Harrowgate Furniture Ltd: three tonnes of foam and a lapsed duty of fair presentation
Harrowgate Furniture Ltd runs a single-site upholstery factory in a 1970s industrial unit. Its combined commercial policy, placed through a broker on 1 March 2023, carries £2.4m for property damage, £900,000 for business interruption and a £5,000 excess. The total premium was £72,000.
The proposal asked: 'Are any hazardous or highly combustible materials stored at the premises?' The answer given was 'no'. It also asked for details of 'any prosecution, improvement or prohibition notice in the last five years', which was left blank.
Nine months later a fire destroyed the spray booth and part of the roof. The loss adjusts to £900,000. The loss adjuster finds (a) around three tonnes of polyurethane foam, well above the insurer's 500 kg guideline, stored against an external wall, and (b) an HSE improvement notice served 14 months before inception requiring improved dust extraction, with which the company had complied.
The underwriter says she would have declined the risk. Her manager says the underwriting manual permits acceptance with sprinklers and a 25% uplift in premium.
1. Did Harrowgate breach the duty of fair presentation? Identify what the company knew or ought to have known, and assess materiality.
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Yes, on both counts. Section 3 of the Insurance Act 2015 requires every material circumstance which the insured knows or ought to know to be disclosed to the insurer in a reasonably clear and accessible way, with sufficient information to put a prudent underwriter on notice.
Knowledge. Harrowgate is a company, so the knowledge provisions (ss.4–6) attribute to it what its senior management and the individuals responsible for arranging insurance actually knew, plus what a reasonable search of the information available to it would reveal. The production director plainly knew about the foam; the improvement notice came to the operations manager. Both were within the insured's knowledge.
Materiality is tested objectively: would the circumstance influence the judgement of a prudent insurer in deciding whether to take the risk, and if so on what terms? The foam far exceeded the insurer's own 500 kg guideline and sat against a wall in a building containing a spray booth. The HSE notice pointed to dust extraction problems. Either fact could influence a prudent underwriter. Compliance with the notice does not remove materiality - the fact of regulatory intervention is precisely what an underwriter uses to gauge management's attitude to risk.
Answering 'no' to the combustible materials question was also a positive misrepresentation, not a mere omission, and it was a question the company could easily have checked before answering.
2. Which remedy is available - avoidance or a proportionate reduction? Show the arithmetic and explain what the insurer must prove.
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Schedule 1 to the Act gives a menu of remedies; which one applies depends on what the insurer can prove it would have done had the truth been told.
Inducement first. The insurer must show the breach actually shaped this contract. The relevant evidence is the decision of the actual underwriter, not that of a hypothetical prudent insurer. Here she says she would have declined, but the manual permits acceptance with sprinklers and a 25% uplift. The insurer must resolve that conflict on the balance of probabilities, explaining how the manual is applied in practice and why this risk fell outside it.
If declinature is proved, the remedy is avoidance: the contract is voidable, the insurer refuses the £900,000 claim and returns the £72,000 premium. It cannot retain the premium, and because no fraud is alleged s.12 does not apply.
If only different terms are proved, both Schedule 1 remedies bite. The contract is treated as if it had included the sprinkler condition, but a condition precedent to liability can hardly be imposed retrospectively on a fire that has already happened. The workable remedy is therefore the premium one: the claim is reduced by the proportion the additional premium bears to the premium actually charged - £18,000 ÷ £72,000 = 25%. So £900,000 × 75% = £675,000, less the £5,000 excess, giving £670,000.
A realistic outcome is a negotiated 25% reduction, with avoidance pursued only if the underwriter's evidence survives challenge.
3. The company says its broker knew about the foam because a 2022 survey report was emailed to the broker's office. Does that change the analysis?
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It changes the target, not the outcome against the company.
The broker's state of mind is not automatically the insured's knowledge. Sections 4–6 attribute to the insured what its senior management and those responsible for the insurance knew; a broker is the insured's agent for placing the risk, but the Act does not treat every file note sitting in the broker's office as the insured's own knowledge.
However, the insured must carry out a reasonable search of the information available to it, and its broker's file is one of the first places that search should go. If the survey was emailed to the broker and never passed to the underwriter, the insured is not excused: a search that consists of asking the broker a vague question, in the face of a specific proposal question about combustible storage, is unlikely to be reasonable.
Practically, the insurer may still avoid or apply a proportionate remedy against the company, and the company may then have a claim against the broker for failing to pass on material information or for completing the proposal inaccurately. A direct claim by the insurer against the broker in negligence requires a separate assumption of responsibility and is much harder to establish.
Advise the client to secure and preserve the broker's file immediately - it will determine whether this is an insurance dispute or a professional negligence dispute.