Solvent storage and the burnt warehouse
Precision Coatings Ltd, a commercial paint contractor with £3.2m turnover, renews its commercial combined policy through a broker. The proposal form asks: 'Do you store flammable liquids or solvents on site?' The broker, who completes the form during a 20-minute call, ticks 'No'. In fact Precision keeps 600 litres of acetone and thinners in a bunded store, a fact the operations director mentions to the broker but the broker does not pass on. The underwriter accepts at a standard premium of £18,500. Six months later a fire in the spray booth destroys the building and stock; the claim is £740,000. The insurer discovers the solvents, treats the answer as a qualifying misrepresentation and seeks to avoid the policy and refuse the claim. The directors say they relied on the broker and assumed the form was correct. The insurer's underwriting manual shows it would have imposed a £12,000 additional premium and a hot-work warranty for solvent storage.
1. Advise whether the insurer can establish a qualifying misrepresentation and distinguish between deliberate or reckless conduct and careless conduct.
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Framework. This is a commercial policy, so the Insurance Act 2015 and the Consumer Insurance (Disclosure and Representations) Act 2012 do not supply the consumer regime. The relevant test is whether there was a qualifying misrepresentation: a false statement of fact that was material to the risk and that induced the underwriter to enter the contract on those terms.
Materiality and inducement. A prudent underwriter would plainly want to know about 600 litres of acetone and thinners; the underwriting manual proves that this insurer would have charged more and imposed a hot-work warranty. The 'No' answer was therefore material and induced the standard terms. The broker completed the form, but the operations director knew about the solvents and had told the broker. On the facts, the knowledge is likely attributable to Precision because the broker was acting within the scope of the placement. Precision cannot simply hide behind the broker if it gave inconsistent information.
Conduct. 'Deliberate or reckless' requires that the insured knew the statement was false or did not care whether it was true or false. The directors may not have intended to mislead, but the operations director knew the true position and the proposal was signed or approved. That is at least careless. If the broker deliberately suppressed what he was told, that may also be reckless. A careless finding is the more realistic starting point unless evidence shows conscious disregard.
2. If the misrepresentation was careless, explain the remedy (a) if the insurer would have declined the risk outright and (b) if it would have charged £12,000 extra and imposed a hot-work warranty, with the fire caused by welding without a permit.
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Careless misrepresentation. The insurer cannot simply avoid and refuse everything. The court applies the proportionate remedy in the Insurance Act 2015: it asks what the insurer would have done if the truth had been told.
(a) Would have declined outright. The contract is treated as if it had not been entered into. The insurer may avoid it, but must return the premium. The claim is not payable. The insurer does not need to show that the fire was connected to the solvents, because the test is what it would have done at underwriting.
(b) Would have charged more and imposed a warranty. The contract is treated as if it contained the terms the insurer would have imposed. Two consequences follow. First, if the hot-work warranty was breached at the time of the fire, cover is suspended under the Insurance Act 2015 and the insurer may refuse the claim for that period. The fact that welding without a permit caused the fire strengthens that outcome. Second, if the warranty was not breached, the claim is reduced proportionately to reflect the premium shortfall: roughly £740,000 × (18,500 ÷ 30,500) = about £448,850, subject to the exact policy limits and any excess. The insurer must still pay the reduced amount and must not double-count the same prejudice.
3. What claims might Precision have against the broker, and what practical steps should the insurer and broker take now?
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Broker liability. The broker owed Precision a duty to exercise reasonable skill and care when completing and checking the proposal. The operations director had told the broker about the solvents, so the broker either failed to record the information or failed to correct the 'No' answer. Precision relied on the broker's expertise. If Precision suffers an uninsured loss, it can claim damages in negligence or for breach of contract. The measure is the loss caused by the broker's failure, subject to reduction for contributory negligence if Precision failed to check the form or gave inconsistent instructions. Precision may also recover any additional premium it would have paid anyway, but not a windfall.
Insurer's position. The insurer should preserve the proposal, call notes, underwriting manual and correspondence, and make a clear decision on the remedy. If it alleges deliberate or reckless conduct, it should document why. It should also consider whether the broker breached any agency or delegated-authority terms; if the broker was the insured's agent, any direct claim against the broker is less straightforward, but the insurer can still report conduct issues.
Practical steps. Notify the broker's professional indemnity insurer, avoid admissions, and consider whether the claim can be settled proportionately. Precision should be told in writing what evidence is needed to challenge the broker's account. Any complaint about the broker should be routed through the broker's complaints procedure and, if eligible, the Financial Ombudsman Service.