Insurers’ Duty to Speak: Silence is not always golden


In Ted Baker v AXA [2017] EWCA Civ 4097 the Court of Appeal has for the first time considered the issue of whether and in what circumstances an insurer might be under a duty to speak during the claims process, ie is required to make its position plain in order to avoid being estopped from running certain procedural defences in due course. The Court of Appeal did not confine the duty to speak to insurance contracts but made it clear that the principle was of general application.

The dispute in question arose out of the sustained theft over a number of years of stock from Ted Baker’s distribution centre by a trusted employee. When the cause of the losses became apparent, Ted Baker duly claimed under its Commercial Combined insurance, in respect of which AXA was the lead underwriter, for both stock losses and loss of profit as a result of the thefts.

In a trial of preliminary issues centred around the coverage afforded by the policy the defendant insurers “lost on every issue” (CofA judgment para. [2]) having run a defence which “left “no stone unturned” and seemed to ignore all sense of proportionality” (Ted Baker v AXA [2014] EWHC 4178 at [19] per Eder J). At the subsequent trial of issues relating to notification, alleged breach of condition precedent and quantum, at first instance Eder J found in favour of insurers on breach of condition precedent (the non-provision of management accounts which had been requested by the loss adjusters) and quantum: essentially the finding was that it was impossible to find any single loss in the series of thefts which exceeded the policy, deductible on the balance of probabilities. What that means for business interruption claims of a similar nature is likely to be a matter of some debate.

The learned judge noted that: “I have to say that I do not reach this conclusion with any great enthusiasm having regard, in particular, to the facts that (i) as I previously concluded in the earlier trial of preliminary issues, the policy covered theft by an employee; (ii) there is no doubt that TB suffered substantial losses arising out of the thefts which I have held were carried out by JON who was, of course, one of TB's employees; (iii) such losses amounted, even on the defendants' experts' evidence, to some £2.16 million; and (iv) the legal costs apparently incurred by TB were in excess of £2.5 million even before the beginning of this trial.” Ted Baker v AXA [2014] EWHC 3548 at [175].

Ted Baker duly appealed. At the Court of Appeal, as it had been throughout, Ted Baker was represented by Tim Marland of Quadrant Chambers and Stephen Cogley QC, XXIV Old Buildings, instructed by Nichola Evans of Browne Jacobson LLP.

Although Ted Baker was ultimately unsuccessful in its attempts to reverse the judge’s findings on quantum, in reversing his decision on the condition precedent point the Court of Appeal addressed directly for the first time the circumstances in which an insurer might be under a duty to speak.

The factual scenario was that the loss adjuster appointed by insurers had, as was routine, requested a ‘shopping list’ of documentation which he required to substantiate the claimed quantum. One of the items on the list was copies of Ted Baker’s management accounts for the relevant years. Some of this documentation (although not the management accounts) would have been time-consuming and expensive to produce. Ted Baker, in concert with its broker, therefore took the position that it was not prepared to produce the documentation until either liability was admitted in principle or insurers confirmed that the costs of retaining accountants to produce the information would be covered by the Professional Accountant’s Clause (‘PAC’) in the policy.

The loss adjuster left matters stating that he would take instructions from AXA and revert. In the event he never did revert; the requests were not renewed and at no stage until AXA filed its pleaded defence in the case was the point taken by insurers that the failure to produce the requested documentation was a breach of condition precedent.

At first instance Eder J had held that, because the management accounts would have been easy to produce and because their production would not have required outside accountants to be involved, they were not covered by any ‘agreement to park’ production of material until the instructions of AXA were received and communicated by the loss adjuster and the defence based on breach of condition precedent succeeded.

The Court of Appeal disagreed. They agreed with the judge that there was no unequivocal agreement that production of the management accounts was parked, and agreed that those accounts were not covered by the PAC. They did, however, find that in circumstances where insurers knew that the insured regarded the production of all quantum documentation as parked pending resolution of liability issues, a duty to speak arose if that was not in fact the position as far as insurers were concerned. In staying silent and then subsequently seeking to take the point as a breach of condition precedent, AXA was acting with the requisite degree of ‘impropriety’ and the estoppel founded on breach of the duty to speak succeeded.

The importance of this judgment is that it establishes for the first time that there may be circumstances where an insurer is obliged to spell out to an insured that its actions (or inactions) during the claims process may risk jeopardising a claim. This is in spite of the fact that, as was common ground between the parties, there is no general duty on insurers to warn an insured of the need to comply with policy conditions, in particular there is no general duty to warn an insured that its conduct is or might amount to a breach of a condition precedent or that the insurer will later insist on procedural requirements having been met (see eg Diab v Regent Insurance [2006] UKPC 29).

Moreover, the Court of Appeal did not confine this to insurance contracts. Although Sir Christopher Clarke observed that the fact that insurance is a contract of utmost good faith “will, if it does anything, increase the likelihood of a party having a duty to speak” (para [89]) he made it clear that the principle was of general application. Drawing on previous case law in the general contractual arena, the Court of Appeal found that the duty to speak “may arise if, in the light of the circumstances known to the parties, a reasonable person in the position of the person seeking to set up the estoppel would expect the other party acting honestly and responsibly to take steps to make his position plain.” (para.[82])  As to previous suggestions that some kind of impropriety or dishonesty was an essential ingredient, the Court observed that “An estoppel of this nature in a contract of this kind does not require dishonesty or an intention to mislead; nor any impropriety beyond that inherent in the conclusion that the insurers should have spoken but did not.”  (para.[88]). As such, it should be easier in the future to establish an estoppel of this kind in the right factual circumstances.

A copy of the judgment is available here.

Originally published on Quadrant Chambers.

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