MR. JUSTICE DAVID STEEL :
Introduction
- The Defendants ("Environcom") are engaged in the business of electrical goods waste recycling. From 2004 to 2007, Environcom traded from premises in Grantham, Lincolnshire. This claim arises out of a serious fire that occurred on 16 September 2007 at those premises.
- The Third Party ("Miles Smith") was Environcom's insurance broker for the same period. It placed various insurance polices for Environcom including commercial combined insurance covering property and business interruption risks with the Claimants ("Woodbrook") for a number of years including May 2007 to May 2008.
- As a result of the fire, Environcom made a claim on the then current policy but Woodbrook declined the claim on 30 November 2007 on the basis that it had elected to avoid the policy on the grounds of material non-disclosure. The non-disclosure asserted related to the use of plasma guns in the process of de-manufacturing fridges and the occurrence of further fires in addition to two previous claims.
- In February 2008, Woodbrook commenced these proceedings seeking a declaration of non-liability. Environcom counterclaimed for an indemnity under the policy and then, in October 2008, Environcom joined Miles Smith as Third Party alleging negligence in the broking of the policy.
- In January 2009, a Case Management Conference took place at which a joint trial of liability and causation was ordered. In November 2009 there was mediation during which Woodbrook and Environcom settled their disputes on the basis that Woodbrook agreed to pay Environcom £950,000 inclusive of costs. These proceedings thus continue with the claim by Environcom against Miles Smith. The claim is a substantial one amounting to something in the region of £6 million.
The processing line
- Environcom was established in about 2002. Thereafter, it acquired leasehold premises in the Houghton Road Industrial Estate in Grantham for its processing facility. In 2003 Environcom ordered a new state of the art refrigerator line from a Danish company known as Uniscrap A/S. This incorporated mechanical plant manufactured by ARP Scandanavia and CFC processing equipment supplied by Lesni A/S. The equipment was delivered and installed between January and May 2004.
- The equipment was designed to extract and destroy CFC chemicals present in the compressors within refrigerators. The CFC was usually contained in a synthetic oil within a compressor. Being volatile it provided the mechanism for cooling by evaporating and then condensing in the cooling circuit. The CFC's needed to be destroyed because they were ozone depleting and thus from January 2002 regulations required recyclers of domestic refrigerators and freezers to have processes in place for the recovery or destruction of these chemicals.
- In fact refrigerators contained CFCs in two areas: not only in the refrigerant present in the compressor and in its circuit tubing but also as a blowing agent in the polystyrene foam that surrounds and insulates the main chamber of the refrigerating unit. More modern refrigerators use alternative chemicals as a refrigerant and as a blowing agent, particularly hydro-carbons such as pentane. But, whilst pentane is not ozone depleting, it is highly inflammable. Thus it is a matter of some note that although most of the refrigerators being processed at the Grantham plant were CFC refrigerators, some (about 15%) were pentane fridges.
- The very first stage of the recycling process was the removal of the compressors. This was done by removing the bolts that fix the compressor to the bottom of the refrigerator. On most refrigerators this was done by spanner or screwdriver and hammer. However where the bolts were stubborn a plasma cutter or gun was used to remove them.
- Since they play a significant role in the story it is desirable to explain in brief the nature of plasma cutters or guns. A plasma cutter is a metal cutting tool used extensively in manufacturing industries. The device works by forcing a gas through a constricting tip charged with a high frequency electrical discharge between the electrodes and the tip. This ionises the gas to produce plasma which can achieve very high temperatures (over 15,000°C) at high velocities. When applied to the target material for cutting, the high temperature melts the part to cut, while the exit velocity of the gas removes the molten metal by blowing it away from the base of the cut.
- In line with oxy-fuel and laser techniques, plasma cutting is considered a hot, burning technique by the industry and the Health and Safety Executive. As explained by Miles Smith's expert Mr. Bain (whose evidence on this topic I accept) the use of plasma cutters on fridges gave rise to the risk that the hot metal splatter and sparks could ignite exposed insulation in the fridges being recycled which would remain smouldering for some time. The danger would be enhanced if any pentane fridges were being recycled at the relevant time.
- Once the bolts had been removed, the refrigerator would then move along further down the line to the degassing station, where the circuit tubing to the compressor was crimped in two places to allow it to be cut without releasing any gas. Thereafter, the compressors were pierced in a draining rig and the CFCs and oil were drawn off under vacuum.
- There followed the processing of the shell of the fridges through three shredders:-
i) Shredder I was a Lindermann Twin Axle Shredder that took the refrigerator carcass as a whole and reduced it to pieces of material about three inches square.
ii) A Lindermann Single Axle Shredder, Shredder II, which reduced the pieces to small chippings of less than one inch square. Within the enclosure to Shredder II there was a vibrating screen and an overband magnet that extracted the metal elements from the waste for bagging and onward sale.
iii) A Lindermann Small Single Axle Shredder, Shredder III, which reduced the wastes further in size. The residue from this process passed into an air separator where plastic material was separated from the insulating foam and then bagged.
iv) The foam then passed to a briquetting plant in which it was moulded and heated to release the last vestiges of blowing agent before being formed into compact briquets.
- In 2005 Environcom expanded their operations to deal with television sets on a separate processing line, and again in 2006 they installed a further processing line to deal with other types of electrical waste, in particular washing machines.
Background to the insurance
- By February 2004 discussions were underway between Environcom and Miles Smith about property and machinery breakdown insurance as the construction of the fridge recycling plant neared completion. As recorded in his file note of a visit on 4 February 2004 by Mr. Smith of Miles Smith, the recycling plant and machinery was described to him as concerned with the recycling of ODS ("Ozone Depleting Substances").
- In response to a subsequent request for a "breakdown of plant values and details of conveyor parts and what they do", more details of the equipment and the recycling process were provided to Miles Smith by fax on 16 March 2004. These were sent on to Woodbrook. It was described as a plant for degassing CFC's. Although removal of the compressor was set out as one of the stages in the process, there was no description as to the method of doing so or the tools used.
- By 25 May 2004 Miles Smith obtained cover from Woodbrook subject to a completed proposal form and a satisfactory survey of the property. The sum assured for material damage was £1.6 million and for loss of profits £1.1 million. The premium (for material damage) was £19,900.
- Environcom commenced operations at the Grantham site in June 2004. On 1 June 2004 Environcom completed the proposal form. This was signed by the chairman Mr. Simpson. It confirmed that a fire alarm system was being installed[1]. The business was described as "Recycling White Goods" but no details of the process were sought in the standard form. However, just above the signature section there was this declaration:
"To the best of my knowledge and belief the information provided in connection with this proposal, whether in my own hand or not, is true and I have not withheld any material facts. I understand that non-disclosure or misrepresentation of a material fact will entitle the Underwriters to void the insurance.
(N.B. A material fact is one likely to influence acceptance or assessment of this proposal by Underwriters; if you are in any doubt as to what constitutes a material fact you should consult your Insurance Advisor.)"
This declaration went on to say:
"I understand that signing this proposal form does not bind me to complete the insurance but agree that, should a contract of insurance be concluded, this form and the statements made therein shall form the basis of the contract.".
- The survey required by Woodbrook was carried out on their behalf on 10 August 2004 by Mr. Moss. The report was not disclosed to Miles Smith or Environcom. It described the de-manufacturing process and, as regards the process of compressor removal, stated:
"The process consists of clamping, crimping and cutting the cooling circuit tubing, using pneumatic tools then disconnecting and unbolting the compressor… "
Thus no mention was made of the tools used to remove the bolts let alone the use of plasma guns. Furthermore, it was expressly stated that the fridges involved in the recycling process contained CFCs.
