Ted Baker Plc & Anor v Axa Insurance UK Plc & Ors

The Appellant insurers seek permission to appeal against the determination by Eder J in the Commercial Court of preliminary issues concerning the scope of insurance cover afforded by them to the Respondent insured in the years 2004-2009. Axa bore the bulk of the risk over the period in question, Fusion carried 20% of the risk for two of the years of account, 2004/5 and 2005/6, whilst Tokio Marine was co-insurer for 25% of the risk in 2006/7. At the conclusion of the hearing we refused permission to appeal for reasons to be given in writing at a later date. These are the court’s reasons for dismissing the application.

The Respondents may for present purposes collectively and shortly be described as the distributors and marketers of the well-known Ted Baker brand of merchandise. The underlying claim concerns loss of stock from the Respondents’ warehouse in Harlesden. Eder J determined the issues in a reserved judgment delivered on 25 May 2012, following a seven day trial in February and March. The judge heard a large number of witnesses give evidence concerning events which had occurred some years before.

The principal issue was the proper construction of the policy wording. The judge determined this issue in favour of the insured, and also held that the insured were not estopped by convention from reliance on the natural meaning of the wording of the insuring clauses. The judge refused the insurers’ application to rectify the policy wording. The judge also refused two free-standing applications by the Second and Third Appellants, Fusion and Tokio Marine, to rescind or avoid their participation in the cover in reliance on or on the grounds of misrepresentation and non-disclosure.

The Appellants sought permission to appeal from the judge, placing before him draft Grounds of Appeal which challenged his findings on construction, misrepresentation and non-disclosure. It will be noted that there was therefore no challenge to the judge’s conclusions on rectification and estoppel by convention. The judge refused permission to appeal. There the matter was left to rest. It was said before us on behalf of Fusion and Tokio Marine that it was decided that to attempt to pursue an appeal on the misrepresentation and non-disclosure ground would have been neither proportionate nor reasonable unless that appeal formed part of a wider appeal by all of the insurers. However that may be, the first hurdle faced by all the insurers on this application is that time for filing an Appellants’ Notice expired on 9 July 2012 and the Appellants require an extension of time to 8 April 2013. The remaining issues of liability and quantum are due to be tried on 7 July 2014 with a time estimate of three weeks.

The application with which we are concerned has been prompted by disclosure of documents in the on-going action given by the Respondents on 26 February 2013. There is no doubt that documents then disclosed for the first time from the files of the placing brokers were potentially relevant to the preliminary issues tried by Eder J, or to some of them, and ought to have been disclosed earlier pursuant to orders for standard disclosure relevant to those issues. The explanations offered for the failure to disclose are unconvincing, as is the suggestion that the Appellants could themselves have obtained the documents from the brokers. We accept that the Appellants acted with reasonable expedition in assimilating the documents, considering their position and issuing their Appellants’ Notice on 8 April 2013. The first issues for decision however are whether there is any reason why the grounds of appeal now put forward could not have been advanced earlier and whether the new material has any real connection therewith. In order to put those issues into context we must first say a little more about the issues resolved by the judge and then examine the relevance, if any, of the new documents thereto.

Although it was once wider the claim now made by the insured against their insurers is for business interruption consequent upon more than five hundred incidents of theft of stock by an employee, said to have occurred over a five year period. The thefts are alleged to have been carried out by Mr Nsiah, an employee of No Ordinary Designer Label Ltd, at its warehouse in Harlesden, London NW10, where he was employed. It is accepted by the Respondents that the thefts took place without forcible and violent entry into or exit from the premises. We shall from time to time refer to this as clandestine theft. The claim is for substantial loss of profit over and above the cost of the stock and is said to give rise to liability under the policies in five policy years.

All of the policies in question were placed on behalf of the Respondents by their insurance brokers: initially Chambers and Newman, and later, as a result of successive takeovers, Layton Blackham, and then Bluefin. The employee with prime responsibility for placing the policies under which the Respondents claim was a Mr Guy Burbedge: in particular, he placed all of the policies with Axa and also the policies with Fusion.

It was common ground at the trial that cover for theft by employees is traditionally provided by Fidelity Insurance and that cover for business interruption consequent upon theft by employees is always excluded under such insurance. It was also common ground that such cover is not available in the general commercial market.

Axa’s policy, to which the other insurers in due course subscribed, was initially to be found in a document entitled, confusingly, “Schedule: Commercial Combined”. As the judge recorded this was in effect the primary document constituting the policy. It referred to Axa’s then standard printed wording.

Axa’s policies, like most commercial combined policies, each consisted of policy wording and a schedule containing specific details and endorsements. Both the policy wording and the schedule were divided into sections providing different types of cover. The policy wording contained, inter alia:

The theft section contained policy wording limiting cover to theft involving forcible and violent entry; but contained also an endorsement, the “Theft Extension Clause” (designated initially “A05”, later “F08”), which extended the insurance to cover loss or damage resulting from theft or any attempt thereat which did not involve forcible and violent entry. There was an excess of £1000 later raised to £5000. On its ordinary and natural meaning, this provided indemnity in respect of the cost of stock stolen by an employee.

