An insurance broker was effectively blamed for causing a serious fire at its client’s premises in a recent legal case that highlighted the risks faced by brokers in advising their clients on the duty of disclosure and of providing risk management advice.
Environcom, an electrical goods recycling business, had placed its commercial combined insurance covering property and business interruption risks through the same broker for a number of years. After a serious fire at its premises, the insurer declined the claim on the basis that Environcom had not disclosed a history of previous fires and claims and its use of plasma cutters.
Environcom alleged that the broker had been negligent in placing the insurance policy when the case was first heard in the High Court. At Appeal it also argued that the broker had failed to give proper advice by failing to advise it that its business was effectively uninsurable. Environcom alleged that if the broker had given proper advice it would have changed its business practices, thereby avoiding the fire – and effectively blaming the broker for the fire!
While Environcom lost the Appeal on a point of law, the case highlights two important issues which brokers must be aware of, if they are to avoid claims for negligence from their clients:
- Make sure that clients are fully aware of their duty of disclosure when placing a policy and document the fact. In the High Court Environcom actually succeeded in proving that the broker had breached its duty to advise about proper disclosure but, fortunately for the broker, failed to prove that it had suffered any loss as a result.
- In this case, the broker had not provided any risk management advice, but many brokers do. In similar circumstances, it is possible that a client could claim that the broker was liable if poor business practices caused a fire or other loss, which had not been identified as part of a risk assessment and management exercise.
An excellent summary of the case, Jones v Environcom Ltd & Anor, has been prepared by solicitors Robin Simon LLP and is available here.