- As regards fire risks, the surveyor commented that:
"Heat is used within the degassing station but overall the process does not involve any particular hazard although the redundant refrigeration equipment does incorporate expanded polystyrene (EPS) insulation which results in a significant fire loading."
- Annexed to the survey report were some "Requirements" as well as some "Recommendations" in regard to risk improvements. Although the survey report itself was not disclosed to Miles Smith, the annex was later sent to Miles Smith for onward transmission to Environcom. In the light of the annex, Woodbrook insisted on compliance with the "risk improvements" within 30 days, and Endorsement No. 1 to the policy dated August 2004 contained a warranty broadly to that effect, but in fact only as regards "the requirements". However, the specified requirements are of no materiality to the present dispute. In contrast, it is notable that included in the recommendations was a reminder of the need for a formal fire risk assessment "to identify any hazardous processes, the controls to reduce fire risk, adequacy of fire escape routes, emergency lighting requirements and the suitability of fire escape procedures for the premises".
- The combined policy documents were forwarded by Miles Smith to Environcom on 1 September 2004. The covering letter stated:
"…please ensure the cover is adequate for your requirements and try to familiarise yourself with the terms and conditions… You are duty bound to notify us of any material changes that may affect your cover and advise of any alteration and/or claims as and when they arise."
- On 22 November 2004, Mr. Hamilton of Environcom (who had taken over responsibility for insurance matters) asked Miles Smith for a summary of the existing cover. He also reported a break-in over the weekend. He indicated that a claim in the region of £3000 or £4000 would be made in respect of a stolen generator and a plasma cutter. Although Environcom were sent a claim form, it does not appear that in fact the claim was pursued.
- On 25 November 2004, Miles Smith wrote to Environcom to discuss the impending renewal of their liability policy[2]. The letter asked for details of any potential claims. Attached was the "Summary of Insurance" which Mr. Hamilton had asked for earlier. The introduction drew attention to various "salient" points. In particular it focused on the need to update the description of the business to take account of any new acquisitions or developments. It went on:
"2. Warranties
Specific Warranties attached to the Insurance Policies must be strictly complied with as failure to do so may invalidate the Policy even if the cause of loss is unconnected with the Warranty, you must advise us immediately in order that we can discuss the matter with your Insurers…
4. Material Facts
You are under a continuing obligation to notify Insurers of any Material alterations to risk, for example:-
- Change in business activities/acquisitions or disposals
- Additional premises/Risks/Insurable Items
- Onerous Contract Conditions
In addition, you may from time to time be asked to complete a Proposal Form for Insurers to provide other information which will form the basis of an Insurance Contract. When providing such, it is important to understand that all answers or statements made are your responsibility and that if incorrect information is supplied it could result in the Policy being repudiated on the basis of non-disclosure or misrepresentation.
All information requested on a Proposal Form is a material fact, and changes in that information should always be notified to us immediately.
If you are aware of any fact which may affect Underwriters attitudes you should make it know (sic), whether it is specifically requested on the Proposal Form or not."
- On 7 January 2005, Miles Smith forwarded its revised terms of business to Environcom in the wake of the FSA becoming responsible for regulation of insurance brokers. This contained the following section:
"Utmost good faith and duty of disclosure
The law imposes onerous duties upon anyone entering into an insurance contract and anyone acting on his behalf. A proposer has a duty to disclose all facts that may influence the insurer in deciding whether to accept insurance, impose special terms or charge an increased premium. This duty arises not only at inception of the contract but also applies to the submission and substantiation of all claims.
A proposal or claim form or any other document relating to the contract of insurance must be answered fully and accurately, the provision of such information/documentation being the sole responsibility of the insured."
Mr. Hamilton duly signed and returned a copy on 20 January 2005.
- Mr. Blake made a visit to Environcom's premises on 27 April 2005 (arrangements for an earlier visit in January having been postponed). He was taken on a short tour. At one stage it was suggested that the use of plasma guns was explained to him but I do not think this was in the end pursued. Whilst he may possibly have seen a gun, I am not persuaded that he would have been aware of its potential use even if he had. What he did was to run through a list of potential insurance needs for Environcom with Mr. Hamilton. His queries identified that Environcom were underinsured. Thereafter discussions as regards renewal of the commercial combined policy got underway.
- The terms as finally offered by Woodbrook were not available until 23 May 2005 and were accepted the following day. Once again the renewal was subject to survey. Accordingly Mr. Moss revisited the plant on 21 June 2005. As regards fire, the report (sent only to Woodbrook) stated:
"Fire:
Since the last survey the following changes have been made:-
Recycling of domestic electrical appliances has been introduced albeit on a fairly limited scale (<15% of plant capacity) although it is intended to develop this aspect of the business and purchase new machinery.
Automatic fire alarm installed.
New electric solid metal roller shutters have or are in the process of being installed to some openings with the intention that all doors will be replaced.
All waste bins are held internally.
Staff canteen now provided (no cooking other than the use of a microwave).
The Company has appointed a health & safety officer who visits the site on a monthly basis and who is in the process of undertaking the necessary risk assessments.
Otherwise the risk remains unchanged. Heat is used within the de-gassing station and television recycling process but overall the processes do not involve any particular hazard although the redundant refrigeration equipment does incorporate expanded polystyrene (EPS) insulation, which results in a significant fire loading….
Continued cover is recommended. "
Attached to the report was another copy of the earlier list of "requirements" and "recommendations".
- On 27 October 2005, there was a fire on the fridge line in the vicinity of Shredder II. The fridge line was shut down as a result. There followed a series of reports by loss adjusters, Messrs. Stuart Neal, acting for Woodbrook. They in turn instructed Messrs. Burgoynes, a specialist forensic fire investigation firm. (In their final report nearly a year later dated 22 September 2006, Burgoynes reported to Woodbrook (but not copied to Miles Smith or Environcom) that the fire started as a result of the ignition of pentane in the Shredder, the source of ignition being uncertain.)
- In the meantime in February 2006, a surveyor from Aspen Ltd. (Mr. Ifould) conducted a survey on the instructions of Miles Smith for the purposes of renewal of Environcom's liability cover. His report reiterated the need for risk assessments relating to such matters as fire. This, together with other recommended risk improvements, was notified to Environcom under cover of a letter from Miles Smith dated 23 February 2006.
- In March 2006, Environcom prepared a document entitled "Process Description". It is not entirely clear to what use this document was put. But the description of the "fridge destruction process" was notable in two respects. First, it emphasized the capture and destruction of CFCs. Second, there was no mention of the use of a plasma gun to remove the compressor bolts (although the diagram for the processing of other domestic appliances mentioned the use of "plasma cutter…to open where required").
- Miles Smith faxed Woodbrook on 27 March 2006 to notify the sums insured required by Environcom on property and business interruption. Miles Smith pressed Woodbrook for a response but it was not until 4 May 2006 that Woodbrook offered renewal terms (again subject to survey). These were passed on to Environcom by Miles Smith in an e-mail dated 6 May 2006. Environcom gave instructions to renew on 23 May 2006. A debit note for the premium was sent out on 25 May 2006. Like all other debit notes for premium, this stated:
"Please note that Insurers must be advised of any circumstances which could alter their assessment of the risk. Failure to do so could result in your being without insurance cover…"
- The required further survey was carried out on 27 June 2006 this time by Mr. North. His report (not disclosed to Miles Smith or Environcom) contained the following points:
a) There was a "high inception hazard" and "the potential for a rapid and short fire spread".
b) Nonetheless it was "an acceptable risk for the highly specialized and distinct class".
c) The author recommended yet another resurvey in three months.
- As already noted Messrs. Burgoynes produced their final report on the October 2005 fire on 22 September 2006 which explained that the probable mode of outbreak of the fire was the ignition of pentane, although the source of that ignition remained unknown. The report contains a reference to a conversation between the author of the report and a director of the suppliers of the plant in October 2005 as regards tests that had been carried on with a "maximum loading of feedstock containing pentane". It was thought by the manufacturers, as a result, that the local exhaust ventilation system had prevented the build up of pentane. But Burgoynes expressed doubts about the efficiency of this system.