The business interruption section provided financial loss cover consequential on loss of property, if that property was insured against loss; but the policy wording contained:

The judge ruled, unsurprisingly, that the Theft section provided cover for direct losses as a result of employee theft not involving forcible or violent entry. That conclusion as to the clear and natural meaning of the words used was not displaced or affected by any factual matrix or market practice as alleged by insurers – judgment paragraph 105.

The Business Interruption section provided cover for financial loss consequential on loss of property provided the property was itself insured against loss. The stock was covered against the risk of theft by employees not involving forcible and violent entry. Exclusion 2(c) would ordinarily have excluded consequential loss arising directly from theft or attempted theft, but that exclusion was itself deleted by Endorsement No 637. The judge concluded that it followed that business interruption losses arising from theft, including theft not involving forcible and violent entry by employees, was covered under the policy. The judge rejected the suggestion that Exclusion 4(c) nonetheless excluded clandestine employee theft. Exclusion 4(c), standing alongside Exclusion 2(c), was not concerned with theft at all but rather with fraud or dishonesty other than theft. The evidence as to market practice or resort to other supposedly standard market wordings was of little relevance, given that for all of the witnesses who gave evidence on these topics the deletion of Exclusion 2(c) in the Axa standard form was unprecedented.

The judge’s conclusion as to the proper construction of the policy is not now sought to be challenged. That draft ground of appeal is not repeated in the current Grounds of Appeal.

The insurers contended at trial (i) that the insured were estopped by convention from relying on the proper construction of the policy wording and (ii) that the policy should be rectified so as expressly to exclude theft of stock by employees by non-forcible or non-violent means. Presumably because the List of Issues put these issues in an illogical order, the judge dealt first with estoppel and next with rectification. Both defences failed in limine. As to estoppel, the judge said this, at paragraph 118:-

We should explain that Mr Lindsay Page had joined Ted Baker in 1997, was at all material times the Financial Director and was from the start very closely involved in the placing of Ted Baker’s insurance policies until about 2003 when Mr Charles Anderson, Head of Finance, became more closely involved. Mr Davenport, Mr Cash and Mr Glover were all from the brokers.

The judge said this of the evidence given by Mr Page and Mr Anderson:-

The judge described the involvement of Mr Burbedge in this way:-

The insurers mounted a full-scale attack upon the evidence of Mr Burbedge. Whilst falling short of inviting the court to regard him as dishonest, the insurers submitted that the court should conclude that Mr Burbedge had persuaded himself that he had always believed that the Axa policy as extended provided the disputed cover when such was not in fact the case. Of course, the judge subsequently concluded that the Axa policy did indeed provide the disputed cover. After careful consideration of Mr Lynagh’s sustained attack on Mr Burbedge the judge concluded:-

On rectification the judge’s conclusion was:-

The documents disclosed late come from the brokers’ files and were created in early 2009, shortly after Mr Nsiah’s thefts were detected and the Respondents made a claim on the Axa policy. They are largely documents internal to the brokers, said to evidence the thinking of Mr Burbedge and other employees at the brokers, although there is at least one communication with Mr Page. Given that the estoppel defence was in play, it is plain that the brokers’ files should have been searched with a view to ascertaining whether they contained anything which might bear upon the brokers’ beliefs and what they may have communicated to the underwriters concerning those beliefs. Absent dishonesty, a person is more likely to communicate an assumption in line with his belief than one at odds with it. However, the significance of evidence internal to the brokers should not be exaggerated. No case on estoppel by convention can succeed without an indication by each party to the other of a shared assumption, and for that purpose what is critical is not subjective belief but the objective impression reasonably conveyed by the words or conduct “crossing the line”. There does not appear to have been any significant issue concerning what did actually cross the line.

The insurers contend that had these documents been available to be deployed in cross-examination of Mr Burbedge, the judge would neither have accepted Mr Burbedge’s evidence on the key issues nor found that he was an honest witness. We will assume that this is so, although we entertain grave doubts whether it is a justified assumption. The high water mark of the new evidence is perhaps to be found in an email written by Mr Burbedge on 9 January 2009 which contains the following passages:-

Obviously there is there material for cross-examination. We do not have the advantage of having seen Mr Burbedge give evidence, and we mean him no disrespect, but we would be slow to rule out confusion before proceeding to a conclusion of dishonesty. We will however make the assumption that the new material could have demonstrated that Mr Burbedge had no contemporary belief that the cover extended to Business Interruption consequent upon clandestine employee theft. It is not of course suggested that Mr Burbedge represented that he did have such a belief.

