A recycling company (materially represented) that its recycling was 80% aluminium, 20% iron/steel with small amounts of non-metals when in fact plastics and paper exceeded 50% of the recycling. It was held that the insurer had waived its right to rescind the policies because it failed to investigate information revealing a different story from that disclosed.
The insurer received several documents and communications consistently showing that the amount of paper and plastics processed by the insured was far greater than disclosed. This included the insured’s website indicating that paper and plastics were recycled onsite, the failure by the insured to answer some specific questions put to it, a three year old loss control report indicating the purchase and sale of “aluminium, glass and paper”, a photograph taken in connection with another policy showing large bales of cardboard in the insured’s yard, a three year old accountant’s estimate that paper sales comprised 35% of its business and other discrepancies.
It was held that the numerous red flags raised by the various reports and communications imposed a duty on the insurer to investigate further. Although their recycler insurance policy would normally not accept any business that recycled more than 15% paper, the insurer was held bound to its policy.
This US case is an example of particular circumstances that are unlikely to be repeated. The fact remains that an insurer cannot remain supine in the face of information contradicting what is stated by the insured and still issue the policy without further investigation. Waiver is not easily established in the face of a material representation by the insured but all risks must be assessed by good underwriting practices. There is no substitute for a thorough onsite inspection before issuing a policy to a potentially high risk business.