- They went on to say that "it would be prudent for a suitably qualified and experienced consultant to consider the detailed operations of the equipment on site". The report went on:
"They could provide advice concerning process hazards, the possibility of unsafe situations occurring and the necessary control/mitigation measures such as explosion protection and/or relief and the necessary fire suppression measures required. Under the requirements of DSEAR[3] it could be argued that Environcom should arrange for such an assessment to be undertaken."
This recommendation was not taken up by underwriters. Equally nor were Environcom asked to arrange for such an assessment under the regulations or otherwise.
- Mr. Ifould made a return visit on 27 September 2006 by which time the fridge line was back in operation. His report contained inserts updating his report on his February inspection. He recorded that Environcom, through the services of Mr. Milliken had engaged Peninsular Business Services to provide safety consultancy although expressing some scepticism as to the potential value of their input. In his summary opinion of the risk he emphasised that business recovery had been management's priority. "Physically the risk is basically as bad as previously described although marginally less congested." In a separate section devoted to risk improvements, he yet again emphasised the need for fire risk assessment to be undertaken by Peninsular.
- Peninsular's report is based on a survey carried out the same day. Only part of the report is now available. One outcome was at least a fire risk assessment on a Peninsular standard form dated October 2006. This had been prepared by Mr. Login. The overall risk was rated as low having regard to the ignition sources, fuel sources and precautions taken. However it is of some note that the identified ignition sources included a plasma cutter. This risk assessment was neither shown to nor asked for by underwriters
- On 4 December 2006, Mr. Wall who had taken over the Environcom account from Mr. Blake in June, sent an e-mail to Mr. Hamilton asking for an update on risk improvements carried out since the September survey and also enclosing a renewal questionnaire for liability cover. One of the questions asked in the form was whether Environcom had any form of Waste Management Licence issued by the Environment Agency.
- Earlier, during the summer of 2006, Mr. Milliken had been making inquiries about fire protection or control systems for the three shredders and had obtained some quotes. He recommended to the board that a CO2 based system be installed at a cost of about £40,000. The board minutes for 15 December 2006 record:
"BM preferred solution would be CO2. That CO2 system has been agreed with ARP but confirmation required from insurance company. Board agreed to proposal but subject to affordability."
- On the 21 December 2006, a small fire occurred on the fridge line in part of the briquetting plant. The fire brigade attended and extinguished the fire. However, hardly had the fridge line begun operation again when a serious fire broke out on 27 December 2006 in the briquetting plant. Stuart Neal were again appointed loss adjustors. In their initial report, dated 3 January 2002 they expressed concern that the water used to extinguish the earlier fire might have led to an electrical fault. In due course Burgoynes in a report dated 5 April 2007 confirmed this theory.
- On 22 January 2007, Mr. Hamilton brought Mr. Wall up to date on improvements carried out since September, given the imminence of the liability cover renewal. Having referred to the reduction in the stockpile attributable to the interruption in production caused by the fires, he also reported on the appointment of a health and safety co-ordinator who amongst other things would reassess all the risk assessments. This was Mr. Login who had arrived in October 2006.
- On 15 March 2007 there was another small fire, this time in Shredder III. This was put out with a fire extinguisher. Mr. Ifould returned again on 27 March. He was not told of the recent fire. Indeed his report recorded that Mr. Login's appointment had led to significant improvements on the safety front. In particular about 80% of all required risk assessments had been undertaken.
- Renewal of the Combined Property Policy was now again on the horizon. Mr. Wall e-mailed Environcom on 17 April 2007 to say that he had been asked by Underwriters "to find out if you have any additional procedures in place to prevent further losses following the two fire claims in recent years." In fact no such request had been made but Mr. Wall anticipated that the topic would inevitably be raised. Mr. Hamilton responded by asking for a "note of the present cover".
- Shortly afterwards, on 2 May 2007, Woodbrook volunteered to Miles Smith that they were "not able to offer renewal terms due to adverse claims experience". This was not passed on by Miles Smith to their client. Miles Smith through the offices of Mr. Wall and his superior Mr. Lee are then said to have embarked on a vigorous effort to obtain cover from Woodbrook or elsewhere.
- On 16 May 2007 Mr. Hamilton reported on a number of steps taken to minimise the risk of fire or its consequences including improvements in access, improved cleaning arrangements and so on. This was sent on to Woodbrook. The initial reaction of Woodbrook is set out in an e-mail of 22 May 2007:
"…The two losses we have dealt with are similar and although on the face of things you would have expected the circumstances to have been controlled just by the fact that the risk was actually trading at the time of the loss. It seems that whatever we could put in place it will not make a difference and the combination of the heavy trade and the condition of the premises which is not particularly good. With all things taken into account unfortunately this is not a case we would like to invite renewal."
- Despite this, the good offices of Mr. Lee were enough to persuade Woodbrook to quote on 24 May albeit on stringent terms including a requirement for resurvey, a premium in excess of £100,000, a £10,000 excess and a 20% coinsurance clause. This was all accepted by Environcom[4].
- On 26 June 2007 Miles Smith arranged for a survey by Mr. Morfitt to be undertaken for the purposes of obtaining alternative cover[5]. One of the housekeeping procedures is described as follows:
"The company employs a health & safety Officer who is assisted by outside consultants (Peninsula). Peninsula were responsible for the initial building blocks and they are assigned to complete periodic audits. Included are safe systems of work (during the preparation processes small metal parts are removed using plasma cutting apparatus)."
Mr. Morfitt appears to have been unaware of the fires in May and June. He went on to set out his opinion of the risk, pointing out that some of the recovered materials were combustible such as the insulation but not the CFCs. Since the "reduction machines (ie high speed granulators and pelleter) represent the governing hazards", he recommended the installation of spark detection sensors and an automatic fire suppression system.
- On 24 July 2007 Mr. Moss returned again for Woodbrook to perform the required resurvey. He drew attention to the fact that plasma cutting equipment was used on the newly installed electrical waste line. Having referred to the fires in October 2005 and December 2006 (although not the fires in March, May or June) he expressed the view that Environcom had taken reasonable steps to help prevent fires. Indeed he considered that although the fire load from insulation was heavy the overall processes did not involve any particular hazard given that heat was only employed in the de-gassing station.
- Yet another fire occurred on 6 September. The fire that gave rise to the present proceedings occurred on 16 September 2007 in Shredder II. Underwriters in rejecting liability asserted that the source of ignition was probably a plasma gun. Indeed in the risk presentation prepared by Environcom's new brokers for the new plant built by Environcom, they put forward the same explanation. In any event cover was avoided on the grounds of non-disclosure of the fires and ignitions and of the use of plasma guns
Witnesses
- Environcom called four factual witnesses to give oral evidence:
i) Paul Hamilton, company secretary and financial controller from October 2004.
ii) William Milliken, Operations Manager from September 2004.
iii) Brett Login, Site Health and Safety Coordinator from October 2006.
iv) Jeffrey Weeks, a Technical Executive from October 2005.
- Miles Smith also called four factual witnesses. Three were from Miles Smith:
i) Jeff Blake, Associate Director from November 2004 until his retirement in July 2006.
ii) Mark Wall, Account Executive as from July 2006.
iii) Steven Lee, Broking Director of Miles Smith in the summer of 2006.
Miles Smith also called Greg Moss, the surveyor retained by Woodbrook.
- By and large I regarded all these witnesses as having sought to help the court although allowances have to be made in assessing their reliability for the considerable period of time that has passed since many of the events they were being asked about. In any event, fortunately there were limited issues of primary fact and there was a wealth of contemporary material.
