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