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Insurers have 'duty to speak' in claims management, rules Court of Appeal

  • Duty to speak arises from good faith obligations in general commercial contracts
  • Insurers will need to make their position "plain"
  • Insurers do not have to warn insureds about need to comply with policy conditions

13 Sep 2017

Speed Read

LEGAL UPDATE: Insurers have a positive obligation to make their position plain with insureds in the course of managing claims, the Court of Appeal has ruled. This 'duty to speak' arises from good faith obligations in normal commercial contracts and not because of the more onerous utmost good faith obligations in insurance contracts. Those additional obligations, however, may "enlarge the circumstances in which a duty to speak arises".

In the case the Court said that Ted Baker's insurer should have said that it was still waiting for certain information and that, in not providing it, Ted Baker was in potential breach of a condition of its insurance policy. Although Ted Baker's appeal was dismissed on other grounds, this ruling by the Court of Appeal is significant for insurers. Insurers are under no obligation to warn insureds generally of the need to comply with policy conditions – this has not changed.


Ted Baker made a claim on its business interruption insurance cover following employee theft from one of its warehouses. The theft took place over five years and the loss of profit was significant – just under £1.5million according to the recent Court of Appeal judgment.

The insurer denied the claim and said that Ted Baker had breached a condition of coverage in the policy, the special claims condition. This required that relevant information and documents relating to the claim had to be provided to the insurer within a particular timeframe. Although evidence showed that the insurer had agreed certain information and documents could be "parked" because these were difficult and expensive to supply, other information referred to in the case as "Category 7" was not. Ted Baker had failed to provide the Category 7 information and therefore did not comply with the special claims condition.

The High Court in October 2014 agreed with the insurer and found against Ted Baker on a number of grounds including for non-compliance with the special claims condition. In addition, the Court found that Ted Baker had not been able to prove the loss it had claimed.

 

In the Court of Appeal judgment in August, although Ted Baker's appeal was ultimately dismissed, the Court reversed the part of the decision relating to the special claims condition. The Court found that the insurer should have told Ted Baker that the Category 7 was "outstanding, due and unparked" and "not to do so was misleading". This is a significant development for insurers because the Court has for the first time identified a duty to speak for insurers in course of managing their claims.

The duty to speak arises from the good faith obligation that exist in general commercial contracts. Examining the authorities, the Court concluded that a reasonable person "would expect the other party…acting honestly and responsibly to take steps to make his position plain". Where he does not an estoppel by silence or acquiescence arises to prevent that party from profiting from the failure to speak. Here, Ted Baker was entitled to assume that the insurer would let them know that the Category 7 material was outstanding. Since they did not, "it would be unjust and unconscionable to allow them to escape any liability on the ground of non-compliance with a condition precedent in relation to the Category 7 material."

The Court hinted that the more onerous obligation of utmost good faith in insurance contracts "may enlarge the circumstances in which a duty to speak arises". It did not however need to consider that point in this case. This does however leave the door open for the duty to expand in an insurance context. The Court said that an insurance contract will "increase the likelihood of a party having a duty to speak". Importantly the Court acknowledged that an insurer is under no obligation to warn an insured about the need to comply with policy conditions.

Nick Bradley and Elaine Quinn are insurance experts at Pinsent Masons, the law firm behind Out-Law.com