- As regards expert evidence, Environcom called Mr. Robin Wood and Miles Smith called Mr. David Hurrell on matters relating to broking practice. As regards health and safety, Environcom called Mr. John Smith and Miles Smith called Mr. Paul Bain. I have greatly benefited from the evidence of all of these experts. As might be expected the differences in their views had substantially narrowed in the course of meetings. I deal with the residual issues below. In doing so I have regarded the experts called by Miles Smith as being better placed in terms of experience.
Broker's duty
- There was no dispute as to the scope of a broker's duty in placing or renewing insurance cover for a client. The matter is summarised in the FSA Insurance Conduct of Business Handbook dated May 2007:
"4.3.1 (1) An insurance intermediary must take reasonable steps to ensure
that, if in the course of insurance mediation activities it makes
any personal recommendation to a customer to buy or sell a
non-investment insurance contract, the personal recommendation
is suitable for the customer's demands and needs at the time the
personal recommendation is made….
4.3.2 In assessing the customer's demands and needs, the insurance intermediary must:
(1) seek such information about the customer's circumstances and
objectives as might reasonably be expected to be relevant in
enabling the insurance intermediary to identify the customer's
requirements. This must include any facts that would affect the
type of insurance recommended, such as any relevant existing
insurance;
P (2) have regard to any relevant details about the customer that are
readily available and accessible to the insurance intermediary,
for example, in respect of other contracts of insurance on which
the insurance intermediary has provided advice or information;
and
(3) explain to the customer his duty to disclose all circumstances
material to the insurance and the consequences of any failure
to make such a disclosure, both before the non-investment
insurance contract commences and throughout the duration of
the contract; and take account of the information that the
customer discloses.
In relation to 4.3.2 (3), an insurance intermediary should make clear to the customer what the customer needs to disclose. For example, in relation to private medical insurance, this could include any existing medical condition where relevant, or in relation to motor insurance, any modifications carried out to the vehicle."
- In short, a broker:
a) must advise his client of the duty to disclose all material circumstances;
b) must explain the consequences of failing to do so;
c) must indicate the sort of matters which ought to be disclosed as being material (or at least arguably material);
d) must take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention.
All this flows from the requirement that the broker should take reasonable steps to ensure that the proposed policy is suitable for the client's needs. By definition, a policy which is voidable for non-disclosure is not suitable.
- Moreover it was, or became, common ground that where a change in personnel led to a new person being responsible for insurance matters in the client's organisation, the broker must ensure that an appropriate understanding of questions of materiality is held by that person. In this regard, Mr. Hamilton took over responsibility for insurance matters at Environcom in November 2004. It was Miles Smith's case that, whilst it was probable that thereafter no specific oral or written advice on the topic was provided to him by Mr. Blake, the broker then responsible for the Environcom account, an adequate explanation to him of questions of materiality was contained in the various documents sent to Environcom thereafter.
- The rationale for the imposition of these duties on a broker is that it is an unusual obligation for a contracting party, and an area of the law which can have harsh consequences, not least because any non-disclosure relied upon by the underwriter to avoid the policy may have no causative significance as regards the claim that will as a result not be paid. This makes it all the more important that the lay client is told of the paramount duty to disclose and what it involves. Further, in case the client does not appreciate what may be material, (as will often be the situation) he needs to be advised to err on the side of caution so as to disclose anything that might impinge on the judgment of a competent underwriter in assessing the risk and be helped to unearth such matters.
Breach of duty
- As indicated already, Miles Smith relied primarily on the documents they sent out to Environcom as containing adequate education to the client on the obligation of disclosure. The initial document sent to Mr. Hamilton was in response to his request for a summary. It contained clause 4 set out above. This was an incomplete and confusing analysis. It referred to material "alterations" to risk such as "additional premises". The only information which, if incorrect, could lead to a loss of cover was that submitted in a proposal form. The last sentence read: "If you are aware of any fact which may affect underwriter's attitudes you should make it know (sic), whether it is specifically requested in the Proposal Form or not". In my judgment all this afforded little or no help on understanding the obligations to disclose material facts, the nature of material facts or the consequences of failing to disclose them.
- The new terms of business were sent to Mr. Hamilton on January 2005 and signed off by him. They at least had the merit of explaining in very broad terms the obligation of disclosure. But again they afforded no help in determining at what stage disclosure was required, what might be material or any warning as to the consequences of any failure to disclose.
- The invoices for premium sent by Miles Smith from time to time gave notice of the obligation to disclose circumstances which could alter the underwriter's assessment of the risk, and the consequence of failure to do so. But again there is no explanation of what would accordingly be material. In any event the invoices were by definition furnished after the relevant policy incepted. The recipient might well be forgiven for thinking that it did not bear on any pre-contractual obligations particularly where the earlier documents setting out the contractual terms were to different effect.
- It was suggested to Mr. Hamilton and accepted by him that he would have (or should have) reviewed the file and thus would have seen the terms of the proposal form signed by Mr. Simpson which had a more satisfactory general summary of the obligation of disclosure and the effect of non-disclosure. But this was all in the context of information provided in response to questions posed in the Proposal Form, the only express significance of which was purportedly picked up in the summary referred to above.
- However limited the advice contained in these documents, it was submitted that Mr. Hamilton accepted in evidence that he had a good understanding of the disclosure obligations. In my judgment the material contained in his oral evidence fell well short of that. Mr. Hamilton sought to summarise his understanding as follows during cross examination and I accept it:
"Q. So, not to labour this point too much, Mr. Hamilton, but it must be right that from the moment you took over the insurance function, you were advised repeatedly and regularly in writing, in these general terms that we have been looking at, about your duty to disclose material facts; that is correct, isn't it?
A. Well, no, this one doesn't say that. This says "any circumstances which will alter the assessment of the risk", which is surely slightly different.
Q. Well, you were either advised in those terms or in the terms of the summary that we looked at, or in the terms of the terms and conditions you were sent, correct?
A. Yes, either of them, yes.
Q. Are you telling us that you simply had no idea what a material fact to disclose to insurers was, for all this time that you were in charge of the insurance?
A. I would say that even now it is probably -- I mean, it is asking, or it's telling you that you need to, in any circumstances, give them what is an alteration to the risk. Now, at no point did the insurance company or the brokers come along to me and said, you have seen what we have assessed you of risk, any alterations to that you need to let us know about. And they never, as far as I am aware, I can recall, that any, when it says that you need to declare material facts, it doesn't give examples what a material fact is.
Q. So are you saying that you spent this whole period completely clueless as to what might be a material fact to Miles Smith or your insurers? Nobody ever helped you out, is that your case?
A. Nobody has explained it, unless you can show me somewhere else that I have read and I have missed it, but it doesn't declare what -- it doesn't give you an example what a material fact is. I am aware that you, when you bought new kits and things like that, we declared it and asked for it to be covered, but from the point of view of that being a general statement, it was a general statement without examples."
- As I say I accept that evidence which entirely accords with the confused and incomplete nature of the written material referred to above. Mr. Blake had simply given no adequate explanation to Mr. Hamilton let alone one complying with ICOB 4. As regards Mr. Wall he never gave any thought to assessing Mr. Hamilton's understanding, let alone supplementing the content of the written materials. In short, I regard the documents relied upon by Miles Smith as satisfying their duty of explanation of the obligation above of disclosure to be seriously inadequate for that purpose.
- In any event, I am not persuaded that it is sufficient simply to rely upon written standard form explanations and warnings annexed to proposals or policy documents. I understood the experts to be agreed on this. The broker must satisfy himself that the position is in fact understood by his client and this will usually require a specific oral or written exchange on the topic, both at the time of the original placement and at renewal (particularly if a new person has become that client's representative). There is no evidence of any such exchange let alone one accompanied by any inquiries by Miles Smith to help unearth material facts.
