A duty to speak, or is silence golden?

Published 30 November 2017

Insurers are often reluctant to reserve their rights due to legitimate concerns that such a reservation may destabilise their relationship with the insured and broker. Many insurers have agreed to the AIRMIC scheme in this regard. The main authority in this area is Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] which recognised that insurers are not obliged to reserve their position in circumstances where they have no reason to conclude that there are any coverage issues. This is particularly the case if very little information is presented at the time of notification.

However, the Kosmar case does recognise that there may be times when it is "practical and wise" for insurers to reserve their position. Indeed, this is particularly the case if insurers are investigating coverage and policy issues. These types of issues are common for claims notified under FI policies, with the complex nature of the claim and extent of the allegations not always being clear at the beginning.

Of course, if insurers are investigating issues which may cause them to take certain policy points, they must be careful not to act in a way that gives the impression that they are treating a claim as covered.

In a recent decision, the court considered these difficult issues and in particular whether an insurer has a "duty to speak" when handling a claim under a reservation of rights. The duty to speak is adopted in certain commercial contracts but this is the first case on the issue of whether an insurer is under such a duty during the claims handling process.

Reversing the first instance decision, the Court of Appeal found that the insurers were estopped from arguing that the insured had breached a condition precedent to cooperate (by failing to provide accounting documentation) because the insured had regarded quantum as "parked" pending the resolution of liability issues. The Court held that insurers should have made their position plain to the insured and told it that certain accounting information was still outstanding as far as they were concerned.

The Court stressed that the "estoppel by acquiescence" arose from general principles of English commercial law.

This case does not create a general obligation on insurers to warn insureds about the need to comply with insurance policy terms. It does, however, highlight that even if a reservation of rights is in place, insurers cannot allow an insured to fall into a procedural trap (by suggesting that it did not require it to provide certain information pursuant to a claim cooperation clause) and then decline cover on that basis.