Companies are at risk of leaving themselves uninsured if they fail to disclose relevant information, even if they have answered fully every question on an insurance proposal form.
That is the stark message of a recent case in the Court of Appeal, Nicholas Jones v Environcom Ltd and MS plc, which has left a company without an insurance payout following a devastating fire.
Environcom recycled electrical goods, including fridges that contained pentane, which is a highly flammable substance. To dismantle the fridges, Environcom often had to use plasma cutters which melted bolts at a very high temperature, so the process involved a risk of fire.
In 2005 and again in 2006, Environcom made insurance claims for damage caused by fire, but over the same period there were a number of minor fires at the plant for which no claim was made and which were never disclosed to the insurers. The insurers then gave notice in 2007 that they were not prepared to renew the policy because of the two fires claims, but finally agreed renewal at a much higher premium after negotiation.
After renewal there were several more minor fires and then, in September 2007, there was a catastrophic fire, caused by a plasma cutter and fuelled by pentane, which destroyed all of Environcom's plant and machinery and which meant that the site had to be demolished.
When the insurers refused to accept liability, saying that Environcom had failed to disclose the use of plasma cutters and the succession of minor fires at the plant, the company in turn blamed insurance broker MS plc, for failing to advise them properly on their duty of disclosure.
The case finally reached the Court of Appeal, where the judge held that broker MS plc could not rely on its standard information documents and its terms of business as providing sufficient advice on the duty of disclosure, and that it had failed in its duty. But he also went on to say that the insurers would not have offered to renew the insurance on terms that Environcom would have accepted, if disclosure had been made. So, even though the brokers had been negligent, it made no difference to the outcome and Environcom had to foot the bill for the damage.
Said commercial law specialist Simon Wilson of Norfolk-based solicitors Ward Gethin Archer: "The outcome of this case is a reminder that anyone buying insurance must think hard about what may be relevant facts, even if they are not asked for in the proposal form.
"Insurance renewal is not just a matter of form-filling, and employees whose job includes insurance renewal must be properly trained in the duty of disclosure and be properly briefed on the risks involved in the employer's business.
"Another message is the importance of clear communication between the brokers and the insured company, especially when staff involved have changed, as happened at Environcom in this case."
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