Jones v. Environcom, 2010: duty to advise and declaration of risk
A waste recycling plant was seriously damaged due to a fire. The insurer refused cover on the grounds that the insured had not mentioned the occurrence of two previous fires or the use of inappropriate equipment for waste treatment.
The insurer therefore cancelled the policy alleging that it had not obtained all information enabling it to form a proper opinion of the risk at the time of underwriting. In fact, there was a very high risk of loss due to the process used for waste treatment and the two earlier fires. The insurer argued that it would never have accepted such a risk if it had been aware of this information. As a result, the insured sued both the insurer and the broker, contending that the broker has not asked it the questions necessary to comply with its duty to advise. It claimed that the policy would not have been cancelled if all questions had been properly asked.
The court held that the building would never have been insured if the broker had accurately presented the risk. It also held that a broker must stress to the client its obligation to communicate all information it has and to warn the client of the potential consequences if it does not do so. Accordingly, the broker was held liable in this case.
The court held that the insurer had justifiably cancelled the policy. It was the broker’s responsibility in this case to provide the insurer with all relevant information to enable it to form an accurate opinion of the risk, which it was unable to do in this case. The broker thus owed an obligation to the insurer, in addition to its duty to advise the insured.