global insurance management

Legal decision impacting the use and content of standard documents (Jones v. Environcom)

Oct 06 2010

Legal decision impacting the use and content of standard documents (Jones v. Environcom).

Relevance – All regulated firms

Action required – Review communications to clients regarding the disclosure of ‘material’ facts.

Background - A recent case, involving an insurance broker in dispute with its client, provides an important reminder of the intermediary’s duty of care to its clients.

In the case of Jones v Environcom Limited the judge restated the broker's duty to inform clients of their disclosure obligations (and the potential consequences of any failure to disclose).

The judge confirmed the usual position that a broker has a duty to:

• advise the client of the duty to disclose all material circumstances (facts);
• explain the consequences of failing to do so;
• indicate the sort of matters which ought to be disclosed as being material or arguably material;
• take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention.

The Judge emphasised that if a new person became responsible for insurance matters in the client's organisation, the broker had a duty to ensure that the new person had the requisite understanding of the duty of disclosure.
The broker had argued that it had fulfilled its duty by sending various documents to the client which explained its disclosure obligations. In the view of the Judge:
"I am not persuaded that it is sufficient simply to rely upon written standard form explanations and warnings annexed to proposals or policy document."
Given that it is common practice for intermediaries to use standard statements, in their ‘Terms of Business’ (TOBA) document, to remind clients of their duties in respect of material facts, this could leave many intermediaries severely exposed. The Judge added:
"…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)."
This raises a significant practical problem for intermediaries who, in many cases, will have no discussion with the client at renewal but will simply send out a standardised renewal invitation.

Additionally, while this case relates to a commercial client, we have already seen this judgement read across to a consumer case so it seems there is little wriggle room on this issue.

Suggested action

Clearly, for larger commercial cases where face to face discussion take place, broking staff need to be made aware of the implications of this case, specifically, the need to explain the issues, and to make enquiries about incidents or changes that may be material.
For smaller commercial cases it will be neither practical, nor economic, to check that a client has understood its disclosure obligations. Therefore, for these cases, brokers will simply have to accept the risk inherent in dealing with clients remotely.

So, in practical terms, you should word any warning as carefully as possible and ensure that it is given sufficient prominence in the renewal invitation (not left in the TOBA). If you are not already going into the appropriate level of detail with your clients, we would suggest that something along the following lines may help to comply with the ICOB requirement although, as stated above, it still suffers by being a ‘written standard form explanation:’

‘Duty of Disclosure - Material Facts

Your Policies have been prepared on the basis of the information provided by you. It is important that this contains all facts which would be considered ‘material’. Under English Law, insurance contracts impose an onerous duty of disclosure on the Insured. It is your duty to disclose all material facts to Underwriters and you should not rely on casual observation of any material aspect of the risk, by your broker or other party, as satisfying this obligation.

A material fact is “Any fact which may influence an Underwriter’s Judgement in their assessment of a risk”.

Failure to comply with this obligation could prejudice your rights to recover in the event of a claim or allow Underwriters to void the Policy from its inception. The duty of disclosure is ongoing and applies from the moment discussion commences with insurers, prior to the issue of any policy document, throughout the period of insurance and at renewal. For your own protection, please adhere exactly to the Duty of Disclosure.

For example, you should disclose any:

• Incidents that would normally be covered by insurance whether or not you have made a claim
• Changes to business activities or processes
• Additions to buildings/premises or contents
• Changes to fire or security installations or protections
• Overseas trading
• Contractual liabilities &/or hold harmless agreements
• Criminal convictions, driving or other offences
• Health factors that may affect driving
• Hiring, borrowing or leasing of plant & equipment either in or out
• Changes to sums insured, especially increases

The list is not exhaustive.


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