To speak or not to speak – that is the question…

It will come as no surprise to you that all insurance policies impose certain duties on the insured. Some of those duties require the insured’s compliance before an event or loss has occurred, whereas others require the insured to take certain steps after the insured event occurs in order to make a valid claim under the policy.

It is those “after the event ” duties which recently came under scrutiny in the long running court case involving Ted Baker and its insurers, AXA (Ted Baker v AXA Insurance UK Plc [2017] EWCA Civ 4097).

For those of you not familiar with this case it involved a theft of stock from a Ted Baker distribution centre amounting to £2.16 million in value. The thefts were carried out over a number of years by a Ted Baker employee. Once the thefts were discovered Ted Baker pursued a claim under its commercial combined insurance for stock losses and loss of profit. It was a condition precedent to insurers’ liability under the policy that Ted Baker would deliver such documents and materials as the insurers might require for the purpose of investigating the claim.

At the trial, the Judge found in favour of AXA for Ted Baker’s breach of condition precedent for failing to provide the management accounts which had been requested by the loss adjusters. He also held that the claim would have failed in any event because it was impossible to identify any single loss in the entire series of thefts which exceeded the policy deductible of £5,000.

Ted Baker appealed this decision and although unsuccessful in reversing the Judge’s findings on quantum, it did successfully reverse his decision in relation to the condition precedent point.

As is often the case, the loss adjusters appointed by insurers had furnished Ted Baker with a list of documents required to substantiate the claim. This list included Ted Baker’s management accounts for the relevant years.

Ted Baker felt that some of the requested documents (albeit not the management accounts) would be expensive and time consuming to produce, therefore it advised loss adjusters that it did not intend to provide the documents in the list until either liability was admitted in principle or insurers agreed to cover the cost of retaining accountants to produce the necessary information as per the Professional Accountant’s Clause (PAC).

The loss adjusters advised that they would take instruction from insurers however, discussions instead went quiet. The loss adjusters never repeated their requests for the documentation and did not return to Ted Baker on the point.

Yet, when AXA came to plead its defence in the case, it then sought to rely on Ted Baker’s failure to produce the management accounts as a breach of condition precedent.

The evidence produced during the course of the hearing pointed to miscommunications and different interpretations of what was or was not agreed between the parties in relation to the production of the documents and the scope of the PAC. Ultimately, Ted Baker felt that there had been an agreement that production of all documents in the list produced by loss adjusters had effectively been “parked” pending insurers’ liability decision. Insurers disagreed.

The Court of Appeal held that only some of the documents requested by loss adjusters fell to be covered by the PAC clause and that the management accounts were documents which could easily be produced and did not require accountants to prepare. So although there was an estoppel whilst the loss adjuster was taking instructions from insurers as to payment of accountants under the PAC, it did not extend to the management accounts.

Ted Baker submitted that both parties had duties of good faith and that, irrespective of the general position between the parties, the duty for insurers to speak arose. Indeed Ted Baker went as far as to suggest that they felt “hoodwinked ” by insurers into committing a breach of a condition precedent.

The appeal Judges noted that an insurer is, generally speaking, under no duty to warn an insured as to the need to comply with policy conditions and that the Judge at first instance was right to reject any suggestion of bad faith in the form of hoodwinking on the part of insurers.

However, the Court of Appeal went on to 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.

Lord Justice Clarke concluded that Ted Baker was entitled to expect that if the insurers regarded the management accounts (alone) as outstanding, due and “unparked ”, then, acting honestly and responsibly, insurers should have told Ted Baker and not to do so was misleading.

Thus insurers were estopped from relying on the insured’s breach of duty in failing to comply with the policy condition and disclose the management accounts as requested.

The Judgment establishes that although there is no general duty on insurers to warn an insured of the need to comply with policy conditions, there may well be circumstances where an insurer is obliged to advise an insured that its conduct during the claims process may risk jeopardising a claim and that duty to speak is increased if the contract is one of utmost good faith.

Furthermore, the Judgment provides a reminder to policyholders of the importance of complying with all conditions precedent in their policies, and policyholders and their brokers are advised to clarify with insurers the terms of any agreements or discussions relating to such policy conditions in an effort to avoid a repeat of the Ted Baker debacle.

For further information regarding this topic or any other insurance litigation matters please contact Nicola Maher, Partner or any member of the Edwin Coe Insurance Litigation team.

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