Causation
- It is common ground that three material matters were not disclosed to underwriters:
a) the use of plasma guns on the refrigerator line;
b) the recurrent ignitions of insulation by virtue of the use of plasma guns;
c) the fire in the refrigerator line on 15 March 2007.
- Before considering the question of whether a full and adequate explanation to Environcom of the duty of disclosure would have led to this information being volunteered by Environcom, it is convenient to consider whether the proper scope of Miles Smith's own inquiries should have unearthed the material. This is so for two reasons. First, in my judgment where an inappropriate and incomplete explanation is afforded to the client as to his obligations, it follows that there is a higher standard of care on the part of the broker in eliciting arguably material information for disclosure. Second it was Miles Smith's case that even if specific queries had been raised by them, Environcom would not have furnished the information: if that be right, a fortiori the information would not have been volunteered.
- As regards inquiries that Environcom contend ought reasonably to have been made by Miles Smith and which it is submitted would have revealed the use of plasma guns, Environcom put their case variously and progressively as follows:
a) a duty to ask about the use of plasma guns;
b) a duty to ask about processes involving heat;
c) a duty to ask about hazardous processes;
d) a duty to ask about fires.
This last aspect I will deal with separately in the context of fires generally. But the point demonstrates that in one sense the debate about plasma guns may be redundant since inquiries leading to the revelation about regular outbreaks of fire in the insulation would almost inevitably have led to the emergence of the use of plasma guns as well.
Plasma guns
- At one stage, it was suggested that Miles Smith were actually aware of the existence and use of plasma guns on the refrigerator line and despite that awareness failed to advise as to the materiality of their use. I am not clear that such an allegation remained alive. If it did I reject it:
i) As emerges from the chronology set out above there was no mention of plasma guns in any written description of the processes at Grantham prepared by Environcom. (Notably this includes the "Working Plan" submitted to the Environment Agency as part of the Waste Management Licence.)
ii) No mention of the use of plasma guns on the fridge line by Environcom is recorded in any survey report prepared by Mr. Moss, Mr. Ifould, Mr. North or Mr. Morfitt despite the numerous trips around the plant undertaken by them during processing on the fridge line.
iii) Equally no mention of their use is contained in any report from loss adjusters or forensic scientists engaged to investigate the fires in October 2005 and December 2006.
iv) There is no reliable evidence that Mr. Blake or Mr. Wall in fact saw any plasma guns let alone thereby appreciated what they were or otherwise hoisted in their significance from seeing them in use.
- Plasma cutters were mentioned by Environcom only twice. First was the telephone notification of the theft of a plasma cutter and generator in November 2004. This was not said to be associated with the processing line. In the event the claim was never pursued despite the despatch of a claim form. Even if Mr. Blake knew what a plasma cutter was (which I accept he did not), I am not persuaded that he would thereby reasonably have deduced that Environcom might be using a form of hot work on the fridge line. Second it was identified in the fire risk assessment dated October 2006 as a possible source of ignition. But this was never sent to Miles Smith (or requested by underwriters or their surveyor).
- In the alternative, Environcom pleaded that Miles Smith failed to make reasonable enquiries about the use of plasma cutters. By way of a threshold point I reject the submission that, even if specifically asked about the use of plasma cutters, Environcom would have failed to respond by revealing their use. Those at Environcom may not have hoisted in the risk to be associated with the use of plasma cutters in way of the insulation in recycled fridges (and in particular pentane fridges). But there is no evidence to support the proposition that Environcom would, if asked, have failed to reveal their use, let alone have deliberately suppressed the fact.
- Nonetheless I am unable to accept the proposition that Miles Smith had a duty to inquire about their use (or even hot work as such):
a) It is important to avoid hindsight in this context now that the dangers involved in the use of plasma cutters on Environcom's line, particularly in recycling pentane fridges, is only too apparent. Indeed, it has to be remembered that there would be a whole range of topics on which brokers might properly regard it as appropriate to ask questions and it would be unrealistic to focus on the one element which thereafter emerges as the rogue element.
b) The brokers had no technical expertise in the field of fridge recycling. They could not be expected to comprehend more than the general industrial process involved. Albeit the client had to be properly advised it remained the client's task to identify detailed processes. For yet more information the underwriter could be expected to ask for further detail or rely upon his own appointed surveyors.
c) Reasonable inquiries would primarily involve site inspections in the company of representatives of Environcom able to provide information about the process as required. These were duly undertaken by Mr. Blake on two occasions and by Mr. Wall once. In addition Mr. Ifould attended on three occasions.
d) The minutiae of the process (such as the removal of bolts holding the compressor) was not discussed. It would not occur to Miles Smith to ask about the mode of removing bolts where difficulties emerged from time to time let alone the use of plasma cutters.
e) This must be all the more so where, as I accept, the use of plasma guns for such a purpose was a unique feature of the Environcom process as compared with the whole of the remainder of the specialist fridge recycling industry.
The question is not one in my judgment which must be posed in every manufacturing or demanufacturing process. Questions have to be tailored to the specific process. In short, I do not regard it as made out that it would ever have occurred to a reasonably competent broker to ask specifically whether plasma guns (or oxy-acetylene or similar hot work) were being used in Environcom's fridge recycling process.
- I turn to the first alternative submission that Miles Smith should have asked about the use or development of "heat". Here Environcom are on firmer ground in the sense that heat is, as explained by the experts, of paradigm interest to underwriters insuring against fire. It is not suggested that any such inquiry was made. But I am not persuaded that such a question would have unearthed the use of plasma guns. The probable (and largely accurate) answer would have been that heat was not used save for the Lesni facility for processing CFC gases and to some extent in the briquetting process. From Environcom's perspective the plasma cutters were a wholly incidental part of the process used only intermittently. In short their use was regarded as a trivial detail which need not be and was not mentioned in any written description of the process or mentioned to any surveyor.
- Equally the further alternative case that Miles Smith should have asked about "hazardous processes" even if made out would probably have resulted in an equally uninformative answer as regards plasma guns. Environcom did not regard their use as hazardous (leaving aside intermittent fires which were regarded as providing a remote risk and to which I will turn to as a separate topic). Certainly the penny had not dropped as regards the additional hazard presented by pentane fridges in which respect the hazard would have existed even absent the use of plasma cutters.
- This leaves outstanding the question whether in the event that Miles Smith had complied with its duty to give appropriate advice in regard to the duty of disclosure, the use of plasma guns would have been revealed by Environcom. I am not persuaded that it would. Environcom, as already stated, did not regard the use of plasma cutters as intrinsically hazardous or even as enhancing the risk of a claim on the policy. Environcom would still not have recognised their use as material.
Fire
- I turn now to the question of fires. The focus here was the non-disclosure of two matters:
a) the regular ignition of insulation by the plasma guns;
b) the outbreak of a fire in March 2007.
It is accepted that Miles Smith did not advise Environcom in terms that fires (whether significant or not) were discloseable and that Miles Smith did not ask Environcom in terms at the time of renewal preparations in May 2007 whether any further fires had occurred in addition to those in October 2005 and December 2006.
- The first point here is the submission by Miles Smith that it must have been perfectly obvious to a competent business man like Mr. Hamilton who was responsible for obtaining insurance cover against the risks of fire that the fact of fires was a material matter requiring disclosure. This submission was based on the following considerations:
a) From an early stage Mr. Hamilton had been made aware of the need for a fire risk assessment, as recommended by Mr. Moss, "to identify any hazardous processes, the controls to reduce fire risk, adequacy of fire escape routes, emergency lighting requirements and the suitability of fire escape procedures";
b) This requirement was reiterated in a survey conducted for the purposes of liability cover by Mr. Ifould in February 2006;
c) Miles Smith pressed Environcom for confirmation that the suggested "risk improvements" had been implemented.
