The Court of Appeal has held that insurers could not escape liability by relying on breach of a condition precedent as they had had a duty to tell the insured that they regarded documents as outstanding.
The claimants were a holding company for businesses operating the Ted Baker brand worldwide and its wholly owned UK subsidiary (together “Ted Baker”).
Between 2006 and 2008, Ted Baker noticed losses at one of its warehouses in London. Following an anonymous tip off, an employee (together with two accomplice van drivers) was found to be stealing stock resulting in significant losses for Ted Baker. Ted Baker was insured by AXA along with co-insurers Tokio Marine and Fusion under a series of policies and sought to bring a business interruption claim in respect of the goods stolen over a 5-year period.
Under the policies, it was a condition precedent to the insurers’ liability that documents and information which might be required by the insurer to investigate the claim should be provided. Insurers argued that the condition precedent had been breached as various accounts requested by the insurers’ loss adjusters had not been provided, although provision of these documents had been ‘parked’ pending determination of liability. Ultimately insurers rejected the claims.
Ted Baker began proceedings against the insurers. At preliminary issue, it was decided that the policy did cover employee theft (see our previous Law-Now), but Eder J dismissed the claim in the Commercial Court on the basis that Ted Baker had been in breach of the condition precedent by failing to provide the documents. Ted Baker appealed to the Court of Appeal.
The Court of Appeal held that insurers could not avoid liability on the basis of Ted Baker’s non-compliance with the condition precedent, since they had a duty to tell Ted Baker that the materials were outstanding.
As the Court made clear, an insurer is not under any duty to warn an insured of the requirement to comply with policy conditions. In commercial contracts there is, however, a requirement to speak where a reasonable man would expect a person acting honestly and responsibly to bring the true facts to the attention of another party known by him to be under a mistake as to their respective rights and obligations. Failure to speak in such circumstances will give rise to an estoppel by silence or acquiescence.
The Court 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”. As such, it could arise if, having regard to the circumstances known to the parties, a “reasonable person in the position of the person seeking to set up the estoppel (here Ted Baker) 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 of a failure to speak when under a duty to do so”.
As such, the Court found that Ted Baker could have reasonably expected the insurers to say if they required the accounts and did not consider them ‘parked’. “It would have been the simplest thing for them [the insurers] to confirm that, notwithstanding the wait for instructions, they still wanted the [accounts] before the upshot of those instructions was communicated”. Ted Baker’s claim ultimately failed, however, on the basis that it could not show that each theft resulted in a loss of profits over the policy excess.
While there is an underlying principle that an insurer is not under any general duty to warn an insured of the need to comply with policy conditions, this case provides helpful clarification of the circumstances in which an insurer has a positive duty to speak.
Following the ruling, insurers should be alive to the risk, when liaising with insureds, of any passiveness giving rise to estoppel by acquiescence. Insurers should be prepared to be more proactive in their communications, particularly where they may have given the insured an incorrect or misleading impression which could result in a problem with the presentation of the insured’s claim, and where the insurer might easily bring this to the insured’s attention. As such, insurers may be advised to engage more fully with their insureds at each stage of the claims process and draw insureds’ attention to issues as and when they arise where this can easily be done.