In Nicholas G Jones v (1) Environcom Limited (2) Environcom England Limited and MS PLC t/a Miles Smith Insurance Brokers  EWCA Civ 1152, the Court of Appeal dismissed the insured's appeal against a decision of Mr Justice David Steel (on which we reported previously).
At first instance, David Steel J concluded that, although the insured's broker had negligently failed to advise the insured properly on its disclosure obligations, the insured was without recourse because the nature of its business operation made it uninsurable.
On appeal the insured argued that, had its broker advised it of its disclosure obligations properly, the insured would have taken steps to improve its risk profile, thus preventing the original fire loss. The appeal was rejected on procedural grounds but is notable for the way in which the insured attempted to reformulate its case.
The Defendants ("Environcom") ran a recycling business which involved extracting and destroying chemicals in refrigerators. Some refrigerators contained a highly flammable substance called pentane. As part of the recycling process, the insured often used plasma cutters which operated at very high temperatures and were an ignition source.
Until May 2008, Environcom had in place property damage and business interruption insurance with various Lloyd's syndicates ("Woodbrook"). The insurance was placed by brokers, MS PLC ("Miles Smith"). Environcom submitted insurance claims in respect of two fires at its plant in 2005 and 2006, but a number of smaller fires were not disclosed to Woodbrook.
In early May 2007, Woodbrook said they were unwilling to renew Environcom's insurance because of the two fire claims, but Miles Smith eventually persuaded them to do so (albeit for a higher premium). Several relatively minor fires occurred after renewal. Then, on 16 September 2007, a major fire destroyed all of Environcom's plant and machinery. The fire was ignited by a plasma cutter and fuelled by pentane.
Woodbrook avoided the policy on the ground of Environcom's failure to disclose its use of plasma cutters and numerous small fires, and sought a declaration of non-liability. Environcom counterclaimed for an indemnity under the policy. It also joined Miles Smith as a third party alleging that Miles Smith negligently failed to advise Environcom of its disclosure obligations and make the necessary inquiries to discharge those obligations, resulting in a failure of insurance cover.
Woodbrook and Environcom settled before trial, but the proceedings against Miles Smith continued.
First instance decision
David Steel J found that Miles Smith had failed to give adequate advice to Environcom on its disclosure obligations. He also concluded that Miles Smith had failed to take adequate steps to elicit information requiring disclosure. If it had done so, the existence of regular small fires (and their association with the use of plasma cutters) would probably have been disclosed. David Steel J nevertheless held that Environcom could not recover from Miles Smith because, inter alia:
- Environcom had failed to establish that, had it been properly advised, it would have taken risk reduction steps (such as eliminating use of plasma cutters and recycling of pentane refrigerators) that would have been a precondition to cover.
- Even if those steps had been taken, there was no realistic chance Woodbrook would have offered renewal terms.
- Even if renewal terms had been offered the terms would have been so onerous that the prospect of Environcom accepting them was remote.
Finally, addressing a point which was only raised for the first time in closing submissions, the Judge concluded that even if cover was obtained, the preconditions to cover would probably have prevented the September 2007 fire and Environcom would not, therefore, have had to claim under its insurance. David Steel J noted that Environcom had not pleaded that the fire was caused by Miles Smith’s breach of duty, but said that even if it had, such loss was too remote and was not, therefore, recoverable.
Environcom's appeal against David Steel J's decision centred on this final point.
Court of Appeal
On appeal Environcom challenged the first instance decision on two grounds, arguing that:
- David Steel J erred in finding that there was no realistic chance that the fire risk improvements would have been proposed to underwriters.
- Had Miles Smith not breached its duties, and had Environcom taken steps to improve its risk profile, then the fire on 16 September 2007 would not have occurred at all (the "no fire" point).
Lord Justice Rix, giving the leading judgment in the Court of Appeal, observed that the "no fire" point represented a change in Environcom's case. Previously, Environcom had alleged that Miles Smith's negligence caused the failure of insurance cover, but it now argued that Miles Smith's negligence caused the fire itself.
As this new argument had not been pleaded by Environcom at trial and was only developed late in the proceedings, the Court of Appeal first had to consider whether the "no fire" claim should be pleaded and, if so, whether Environcom should be permitted to amend its statement of case.
Rix LJ noted that Environcom had not amended its pleadings on duty of care, breach or causation to reflect its new case. Instead, it had attempted to squeeze the "no fire" case into its "failure of cover" case, with no attempt to reformulate these critical elements. He identified some of the complexities of Environcom's "no fire" claim:
- David Steel J's conclusions on the "no fire" argument were purely hypothetical, since one of his primary findings of fact was that, even if Environcom been properly advised, it would not have taken the necessary risk reduction steps.
- Environcom was uncertain as to whether its "no fire" claim was a claim for the loss of a chance.
- Environcom asserted that the "no fire" claim was capped by the amount of recovery which unimpeachable insurance cover would have produced, whereas Rix LJ considered that if the claim succeeded, the negligent broker would potentially be liable for the whole of the ensuing loss.
- The question of whether an insured can recover for business interruption losses under the contractual wording of an insurance policy may raise quite different issues from the question of a defendant's liability in negligence for financial losses.
- Contributory negligence will be relevant to any "no fire" claim, requiring an investigation into the parties' causative responsibilities.
Rix LJ concluded that the "no fire" case was "quite different" from Environcom's original case and raised a number of complex points. It was therefore necessary for Environcom to amend its pleadings. (Indeed, this was not disputed by Environcom). However, the Court refused to grant Environcom permission to amend at this late stage, concluding that it was "not in the interests of justice or fairness". Rix LJ said it was a "long-standing and fundamental principle" of the court that a new point not presented at trial may be raised on appeal only where there is no possibility of any injustice occurring. The question was whether, had the point been raised at trial, it might have affected the conduct of and evidence in those proceedings. Since the "no fire" case raised complex fact sensitive issues of mixed fact and law which had been neither properly pleaded nor analysed and would require a further hearing, it was not appropriate for appeal.
Finally, Rix LJ noted in obiter concluding remarks that Environcom's first ground of appeal created a factual hurdle which was difficult to surmount. He also observed that there was "much to commend" David Steel J's view that the fire loss was not within the reasonable contemplation of the parties as likely to result from Miles Smith's breach of duty, and therefore that Miles Smith did not cause the fire. However, Rix LJ stressed that it was not necessary for the Court of Appeal to decide this point and these comments were not part of his determination.
It is interesting that Environcom attempted to reformulate its case against Miles Smith as a claim for the fire loss, rather than a claim for failure of insurance cover. Although it dismissed the appeal on procedural grounds, the Court of Appeal did not rule out the possibility that such a claim might succeed, nor did Rix LJ consider there was any logical difficulty in running both arguments in the alternative.
However, in light of Rix LJ's obiter comments, an insured intending to advance a "no loss" claim may find it difficult to establish the necessary causal link between the broker's breach of duty and the loss. An insured considering advancing such a claim would need to give serious consideration to issues such as contributory negligence highlighted by Rix LJ.
The case remains a salutary reminder to insureds as to the burden of disclosure on them and to brokers of their obligations to explain the duty of disclosure to their clients, including asking questions to elicit information that the client ought to disclose.