The English Court of Appeal has considered for the first time in Ted Baker Plc v Axa Insurance UK Plc  EWCA Civ that there are circumstances in which insurance companies will be under a duty to warn policyholders that they need to comply with policy terms.
The dispute arose following theft of stock from Ted Baker's distribution centre by an employee between 2003 and 2008. Ted Baker sought to recover their losses and claimed £2.16 million from the defendant insurance company, AXA Insurance Plc (AXA).
AXA contended that Ted Baker should be prevented from bringing a claim as it was a condition precedent to their liability that Ted Baker provide certain financial information and documentation that AXA required for the purpose of investigating the claim. As a consequence of Ted Baker's breach, AXA claimed that they were not liable to pay under the policy.
Ted Baker responded by submitting that because some of the information and documentation requested by AXA would be expensive and time consuming to recover, the parties had agreed to "park" quantum issues until the question of liability in principle had been resolved or until the insurers had agreed to cover the costs of accountants recovering the necessary financial information under the Professional Accountants Clause in the policy. Ted Baker's position was that AXA should be prevented from relying upon their failure to provide financial information in circumstances where AXA knew matters were "parked" and had not made it clear that they expected to receive that information.
At first instance, the Court held in favour of AXA and found that Ted Baker had been in breach of the claims co-operation clause by failing to provide documents such as management accounts. In commercial claims it had become common practice for accounts to be requested for the purposes of investigating a claim, therefore the judge held that the various documents were "reasonably required".
Ted Baker appealed this decision which allowed the Court of Appeal to consider the extent of silence as a defence for insurance companies.
What did the Court of Appeal decide?
Ultimately Ted Baker's appeal was dismissed because they failed to demonstrate that the loss of profit resulting from each theft exceeded the policy excess of £5,000 however, for the first time the Court of Appeal commented on the "duty to speak".
What is a Duty to Speak?
The Court of Appeal recognised that in commercial contracts more generally, there is legal authority in support of the proposition that there is a duty to speak in certain circumstances.
A duty to speak will arise when a reasonable person would expect their insurer acting honestly and responsibly to bring the "true facts to the attention" of a policyholder when they are mistaken as to their rights and obligations. It can also be found when one party proceeds on the basis that something is agreed, whereas the other party knows that it is in dispute.
The court emphasised that the insurance company does not have to be dishonest or have an intention to mislead, however the fact that an agreement is of the utmost good faith will increase the likelihood of a duty to speak being found.
In Ted Baker's case, the court stated that insurance companies will not generally have a duty to warn policyholders of their need to comply with policy conditions. However, a policyholder would expect an insurer acing honestly and responsibly to take steps to make their position plain and therefore it was reasonable for Ted Baker to expect AXA to inform them about outstanding documents. In these particular circumstances because there was a relationship between the parties that "sufficiently engaged the duty to speak" AXA was prevented from relying on the insured's breach of duty in failing to disclose their accounts as requested.
Although insurance companies do not have a basic duty to inform policyholders of their non-compliance with conditions, this recent decision establishes for the first time that insurers cannot always remain silent when a claim is at risk of being jeopardised due to the conduct of the insured.
The Court of Appeal has placed a greater onus on insurers to confirm that they are satisfied with the compliance of policy conditions. It also serves as an important reminder to policyholders to ensure that they comply with all policy conditions in order to avoid finding themselves in a similar situation.