availability of suitable insurance in circumstances where they had given full disclosure of the previous fires and use of plasma guns. On appeal they sought to rely on a different argument; that if they had been advised of the duty to disclose the fires and use of plasma guns, they would have significantly improved their own safety procedures such that there would have been no fire and so they would have avoided the loss altogether..

The Court of Appeal did not consider the merits of this new argument in full. It was a new, legally and factually complex argument that had not been raised at the original trial, which Environcom was not entitled to raise it for the first time on appeal.

Comment

The decision on appeal is unsurprising although it would have been interesting to have the Court of Appeal's substantive view on the new argument raised by Environcom. Nonetheless, this case remains a useful outline of the steps brokers must take to explain disclosure obligations to their clients. Particularly of note is the reminder that reliance on standard explanations annexed to a policy may not be sufficient; a broker's duty extends to making sure that the client actually understands their disclosure obligations.