Silence is not always golden: Insurers have a "Duty to Speak"
Ted Baker v AXA  EWCA Civ 4097
In a recent English Judgment handed down on 11 August 2017, the Court of Appeal considered for the first time the issue of whether, and in what circumstances during the claims process, an insurer might be under a duty to speak out and inform the Insured that its action (or inaction) could risk jeopardising cover.
During December 2008, employees of Ted Baker were arrested and charged with theft. The employees pleaded guilty to conspiracy to steal over a period of 8 years, which caused Ted Baker to suffer a substantial loss of stock from its London warehouse. Ted Baker brought an insurance claim for £1m for the loss of stock and £3m for consequential loss and business interruption.
Ted Baker was insured by AXA (along with two co-insurers) against business interruption losses under a series of policies between 2004 and 2008. The policies covered loss of gross revenue on an "all-risk" basis subject to a per loss deductible of £5,000. AXA declined coverage on the basis that the terms of its policy did not cover claims for employee theft. AXA claimed that Ted Baker would need to take out fidelity insurance coverage for such losses.
Court of First Instance
During 2010, Ted Baker commenced a High Court action challenging AXA's decision. In these proceedings, AXA argued for rectification of the policy on the grounds that neither party intended for the insurance policy to cover employee theft, and that Ted Baker should be prevented from relying on the existing policy wording.
The Court found (at first instance) as a preliminary issue that the insurance policy included theft by employees, and that (1) Ted Baker was in breach of the claims condition by failing to provide profit and loss and management accounts from 2005 to 2008 (copies of which had been requested by AXA's loss adjusters), and (2) Ted Baker could not on the balance of probabilities prove quantum as it was impossible to find any single loss in the series of thefts which exceeded the policy deductible.
Court of Appeal
On appeal, Ted Baker was unsuccessful in respect of quantum because it could not show that each theft had resulted in a loss of profits over the policy excess.
• Condition Precedent
The Court of Appeal reversed the first instance decision in respect of breach of condition precedent. The Court of Appeal referred to the position in general commercial contracts where there is a "duty to speak" in certain circumstances.
AXA's loss adjuster asked Ted Baker to provide a series of documents to substantiate quantum - something which is routine in commercial claims. Ted Baker took the position that it was not required to produce the requested documents (i.e. the management accounts) until the liability issue had been settled, or until insurers had confirmed that the cost of retaining forensic accountants would be covered by the insurance policy. The loss adjuster informed Ted Baker that he would take instructions from AXA and revert, but never did. The request was not renewed by either AXA or the loss adjuster, and AXA pleaded in its defence that Ted Baker's failure to provide the requested documents constituted a breach of the condition precedent.
AXA was ultimately found to have acted inappropriately as it was under a duty to inform Ted Baker that the requested documents were outstanding. The Court of Appeal judgment indicated that, had AXA informed Ted Baker that the requested documents remained outstanding "…the documents would no doubt have been supplied". On this basis, the Court of Appeal concluded that the Court (at first instance) was "…in error in finding that a condition precedent to liability under the policy had not been complied with."
Although the English Court of Appeal accepted that, generally speaking, there is "no duty to warn an insured as to the need to comply with policy conditions", this important decision establishes that there may be circumstances in which an insurer is obliged to spell out to an insured that its action (or inaction) during the claims process may risk jeopardising cover.
Although this is an English judgment, Hong Kong Courts can refer and give weight to the English Court of Appeal's decision. Insurers and loss adjusters should take care during the claims handling process to ensure that an estoppel argument does not accidently arise.
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