It is suggested that it should have been clear that it was "implicit" against this background that Environcom were being advised to disclose any fires.
- I am unable to accept this conclusion:
a) Having invited Environcom to undertake risk assessments, Miles Smith never asked to see them let alone suggested passing on their content to underwriters;
b) If, as happened to be this case, the client assesses the fire risk as low or remote, it is far from a necessary implication that disclosure of any fire, however insignificant in terms of period or damage, must be disclosed;
c) The room for misunderstanding is exemplified by the fact that, although Mr. Ifould was recommending a fire risk assessment in respect of liability cover, it was even Mr. Wall's evidence that, as far as he was concerned, outbreaks of fire were not arguably material from the liability underwriter's point of view.
I accept the view of Mr. Wood that Miles Smith should have made it absolutely clear that all outbreaks of fire were material (whether or not resulting in damage below the excess or even no damage at all) and should be disclosed. In any event as part and parcel of their duty to elicit material information, Miles Smith should have asked specifically about any outbreaks of fire at the time of renewal.
- Miles Smith nonetheless submit that even if appropriate advice had been given or pertinent questions asked, Environcom would still not have disclosed the small but regular outbreaks consequent on the use of the plasma cutters. I disagree. This phenomenon was evidenced by short statements taken from three employees of Environcom by Messrs. Burgoynes in the course of their investigation into the final fire. It appears that instructions were given as to the best method of extinguishing such fires. Importantly these statements included one from Mr. Login who was the person to whom Mr. Hamilton would have turned for technical information. Indeed Mr. Login states that he was in the process of purchasing a hose reel to reduce the number of fire extinguishers being used up in the process. Any inquiries made of Mr. Hamilton about fires however insignificant would inevitably have been passed on to Mr. Login. In my judgment, if asked, he would have been fully forthcoming about the phenomenon and indeed the source of ignition.
- It was also submitted by Miles Smith that appropriate advice and inquiry would not have unearthed the March fire. In this regard three particular matters are relied upon:-
a) First, Mr. Ifould's third survey took place on 27 March 2007 only 12 days after the latest fire. He was informed that a full fire risk assessment had been carried out but no mention of the fire (or indeed any other outbreaks) was made;
b) Second, on 17 April 2007, Mr. Wall sent an e-mail to Mr. Hamilton in the run up to the renewal of the property insurance asking for details of "any additional procedures in place to prevent further losses" by reason of fire.
c) Third, it is contended that Mr. Moss actually did ask when conducting his survey in July 2007 and yet got a negative answer.
- As regards the last point I am not satisfied that Mr. Moss made any specific inquiry about additional fires. This was premised solely on his "standard practice". As to the other points:
i) It has to be born in mind that the whole premise to this issue is that Environcom had not received any adequate instruction as to their obligations for disclosure;
ii) The emphasis on a fire risk assessment imported with it a focus on preventing the spread of fire rather then its outbreak;
iii) The last communication from Miles Smith requesting information was expressly directed at additional procedures to prevent losses with a view to negotiating a lower premium: indeed the response from Environcom identified various steps taken to improve the speed and effectiveness of extinguishing fires rather than inhibiting their outbreak.
- I am fully persuaded that if questions relating to the occurrence of fire had been asked against the background of sound advice on disclosure, Miles Smith would have received a full and frank response. This leads back to a point made earlier. Putting aside the March 2007 fire, disclosure of the intermittent fires would itself also had led inevitably to the emergence of the use of plasma guns.
Summary
- It follows that I can summarise my conclusions on this part of the case as follows:
a) Miles Smith failed to give adequate advice to Environcom as to their disclosure obligations.
b) Miles Smith failed to take adequate steps to elicit information requiring disclosure.
c) If Miles Smith had complied with their obligations:-
i) the use as such of plasma cutters as a part of the recycling process would probably have remained undisclosed.
ii) But the existence of regular small fires (and their association with the use of plasma cutters) and the fire on the 14 March 2007 would probably have been disclosed.
24 May 2007 fire
- I must accordingly go on to consider what, if full disclosure had been made, the chances would have been of Environcom obtaining insurance cover and on what terms. But before doing so I must deal with a discrete issue relating to the outbreak of fire on the eve of the renewal. This initially focussed on the question whether the renewal of cover by Woodbrook was in fact effected on 24 May or only on 25 May as a result of alleged delays by Miles Smith. This in turn was said to result in a ground of avoidance caused by that delay. However this dispute, whilst engendering a lot of forensic heat, largely petered out. The residue of the point was the contention by Environcom that the delay somewhat weakened its negotiating position during the settlement negotiations with underwriters.
- Miles Smith unquestionably left matters to a very late stage. The problem originates from their unwise decision not to disclose to their clients Woodbrook's unwillingness to renew as announced in their letter of 2 May 2007. In the result there was understandable delay on the part of Environcom in responding to Miles Smith's request for information about "additional procedures" until 16 May. It was only this response which appears to have convinced Woodbrook to offer renewal on fairly stringent terms at the last minute.
- The key factual issue was whether Miles Smith communicated Environcom's acceptance of Woodbrook's terms during the late afternoon of 24 May 2007. In my judgment, Environcom have failed to establish that no such communication took place until the following day. I find that the sequence as suggested by Miles Smith was indeed as follows:
i) At 16:47 during a call from Miles Smith to Mr. Hamilton, Mr. Wall was instructed to proceed with the cover proposal at a premium of £104,000.
ii) At 16:59 on returning from lunch at a local restaurant Mr. Lee called Woodbrook to confirm Environcom's order.
iii) At 17:04, Mr. Wall sent an email to Mr. Hamilton to confirm the instruction given to Woodbrook.
- It is true that some of the contemporary material is consistent with renewal being only accomplished on 25 May. This is perhaps not surprising given the offer of terms at the end of the business day on 24 May. But in my judgment there is no satisfactory alternative explanation to the call at 16.59 or the e-mail at 17.04.
- But this issue was all somewhat by the by. The more important point is that Environcom went on to submit that despite the unwillingness of Woodbrook to quote, Miles Smith insisted on seeking to press for a change of heart without looking elsewhere or allowing Environcom to engage alternative brokers. In this connection it was submitted that:
i) Mr. Wall's evidence that he approached various underwriters on his return from holiday on 8 May was not to be believed.
ii) Mr. Lee's evidence that he approached yet other underwriters in mid-May was not reliable.
In reality, so the argument ran, if any approach was made by them to any other underwriters this only occurred on or after 24 May solely for the purposes of seeking to replace Woodbrook on more advantageous terms.
- This submission (which obviously trespassed on the issue of insurability to which I must revert) was all swept up with the contention that a number of purportedly contemporaneous documents in Miles Smith's file were not contemporaneous at all but were created later in February 2008 to bolster the case of want of insurability. This was an issue raised at an unsatisfactorily late stage. That said Mr. Wall and Mr. Lee were cross-examined at some length on the topic. Having heard their evidence, Environcom fell a long way short, in my judgment, of satisfying the heavy burden of proof required to support these serious allegations and I reject them.
Insurability
- It was Miles Smith's case that in the event of proper disclosure of the fires Environcom would have been unable to obtain cover from Woodbrook or from any other group of underwriters. Environcom's case on this aspect was that there was a realistic and substantial prospect of obtaining cover and that they are entitled to recover in respect of the loss of that chance: Allied Maples Group Ltd v. Simmons & Simmons [1995] 1 WLR 1602.
