Court of Appeal finds that insurer had a "duty to speak" on particular facts of case

After deciding, as a preliminary issue, that the insurance policy in question did cover employee theft, Eder J found that the insured had breached a claims cooperation clause (a condition precedent) by failing to provide certain profit and loss and management accounts ("the accounts"). The parties had agreed to "park" quantum issues pending determination of liability, but the judge had found that it would not have cost the insured anything extra to provide the accounts, which they already had, and so the condition precedent had been breached. In reaching this conclusion, the judge rejected an argument that there had been an estoppel or breach by the insurers of their duty of good faith. The insured appealed against that decision.

One issue raised at first instance had been whether an insured must comply with a policy condition even if the insurer has (wrongfully) rejected a claim. Eder J did not decide this issue, but by focusing his attention on the policy wording, it might be said that he impliedly accepted that the insured was still bound to comply with the claims cooperation clause even though insurers had rejected the claim. This issue was not discussed at all by the Court of Appeal. Instead, the appeal primarily focused on the issue of whether there had been an estoppel and/or breach of the duty of good faith.

This argument centred on a meeting which had taken place between (inter alia) the insured's representatives and the insurers' loss adjuster. When the insured had argued that the accounts should not be provided until liability was confirmed, the adjuster had responded by saying that he would take further instructions from insurers and revert. However, he did not then revert. Furthermore, in later communications between the insurers and the broker, there was no indication that anything was outstanding from the insured.

The Court of Appeal held that "the judge was entitled to find that it was not clear that a willingness to take instructions necessarily carried with it a representation that copies of accounts which required practically no expense to produce, and which the insurers still wanted, need not be produced until after the instructions had been obtained". Furthermore, there was limited caselaw authority on the duty of good faith post-contract operating to the benefit of the insured.

However, the Court of Appeal referred to authority in relation to commercial contracts generally which supports a "duty to speak" in certain circumstances. It was concluded that "The question is what a reasonable person in the position of the person asserting the estoppel would expect of a person acting "honestly and responsibly" so that irresponsible but not dishonest behaviour could itself give rise to an estoppel". Accordingly, an estoppel 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 (here [the insured]) would expect the other party (here the insurers) acting honestly and responsibly to take steps to make his position plain. Such an estoppel is a form of estoppel by acquiescence arising out a failure to speak when under a duty to do so".

On the facts of the case, it was found that the insured could have reasonably expected the insurers to say if they required the accounts (and did not consider this particular information "parked"), especially if failure to provide the information was said to be fatal to the claim and the insurers must have realised (or would have, had they thought about it) that the insured would have the documents to hand: "It would have been the simplest thing for them to confirm that, notwithstanding the wait for instructions, they still wanted the [accounts] before the upshot of those instructions was communicated".

The Court of Appeal stressed that this conclusion did not depend on the good faith relationship between and insurer and insured, but rather, derived from general commercial law: "It is not, therefore, necessary to decide the extent to which, if at all, the fact that it is such a contract [of utmost good faith] may enlarge the circumstances in which a duty to speak arises. It is however, clear that the fact that the contract is of such a nature will, if it does anything, increase the likelihood of a party having a duty to speak".

Thus, there was an estoppel even though the insurers had not acted dishonestly or with impropriety. On the particular facts of the case, it would be unconscionable to allow them to escape liability on the basis of a breach of CP in relation to the accounts.

However, the insured's claim failed on a separate basis: namely that it could not show that each theft had resulted in a loss of profits over the policy excess. The assumptions used by the insured's expert had been too speculative: "The assumed volume of stolen items for each theft was crucial for establishing the quantum of [the insured]'s claim but it was highly speculative".

COMMENT: Rather than choosing to elaborate on the nature of the post-contract duty of good faith in an insurance context in this case, the Court of Appeal has instead relied on general commercial caselaw to find that it would have been unconscionable for the insurer to rely on a breach of CP argument on the particular facts of this case (even though the insured was a large commercial organisation, advised by experienced insurance brokers).

Accordingly, care should be taken when liaising with insureds during the claims handling process in order to ensure that an estoppel argument does not unintentionally arise. This will be particularly important where an insurer might have given the insured a misleading impression and/or might easily alert the insured to a problem with the presentation of its claim, and the imposition of a reservation of rights may possibly not assist the insurer in such circumstances. In some ways, this may tie in with the late payment provisions introduced by the Insurance Act: ie insurers will be well advised to keep insureds fully informed at every stage of the claims process and to alert them to issues as and when they arise (especially if they are important and can be easily rectified by the insured – it seems more doubtful that a "duty to speak" will arise where the problem can't be rectified, eg the insured has already given notice too late).

Exactly how far the duty to speak might go, though, remains to be seen. The Court of Appeal accepted that "an insurer is, generally speaking, under no duty to warn an insured as to the need to comply with policy conditions" and that was especially the case here, given the involvement of the brokers. But what if the insured/brokers read the policy but have clearly made a mistake about what it requires? Will it be the insurer's duty to alert them to the problem, or will the insurer instead be able to say that they should have read the policy more carefully, and so sit back and do nothing more?