Insured attempts to seek damages from their broker for failing to obtain unimpeachable insurance
The Court of Appeal recently reaffirmed important limits on the scope of duties that brokers owe their clients. In particular, it confirms that a broker will not be liable for failing to prevent the very peril that a policy is designed to insure against – even if the broker’s negligence caused that policy to be impeachable for some reason.
Environcom ran an electrical goods waste recycling facility that burnt to the ground following a major fire in September 2007. Environcom’s insurers subsequently avoided their property and business interruption policy on grounds of material non-disclosure of, amongst other things, their use of plasma guns in disassembling pentane fridges (this being the probable cause of the fire). Environcom sought, therefore, to claim damages from their broker for failing to obtain unimpeachable insurance. Their claim, however, failed in the High Court on the grounds that, had full disclosure been made, Environcom would have been uninsurable.
Environcom appealed the decision. In doing so, they accepted that: (a) in order to obtain insurance, they would have had to eliminate the use of plasma guns and the throughput of pentane fridges; and (b) had they done this, the fire would not have occurred at all and they would have suffered no loss. Environcom argued that, nevertheless, the fact that the fire did occur was due to and caused by the broker’s negligence. The allegations of negligence were, however, no longer rooted in the failure to obtain unimpeachable insurance (as noted above, Environcom would have suffered no loss if they had obtained insurance) but rather the failure to prevent the fire itself.
Ultimately, the appeal never got off the ground. The Court of Appeal held that Environcom needed permission to amend their statement of case in order to raise this argument. Permission was refused, mainly on the grounds that Environcom were seeking to run a new case on appeal.
Although Environcom’s appeal failed on a procedural point, the decision will come as a great relief to the broking industry. What Environcom were essentially arguing was that their broker’s duty extended to advising and/or assisting them with the conduct of their own business so as to eliminate fire risk. This would have had the effect of making a broker responsible for his client’s property as distinct from its insurance cover (meaning that a broker could potentially be liable for all ensuing loss and not just a loss capped by the amount of recovery which unimpeachable insurance would have produced). At first instance, Mr Justice Steel considered that this was not a duty that a broker ought fairly to be taken to assume. Although the Court of Appeal did not grapple with this question, significantly Lord Justice Rix did state that the view expressed by Mr. Justice Steel ‘seems to me prima facie to have much to commend it’.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.