This week we look at a case where an insurer was unable to avoid cover because it had failed to inform its policyholder that certain documents still needed to be provided as a pre-condition to cover, as well as a handful of smaller updates.
Also, on 29 August 2017, the Department for Business, Energy and Industrial Strategy published the formal response to its November 2016 green paper on proposed reforms to corporate governance, including on executive pay, employee board representation and governance of private companies. We will be reporting on this in due course.
Insurer was under duty to speak to insured about outstanding items
In Ted Baker plc and another v AXA Insurance UK plc and others  EWCA Civ 4097, the Court of Appeal found that an insurer was under a duty to tell a policyholder whether documents that had previously been “parked” were still required in order to bring a claim. The insurer did not do this and so could not avoid a claim under the policy solely on the basis that the documents had not been provided.
Parties to a contract governed by English law must not act fraudulently. However, aside from this, they are generally not under any duty to act reasonably or in good faith, or to inform the other side of any matters that might be relevant to the contract.
There are exceptions. A duty of good faith can arise in relation to employment contracts and some kinds of agency agreement, and exceptionally the courts may imply a duty into other kinds of contract.
Most notably, insurance contracts are contracts of “utmost good faith”. Broadly, this requires the parties to disclose to each other any information that may be relevant to the contract and not to make any material misrepresentations, both before entering into it and during its term.
However, in relation to a contract of any kind, a party can come under a “duty to speak”. Broadly, this happens where one party (“A”) is mistaken as to its rights under the contract and the other party (“B”) knows this. If B, acting honestly and reasonably, could reasonably be expected to inform A of its mistake, but does not do so, B may be prevented (or “estopped”) from relying on the mistake.
What happened here?
The facts of the case are detailed. In a nutshell, Ted Baker brought a claim under an insurance policy with AXA for “business interruption” allegedly resulting from an employee stealing goods.
To make a claim, the policy required Ted Baker to provide AXA with any documents and materials it might require to allow it to investigate the claim. To this end, AXA’s loss adjusters requested various materials. These included physical stock-takes, shortage records and breakdowns, and evidence of unsatisfied demand (items 2-6), as well as profit-and-loss and management accounts (item 7).
The policy required AXA to reimburse Ted Baker for certain accountants’ costs in connection with a claim. It was clear that Ted Baker did not need to instruct accountants to provide item 7. However, Ted Baker and AXA could not initially agree whether AXA was required to reimburse costs associated with items 2-6. Ted Baker did not want to incur these costs until it knew whether AXA would cover them.
AXA’s loss adjuster therefore agreed to “park” these items while AXA assessed internally whether the policy covered items 2-6. The items were to remain “parked” until AXA specifically “unparked” them.
Eventually, AXA rejected Ted Baker’s claim, stating that Ted Baker had not supplied item 7. Ted Baker said that AXA should not be allowed to reject the claim, because it had been under a duty to tell Ted Baker that item 7 was still outstanding. In view of that, it would be unfair for AXA to rely on the missing items to avoid the claim.
AXA, in response, said that item 7 had never in fact been “parked”, because the agreement to “park” related only to the items on the list that may have required Ted Baker to instruct accountants. This included items 2-6, but not item 7.
What did the court decide?
The court agreed with Ted Baker. The judges acknowledged that the reason for “parking” the various items was to enable AXA to decide whether it would be covering any accountants’ costs, and item 7 clearly would not attract any such costs. However, it also said that it was clear from correspondence and meeting notes that item 7 had in fact been “parked” along with the other items.
AXA’s loss adjuster had told Ted Baker it would give a response after taking instructions from AXA. The court found that it was reasonable for someone in Ted Baker’s position to expect AXA to say whether they regarded item 7 as still being due. By failing to tell Ted Baker this, AXA was “estopped by acquiescence” and so unable to reject Ted Baker’s claim solely because the relevant item had not been provided. It was irrelevant that AXA was not acting in bad faith or trying to “hoodwink”
Ted Baker. It was enough that AXA had merely failed to meet the standard expected by not informing Ted Baker that the documents in question were still due. However, ultimately Ted Baker’s victory was pyrrhic, because it was unable to prove that it had actually suffered the losses for which it was claiming.
Although this decision relates to an insurance contract, it is relevant to commercial contracts generally. The court emphasised that its decision did not depend on the contract being one of utmost good faith. However, the judge noted that, when the contract is one of utmost good faith (such as an insurance contract), it will, if anything, be more likely that a duty to speak will arise.
The case highlights the need for commercial organisations to take care when following a procedure or mechanism set out in a contract. Parties should document thoroughly any deviation from an agreed protocol in a contract, as well as the reasons for that deviation and the next steps to be taken.
For insurers, the case emphasises in particular the need to take care when responding to claims. Establishing loss and liability can often be a very complex affair fuelled by volumes of supporting documents. Both insurer and policyholder should keep close track of this documentation and the stages that various matters have reached so as to ensure that no items get forgotten.
This case related to a contract that had already been entered into. However, the outcome may also be relevant to a situation where parties are negotiating a contract. In any case, as a general rule, whilst parties to a contract are expected to look after themselves and the courts will not improve their position, neither will the courts allow a party to act unconscionably and exploit a genuine mistake or misunderstanding by another party.
Whilst in this case the court felt that the insurer was under a duty to speak up about a particular item, the judgment was based on particular facts, and the pendulum may not always swing in the policyholder’s direction. The old legal adage states that estoppel is a “shield, not a sword”. A policyholder is unlikely to be able to take deliberate advantage of a failure of this kind by an insurer in order to advance a claim that it knows would otherwise fail.
- QCA paper on future of market structure. The Quoted Companies Alliance has announced that it has published its first position paper on the future of the UK market structure for small and mid-sized quoted companies following Brexit. Its key recommendation is to simplify the market abuse, prospectus and tax regimes for small and mid-size quoted companies.
- Modern slavery. The Home Office has published factsheets and posters that employers can print out and display in their workplace. The posters relate to the construction, food processing, hospitality, manufacturing and restaurant industries. The factsheets relate to the agricultural, construction, fishing, food, hospitality, manufacturing and recruitment industries.
- Companies House refunds. We mentioned in our last update that Companies House is issuing refunds for certificates of incorporation or registration issued in relation to overseas, European and unregistered companies. Companies House has now confirmed it will also be issuing refunds for certificates of good standing historically issued for these kinds of entity.
- Co-operative societies and community benefit societies. HM Treasury is consulting on raising the thresholds at which these societies must appoint an auditor. It proposes to raise the turnover threshold from £5.6 million to £10.2 million and the assets threshold from £2.8 million to £5.1 million to bring them in line with companies. Comments are requested by 22 September 2017.