This long-running case has finally been decided in favour of insurers, since the insured failed to show that its individual business interruption losses exceeded the relevant policy deductible. Importantly, it illustrates circumstances where an insurer may have a duty to speak up about an insured's breach of contract, it the insurer is later to be allowed to rely on that breach in order to deny liability.
The insured Ted Baker's employee had engaged in multiple thefts of its stock, amounting to millions in total. In the hearing on preliminary issues in 20122, the Commercial Court had decided that the resulting loss and business interruption was potentially covered by the insured's combined commercial policy, despite the insurers' argument that the policy did not extend to fidelity risks.
The Court of Appeal upheld the lower court's rejection of the claim, but the most interesting aspect of the decision is the finding that the insurers were estopped from relying on breach of a policy condition precedent (regarding the supply of information), due to the insurers' failure to comply with a "duty to speak" (i.e. to point out the insured's breach to it), which arose during the claims adjustment process.
In general, of course, the insurer has no duty to warn an insured that it must comply with policy conditions (particularly when the insured retains an experienced broker), and the Court reaffirmed this.
However, on the particular facts of this case, such a duty did arise. During the claims investigation phase, the insurer's adjuster had requested a shopping list of information pursuant to policy claims conditions. These encompassed the insured's existing management accounts, which were readily available to the insured and easy to produce, and other categories of financial information which were more difficult to produce, and which, the insured maintained, would require professional assistance, at insurer's cost, pursuant to a policy Professional Accountants Clause (PAC). Since liability was in dispute, the insured expressed unwillingness to produce this information until the insurer had admitted liability. The insurer's adjuster agreed to take instructions on these issues and to revert to the insured, but it never did so. In the meantime the insured believed the whole shopping list request was "parked", pending communications of the insurers' position. In several subsequent communications the adjusters, despite appreciating this was the insured's belief, did nothing to dispel it. The insurer's Defence later distinguished between the more difficult items of information, which had been "parked" pending instructions, and the straightforward supply of management accounts, to which the PAC undoubtedly did not apply, in order to deny liability.
An argument that insurers had deliberately kept quiet about the insured's obligation to provide the management accounts (in order to avoid the insured waking up to the need to do so before it was too late) was rejected. So too was an argument that an express agreement had been reached and a representation had been made, to "park" the request for management accounts.
However, applying established case law regarding commercial contracts generally (rather than case law regarding "good faith" insurance contracts), the Court held that a reasonable person in the position of this insured would have expected these insurers, acting honestly and responsibly, to have made the position clear with regard to the ongoing breach. In upholding a "duty to speak" on the facts of the case, the Court ruled that the insurer should not have remained silent about the insured's breach, and should have made this clear if they required the management accounts before the adjuster reported back, "particularly if the failure to provide these was to be said to be fatal to the claim...It would have been the simplest thing to confirm they still wanted the management accounts, notwithstanding the waiting for instructions." The insurers were therefore estopped by acquiescence from relying on the breach.
Although fact-specific, this decision illustrates that situations may sometimes arise in which an insurer will be estopped from relying on the insured's breach of duty if it has not insisted on compliance with that duty at an earlier stage, and this may be so notwithstanding insurer's continuing reservation of rights.