Make your position plain: the duty on insurers to speak out
In a judgment that will be welcomed by policyholders, the Court of Appeal has held that insurers have a duty to speak out and make their position plain in a claims handling context.
This duty has been found to arise where, in light of the circumstances known to the parties, a reasonable person would expect the other party, acting honestly and responsibly, to take steps to make its position plain.
On the facts of this case, it was unjust and unconscionable for the insurers to escape liability on the grounds of non-compliance with a condition precedent where they were aware that the policyholder thought that its obligation to comply had been effectively parked by agreement between the parties.
The case relates to an insurance claim brought by the clothing retail company Ted Baker for business interruption losses relating to goods stolen by an employee. At first instance, the court rejected Ted Baker’s claim for indemnity under the policy on a number of grounds including for breach of a condition precedent requiring the provision of certain documentation relating to quantum. On appeal, Ted Baker argued that an estoppel by acquiescence had arisen that precluded the insurers from relying on the condition precedent. This was on the basis of a meeting between the parties at which the insurers’ loss adjuster had undertaken to seek instructions as to whether the cost of producing certain documents was covered under the policy, but had not done so. The insurers knew that Ted Baker was under the impression that its obligation to produce the documentation had been parked pending a response on that issue.
The Court of Appeal agreed, finding that in light of what had passed between the parties, Ted Baker was entitled to expect that if the insurers in fact regarded the documentation as outstanding, due and unparked, then acting honestly and responsibility they had a duty to tell them. Not to do so was misleading. Had the insurers told Ted Baker that the documents were in fact outstanding, the court considered that they would no doubt have been supplied. However, no renewed request for the material was made and there had been no suggestion made in correspondence that the insurers considered Ted Baker to be in breach of a condition precedent entitling them to avoid liability.
This duty to speak was found to be of general application, arising in the context of commercial contracts where a reasonable man would expect a party acting honestly and responsibly to bring to his attention the fact that he was under a mistake as to the parties’ respective rights and obligations. It is not specific to insurance contracts, and is not dependent on the duty of good faith, although the good faith nature of an insurance policy would tend to increase the likelihood of such an estoppel by silence or acquiescence arising.
Nor does the duty to speak require any dishonesty, bad faith or an intention to mislead. On the facts of this case there was no suggestion that the insurers had deliberately kept quiet or sought in some way to hoodwink the policyholder. However, Ted Baker’s mistaken understanding was not one that had arisen in a vacuum but in the context of specific circumstances whereby it was common ground that a response from the loss adjuster was awaited. As such, it was reasonable to expect the insurers to say if they required the documentation to be provided in the interim and that any failure to provide it would be fatal to the claim.
The Court of Appeal was clear that, generally speaking, an insurer is under no duty to warn an insured as to the need to comply with policy conditions, and that position has not changed. However, the articulation by the court of the existence of this duty to speak may make it easier for a policyholder to establish an estoppel in the appropriate factual circumstances, particularly as there is no need to demonstrate reliance on an unequivocal representation which would be necessary to found other types of estoppel or waiver.
In a year which has also seen the introduction of damages for late payment of insurance claims, it is clear that insurers need to pay attention to their systems and processes for ensuring that claims are handled transparently, fairly and promptly – which is good news for policyholders.
See Ted Baker v AXA [2017] EWCA Civ 4097.
Joanna Grant is a Partner at Fenchurch Law
BAE Systems Pension Funds – v – RSA
Third Parties (Rights against Insurers) Act 2010
An analysis of the first judgment on the Third Parties (Rights against Insurers) Act 2010 (‘the Act’)
BAE Systems Pension Funds Trustees Limited (‘the Claimant’) brought proceedings against 4 Defendants following the construction of a large warehouse. The damages sought exceeded £10 million.
Protective proceedings were issued against the Defendants on 24 August 2016. In February 2017, the third Defendant, Twintec Limited (‘Twintec’), went into administration, and a few weeks later Twintec’s solicitors revealed that it was insured by RSA. The Claimant accordingly applied to join RSA to the claim.
RSA resisted the application on the grounds that:
- They were not in fact liable to indemnify Twintec for the claim;
- The policy and any dispute as to coverage was subject to French law and must be determined by arbitration or by the French courts.
The First Ground
It was uncontroversial that Twintec had become a ‘relevant person’ under section 1 of the Act i.e. it had incurred a liability to the Claimant, and had become insolvent in one of the ways specified by the Act.
Section 2 entitled the Claimant to bring proceedings directly against RSA seeking a declaration as to Twintec’s liability and/or a declaration as to RSA’s potential liability to the Claimant.
RSA argued, somewhat ambitiously, that Twintec was not entitled to indemnity because of an exclusion for pre-existing circumstances, and, if there was thus no cover, section 2 was not engaged.
The Judge, Mrs Justice O’Farrell DBE, found that Section 2 was engaged even where there was a dispute as to coverage. This did not require the Claimant to establish that there was a relevant insurance policy which necessarily responded to the loss – all that was needed was for the Claimant to make a claim that there was such a policy.