- In this respect it was submitted by Environcom as follows:
i) Either Environcom would have proposed or underwriters would have insisted on a range of risk improvements for the 2007/2008 year:
a) the cessation of any use of plasma cutters.
b) the cessation of any throughput of pentane fridges.
c) the installation of a fire suppression system.
ii) Woodbrook or alternatively another insurer would have offered cover on that basis and Environcom would have accepted such insurance together with the required premium and other terms.
iii) Such cover would not have been impeachable due to non-disclosure of factors relating to Environcom's Waste Management Licence.
iv) The fire in September 2007 would still have occurred and thus Environcom would have sustained an insured loss recoverable against underwriters: alternatively, if the effect of the risk improvements as proposed or required would have prevented the occurrence of the fire Environcom would still be entitled to recover damages reflecting the financial loss that would thus have been avoided.
Miles Smith challenged each and every step of this argument.[6] Even allowing for the fact that in embarking on the hypothetical task of assessing the chance of obtaining cover any difficulty with discerning the prospects of success should count against Miles Smith (see Mount v. Barker Austin [1998] PNLR 493), nonetheless, in my judgment, the stance of Miles Smith was fully justified for the reasons set out below.
- There is one potential area for uncertainty I must mention in passing. The debate in regard to obtaining cover centred on the prospects in the run up to the renewal in May 2007 and in particular in the wake of the March 2007 fire. Indeed it would have been the enhanced reluctance of Woodbrook to renew after that fire that, it is claimed, would have been the catalyst for further investigation. Furthermore the primary source of any information about ignition which might have been provided to Mr. Hamilton in response to Miles Smith's inquiries was Mr. Login. Yet Mr. Login did not join Environcom until September 2006. In the result any questions to him whether directly or indirectly about the incidence of fires would probably not have been posed in any event until some time in May 2007.
- However there was the potential complication that appropriate advice from Miles Smith might have led to someone else (perhaps Mr Milliken) revealing to Mr Hamilton the regular ignition of the insulation much earlier, leading in turn to the discovery of the plasma guns. But this scenario, speculative in itself, would have required an impossibly vague reconstruction of events in terms of earlier disclosure, earlier fires, earlier risk improvements and earlier terms of insurance cover over a three year period. (It would also have given rise to variations on the theme of many of the matters discussed below.) In my judgment it is appropriate to put to one side any such conjecture. Indeed, sensibly in my judgment, a reconstruction along these lines was not put forward let alone pressed by Environcom.
- Thus in considering the impact of a proposal for further risk improvements, the starting point has to be Woodbrook's unheralded refusal of renewal terms in early May 2007. This was expressly attributable to the adverse claims experience arising from the October 2005 and December 2006 fires. The stance was repeated on 22 May in an email expressing scepticism as to whether matters could be improved. If, in addition, disclosure had been made of the use of plasma cutters and the incidence of further fires during the run up to renewal, it is a clear inference that Woodbrook, putting the matter at its lowest, would have been even more unwilling to offer terms. Furthermore, so far as other replacement underwriters are concerned, the disclosable fact of refusal by Woodbrook would have been a further factor weighing heavily against the provision of cover.
- As Environcom conceded, the reality was that Environcom would have needed to adopt a proactive role in obtaining any offer of cover. This, it was accepted by Environcom, would necessarily include making proposals for reducing, if not eliminating, fire risks. The proposals relied upon underwent a substantial degree of development during the trial. As finally presented, I understood Environcom to assert that the process would have been as follows:
a) a further risk survey would be undertaken;
b) this would be followed up by a survey by a consulting engineer;
c) this in turn would reveal the reduction in fire risk that would be associated with the improvements referred to above;
d) Environcom would then canvass the insurance market on that basis.
- The burden is on Environcom to establish, at its lowest, a realistic chance of such a sequence of events. In doing so I envisage very great difficulties facing Environcom:
i) Environcom were scarcely proactive in their earlier responses to fires. Even Mr. Login's October 2006 risk assessment appears to have remained undisturbed at all times thereafter. Certainly no call for help was put out (which Burgoynes had suggested to Woodbrook was a sensible idea from Environcom's perspective even after the 2005 fire).
ii) Yet further fires occurred not only on 24 May but also on 6 June, 10 July and 6 September. Still no steps to improve the fire risk situation were undertaken by Environcom even in the face of a 20% co-insurance clause.
iii) There is also the question whether the penny would have dropped during the suggested process of inquiry in regard to the potent mix of plasma cutters and the recycling of pentane fridges. Even after the October 2005 fire was revealed as having been attributable to the ignition of the pentane (albeit in a report to underwriters not disclosed to Miles Smith or Environcom) that well-known firm of consulting scientists made no suggestion that pentane fridges be eliminated from the recycling line.
iv) Further there is the fact that despite having investigated fire suppression systems in the summer of 2006, the board were not only uneasy about the cost but also as explained by Mr. Milliken unconvinced that such systems would in fact be effective for the kinds of fires that were being experienced.
v) Leaving all that aside the period necessary to accomplish the process suggested would have rendered it unworkable. Even the time needed to arrange and undertake visits to the site and the time needed to prepare and deliver reports for both the risk surveyor and the consulting engineer would be measured in terms of months. Thus stage one alone would have overrun the renewal date. If time is then added to consider and implement the recommendations, including the purchase and installation of a fire suppression system, the whole concept loses practical reality.
In short I do not regard it as made out that there was any realistic chance of the fire risk improvements that Environcom asserts might have been offered to underwriters would in fact have been proposed to underwriters let alone in due time.
- But on the assumption that such a package would have been tendered, the next question is whether there is a realistic prospect of Woodbrook (or some other underwriter) quoting on that basis (if necessary holding Environcom covered pending the completion of investigations, the termination of the use of plasma cutters, the diversion of pentane fridges elsewhere and the installation of a fire suppression system).
- So far as Woodbrook is concerned, I have the gravest doubts. There is no evidence adduced by Environcom that cover would have been offered let alone on what terms. The circumstantial evidence is all one way :-
a) Woodbrook had made substantial payments in respect of fires in 2005 and 2006 totalling an order of magnitude greater than the premium.
b) Prior to any inquiry by Miles Smith, Woodbrook had already given notice that renewal terms would not be offered.
c) Even after notification of the fire risk improvements made by Environcom, the initial reaction from Woodbrook on 22 May 2007 was to reject renewal.
d) It is true that Miles Smith managed to persuade Woodbrook to change heart in the light of actions taken "to minimise the fire risk", but the further fire would have revealed that the measures had not in fact grappled with the underlying problem.
e) If at this stage disclosure of the March fire and the recurrent fires attributable to the plasma guns had been made, it must be wholly improbable that the outcome would have been other than a further hardening of that attitude.
f) Indeed the scale of the proposed improvements would, in my judgment, have heightened concerns about the overall fire risk and given added emphasis to the very poor record of disclosure that had been exhibited by the assured.
g) Absent a significant and successful trial period, I doubt that there was in fact even the slightest chance of obtaining an offer of renewal from Woodbrook bearing in mind that some or all of the further fires which occurred on 24 May, 6 June, 10 July and 6 September may, on Environcom's case, have been attributable to factors other than pentane and plasma guns.
- As regards any other underwriters, the position was no better. Indeed realistically they were, if possible, even more forlorn:
a) Any attempt at placement would only be undertaken if and when Woodbrook had declined cover (even if as leader only). This would further confine the time available.
b) The other underwriters would have little or no experience of Environcom's activities save that substantial payments in respect of fire claims had been made.
c) The prospects would inevitably have been further diminished by the necessary disclosure of Woodbrook's refusal to renew cover.
d) Such inquiries as had been undertaken by Miles Smith suggested strongly that there was little, if any, interest from other underwriters let alone those specialising in the waste management field.
e) The cover required was substantial, namely £8.5 million. There was no evidence of any alternative insurers being able, let alone willing, to act as lead underwriter with a percentage of say 30%.
f) By the same token the indications of available capacity rendered the prospects of even finding an adequate following market as remote.