RSA argued that a number of difficulties could arise if Section 2 was engaged where cover was disputed. In particular, they suggested that this could pave the way for any insurer to be joined to an action, or possibly an insurer who had provided cover for a previous irrelevant period. The Judge gave short shift to this point, and stated that the Court, in these circumstances, could simply strike out those proceedings as having no prospect of success. The Judge’s decision was obviously right. Were it otherwise, the 2010 Act would not avail a Claimant where an insurer had denied indemnity.
RSA also suggested that there was an irreconcilable conceptual difficulty insofar as they would be faced with defending a claim for a declaration, when, in their view, the Claimant did not have the right to step into Twintec’s shoes. Again the Judge was unpersuaded, and found that it was entirely a matter for RSA as to the submissions they wished to make in response to the Claimant’s claim (and whether they wished to take any substantive part in the proceedings at all).
The Second Ground
The policy contained two dispute resolution clauses. The first clause provided for any dispute between the parties to be referred to the French courts and “shall be subject exclusively to French legislation”.
The second clause provided that, in the event of a dispute regarding the activation of cover, the parties agreed to refer their disputes to two arbitrators chosen by each party.
The claimant argued that the coverage dispute was caught by neither of the clauses. RSA, by contrast, argued that the coverage dispute was caught by both clauses.
The Judge was satisfied that the coverage dispute would be covered by one or other of the clauses i.e. it should be decided by either the French courts, or by arbitration. It did not, however, affect her finding as to whether section 2 was engaged.
The Result
The Judge granted the Claimant’s application to join RSA to the Claim, and, somewhat predictably, made it clear that in order to engage section 2 of the Act, a Claimant need not establish, as a pre-condition, that there is valid coverage. Were it otherwise the case, insurers would have carte blanche to reject any claims made against insolvent insureds.
Alexander Rosenfield is an associate at Fenchurch Law
Not Too Slender a Thread - Supreme Court decision in MT Højgaard v E.ON
The Supreme Court has upheld an appeal concerning liability to comply with fitness for purpose obligations in a design and build contract, in a case with significant ramifications for policyholders involved in construction projects. The judgment highlights the difficulties which arise when accepted industry practices are exposed as inadequate and reinforces the importance of precise drafting of contract terms, and associated policy wordings, given the literal interpretation likely to be applied notwithstanding potentially harsh consequences for unwary contractors.
The dispute arose from a significant error in an international standard for the design of offshore wind turbines known as J101. The contractor, MT Højgaard (“MTH”), relied on J101 whilst engaged by E.ON to design, fabricate and install foundations for the Robin Rigg wind farm in the Solway Firth, Scotland. Following completion of the works, it was discovered that J101 contained an inaccuracy such that the load-bearing capacity of grouted connections had been substantially over-estimated, resulting in remedial works at a cost of €26 million.
In April 2014, the trial judge held that MTH was liable to E.ON because the foundations were not fit for purpose, in breach of a provision in the Technical Requirements section of the Employer’s Requirements in the contract which imposed an obligation that the design “shall ensure a lifetime of 20 years in every aspect without planned replacement”. This provision applied in addition to less onerous contract terms requiring MTH to exercise reasonable skill and care, and to comply with J101.
The Court of Appeal overturned that decision, concluding that the 20 year service life provision in the Technical Requirements was qualified by compliance with J101 and good industry practice, in light of the inconsistency between that provision and other contractual terms. The relevant wording tucked away in the Technical Requirements was described as “too slender a thread” upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations, viewed in context of the contractual provisions as a whole and commercial implications.
In a unanimous decision, the Supreme Court ruled that MTH was liable for breach of the fitness for purpose obligations, construed either as a warranty that the foundations (1) would have a minimum service life of 20 years, or alternatively (2) be designed to last for 20 years. The court referred to UK and Canadian authorities where contractor warranties to complete works without defects were held to override any prescribed specification, noting: “it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed”. J101 was expressed to be a minimum standard and the court was not prepared to disregard or give a different meaning to provisions of the Technical Requirements incorporated to the contract.
Construction contracts routinely incorporate schedules and technical documents with less than complete harmonisation as to intended legal standards of design and workmanship. The contract in this case was acknowledged to be of a “complex, diffuse and multi-authored” nature with many “ambiguities, infelicities and inconsistencies”. Nevertheless the court saw no reason to depart from the natural meaning of the fitness for purpose provisions, alongside MTH’s other obligations, in accordance with the prevailing approach of judicial non-interventionism that parties will be taken to mean what they say in their contracts (Arnold v Britton [2015] UKSC 36).
To avoid ambiguity, contracting parties should consider the inclusion of express provisions clarifying whether and how technical schedules are to affect overall obligations as to design and workmanship, clearly distinguishing requirements to exercise skill and care from performance warranties or guarantees of fitness for purpose. This in turn will allow policyholders to properly evaluate the risks assumed under the contract, and liaise with their insurance brokers to ensure adequate professional indemnity and all risks cover for potential liabilities.
MT Højgaard A/S (Respondent) v E.ON Climate & Renewables UK Robin Rigg East Limited and another (Appellants) [2017] UKSC 59
https://www.supremecourt.uk/cases/docs/uksc-2015-0115-judgment.pdf
Amy Lacey is a partner at Fenchurch Law