- Let me assume, despite all this, that an offer of cover would have been forthcoming. The next issue is to consider the prospects of Environcom accepting the terms. A number of considerations arise at this stage:
a) The offer might not have been forthcoming prior to the date for renewal. It might not have been accompanied with "held covered" terms pending the outcome of the surveys and subsequent risk improvements. Rather than continue operations uninsured the decision might have been taken to abandon operations and install a new recycling system not having any of the defects in the existing system (as indeed was accomplished elsewhere after the fire).
b) Whilst a warranty in regard to plasma guns would have been easy enough to comply with, any warranty in regard to the avoidance of pentane fridges would have presented formidable difficulties since the fridges concerned were often not marked. Since any breach of warranty need not be causative, the risk of cover being avoided would probably have been unacceptably high.
c) The costs and expense of the revised form of operations would have been substantial:
i) the cessation of recycling pentane fridges would at the time have involved the loss of 15% of turnover: yet the need to have an effective pentane recycling system was becoming increasingly important as CFC fridges were phased out.
ii) Environcom had had already sounded out the cost of fire suppressant systems and had concluded that the cost was not readily justified.
d) There is then the question of premium. The premium required for renewal by Woodbrook was £100,000 (a factor of 4 greater than the premium of 2004). The premium required would inevitably have been further substantially increased. Perhaps more importantly Woodbrook had already insisted on a co-insurance clause. This in effect left Environcom as self insured for 20%. A further substantial increase in that percentage was likely.
Against that background, the prospect of Environcom accepting such insurance terms as might have been offered must also be regarded as remote.
- The next proposition that has to be considered is whether any such cover would in any event have been potentially impeachable due to non-disclosure of factors relating to Environcom's Waste Management Licence, a point pleaded by Woodbrook during the course of these proceedings. The primary focus of this allegation was the contention that Environcom had no licence to recycle pentane fridges at all, only those with CFC's.
- Table 1.1 of the relevant licence permitted the storage of waste refrigeration equipment "pending inspection and processing" up to 5,000 units (later increased to 33,000 units). In addition storage of waste electrical and electronic equipment was permitted up to 57,000 tonnes. The Table also identified the recycling of waste refrigeration equipment as a specified operation but that the treatment of waste electrical and electronic equipment were not to be undertaken.
- Table 1.2 provided a table of "permitted quantities of waste". There is clear reference to the relevant classifications for CFC fridges, namely 16 02 11* and 20 01 23*. These two categories were bracketed together as a separate group matching the permitted number of units for inspection and processing of refrigeration equipment. The relevant classification for pentane fridges was 20 01 35*. In contrast this was included in the "permitted quantities" by way of storage only of 57,000 tonnes.
- It was Environcom's case that the licence permitted the recycling of pentane fridges. I do not think any fair reading of its terms leads to such a conclusion. In my judgment it clearly restricts recycling to those fridges with chlorofluorocarbons, HCFC and HFC. I accept that there is some ambiguity as to whether storage of pentane fridges was permitted but this is of no immediate relevance.
- I am fortified in this conclusion by four considerations. First, the relevant Environment Guidance Manual requires steps to be taken to eliminate hydrocarbon feed in the absence of an inert atmosphere. Yet by definition such was not the case. Second, examples were furnished by Miles Smith of waste licences in similar terms for other facilities where a specific amendment was sought and obtained to permit processing of pentane fridges. Third, it is also pertinent that Table 12.1 of the licence states in terms that HC refrigerants were not a permitted residual material. Fourth, there is no indication in Environcom's working plan or in Environcom' reports to the Environment Agency of any proposal or intention to recycle pentane fridges.
- It follows that Environcom was conducting its operations in breach of its Waste Management Licence. Was this a material matter for disclosure? In my judgment it was (and certainly no convincing evidence to the contrary was called by Environcom):
a) As a matter of common sense any continuing breach of environmental regulations may well be material to the risk and such must be more the case where the regulation of which the assured is in breach is intended to reduce the risk of fire;
b) Furthermore, the licence includes a requirement for a working plan. The plan may incorporate such topics as fire prevention and control under para. 5.2. Any change to the plan in that respect had to be notified to the Environment Agency together with a risk assessment as to the effect of the change. The change could not be implemented without the approval of the Agency.
c) It follows in my judgment that the scope of the licence and compliance with it are probably material to the risk.
- Were Environcom aware of the limitations to the licence as far as pentane fridges were concerned? That answer must be a qualified "Yes". Although such awareness was denied:-
a) The whole plant, purchased on a turnkey basis, was designed to recycle CFCs;
b) Environcom's own description of the plant involved the capture of CFCs;
c) The express terms of the licence in this respect were, in my judgment, clear;
d) Indeed the Appendix B report annexed to the licence only encompassed CFC fridges and the entire throughput was duly entered;
e) The Working Plan prepared by Environcom only covered CFC's.
It follows in my judgment that, even if cover was obtained despite the additional disclosure discussed above, the resulting policy was at it lowest highly vulnerable to avoidance for further non-disclosure. Would underwriters be likely to take the point? Again the answer must be yes given the reaction of Woodbrook.
- One final point remains. Even if there was a chance of obtaining cover, Miles Smith contend that, because by definition it was a precondition of renewal that there be no deployment of plasma cutters and no throughput of pentane fridges, the September fire would not have occurred. Indeed I am not sure that Environcom argued to the contrary. Certainly there was no disclosure of any investigation by Environcom nor any evidence called to deal with the issue
- In my judgment, as a matter of probability, this view must be right:
a) Whilst no doubt frictional heat could develop in the shredders, the only manifest and persistent source of ignition were the plasma cutters. Their use led to regular ignition of insulation protruding from the carcass of refrigerators.
b) The contemporary evidence from those actually working on the line suggests an ignition associated with the use of a plasma cutter;
c) Again, although there was a wealth of combustible material in the form of insulation (including in dust form), the most inflammable material present from time to time in the system was pentane.
d) The combination of plasma guns and pentane presented a high level of risk. Indeed, such would have been the catalyst for the warranties offered to encourage renewal.
e) The underwriter's surveyor from Messrs. Burgoynes made his final report on the 2005 fire in September 2006. He concluded that the fuel involved was pentane (which was not being removed because of design defects).
f) Little is available as regards the September 2007 fire. But in their presentation to obtain insurance cover for their new recycling operation, Environcom's brokers confirmed that it was probably (albeit not conclusively) attributable to a plasma cutter, a view shared by the loss adjusters.
- It follows that, if Environcom is correct in its analysis, even if cover would have been obtained, it would not have been called upon as no loss by fire would have been sustained. Yet the whole basis of Environcom's claim is that, but for the breach of retainer by Miles Smith, Environcom's claim against underwriters would not have been impaired. The claim was not pleaded in any alternative way.
- This is a further obstacle to Environcom's claim. In my judgment, even if pleaded, the loss claimed is not of the kind or type which Miles Smith ought fairly to be taken to accept liability: see The Achilleas [2009] 1 AC 61. Even taking the issue of remoteness by reference to more traditional lines, I would not be persuaded that the loss sustained was within the reasonable contemplation of the parties as likely to result from the breach of retainer. Put another way, if no fire would have occurred, it follows that the loss sustained by Environcom was not caused by Miles Smith. The fire and consequential loss was attributable to Environcom's failure to identify and enforce appropriate fire precautions by way of changes in the whole working process without which the process was effectively uninsurable.
Conclusion
- Even taken individually these factors demonstrate that the prospects of obtaining cover are purely speculative. Taken together that conclusion is further reinforced. Thus I conclude that, despite breach of duty on the part of Miles Smith, Environcom's claim must be dismissed. But in doing so I would like to express my grateful thanks to both counsel for the skill in which they presented their respective cases.