The insurers also contend that the new material casts doubt upon the judge’s finding that Mr Page assumed and therefore believed that Ted Baker were covered in relation to consequential loss in relation to employee theft. We are even more sceptical about this contention. The foundation for it is the apparent absence of documented reaction by Mr Page to a letter to him of 22 January 2009 from Anne Stone of the brokers, which included the passage “I anticipate a number of challenges to this approach as I do not believe Axa intended to cover employee theft under this section of the policy”. We will however make the same assumption as to the possible impact of this material upon the judge’s finding as to Mr Page’s belief.

It is argued by Mr Jeremy Nicholson QC that the absence of these documents and thus their assumed impact upon the judge’s findings as to the contemporary beliefs of Mr Burbedge and, to a lesser extent, Mr Page, skewed the whole approach of the judge and skewed his findings on estoppel and misrepresentation.

It is certainly true that the judge regarded the insurers’ cases on estoppel and rectification as failing in limine on the footing, so it would seem, that since Mr Burbedge and Mr Page believed that there was cover for consequential loss as a result of clandestine employee theft, there cannot have been a shared assumption that there was no such cover, notwithstanding the policy on its true construction afforded such cover. That is however a non-sequitur which the insurers could have challenged, had they wished, when making their application for permission to appeal to the judge himself. The subjective belief of Mr Page and Mr Burbedge is not relevant to the impression which their communications or conduct would reasonably have conveyed to the insurers. Mr Nicholson suggested that without the new evidence “proving” the subjective belief of Mr Burbedge and Mr Page that there was no relevant cover, a case directed towards the establishment of a shared assumption to that effect would lack traction. As we have already indicated, we can accept that the forensic task of establishing that persons communicated an assumption in line with their belief is easier than that of establishing that persons communicated an assumption which was at odds with their belief, but it is a far cry from that to conclude that the new evidence justifies bringing (very) belatedly a challenge which could have been brought earlier. The insurers chose not to pursue an appeal against the judge’s conclusion on estoppel by convention.

Mr Nicholson also submits that the judge’s “skewed” approach to this question led to his failure even to address the question whether there was communication or conduct which crossed the line evincing a shared assumption. This was not a point taken in the Grounds of Appeal served in April 2013.

These applications for permission to rely upon fresh evidence, an extension of time and permission to appeal first came before me on the papers in June 2013. In adjourning the application to a hearing inter partes we offered the following preliminary review:-

Mr Nicholson is certainly right to point out that the judge’s finding at paragraph 124 as to an absence of expression of outward accord set out under the rubric “rectification” is not of itself conclusive of the position so far as concerns estoppel, since rectification is concerned only with the position as it obtained up to agreement upon the wording appropriate to express the agreement. However the new evidence is of no relevance to the judge’s conclusion on rectification, if that is intended to be challenged by the new Ground 5A, and it is again a challenge which could have been pursued before.

In support of his contention that the court should have held that the parties had conducted themselves on the basis of a shared assumption that neither under the theft section nor under the business interruption section was there cover for employee theft without forcible and violent entry, Mr Nicholson submitted that there was clear evidence before the judge of conduct communicating that assumption, passing across the line between the parties, including, without limitation, evidence that:-

Any previous losses

The nature of the insured’s supervision, checking and management systems

The size of the insured’s payroll

The number of the insured’s employees

The insured’s annual shrinkage rates, and any significant increase in them

The existence of the CGU and AIG policies (providing fidelity cover).

Contained no reference to cover for theft by employees.

Further or alternatively, included as one of the Principal Clauses & Extensions listed “Larceny (own premises only)”. A request for this would not be understood by anyone experienced in the general commercial insurance market to include cover for surreptitious theft by employees, on the expert evidence of Mr Coates. Furthermore, in view of the documents now in question, it is likely that Mr Burbedge also did not understand it to include cover for surreptitious theft by employees.

We are unimpressed by Mr Nicholson’s submissions in this regard for at least three reasons. First, reliance in this context on the wording of the policies seems to me futile given that the judge has held that on their true construction they afforded the relevant cover. Second, the insurers are here attempting to rely upon silence as conveying an unequivocal indication of a shared assumption. Third, and critically, if it is said that the judge ignored or failed to make findings about the evidence of words and conduct crossing the line, that is a challenge which is in no way dependent upon the new evidence which is of no real relevance to it.

In short, we are not satisfied that the new evidence would probably have had an important influence on the resolution of the estoppel by convention defence. It does not bear on the question what impression was reasonably and objectively conveyed by the words and conduct upon which reliance is placed. Equally, we are not satisfied that the emergence of the new evidence justifies a grant of an extension of time so as to permit, for the first time, a challenge to the judge’s conclusions in this regard. The new evidence may have presented, for understandable reasons, an opportunity further to reflect upon those conclusions, but properly and rigorously analysed the new evidence is not relevant to the impression reasonably and objectively to be derived by the insurers from the conduct of the insured and their brokers. Finally, we are not satisfied that an appeal against the judge’s conclusion on estoppel by convention has any real prospect of success.

We can deal much more shortly with the application so far as it bears on the misrepresentation and disclosure defences of Fusion and Tokio Marine. The shape of the debate so far as concerns Fusion appears from the following paragraphs of the judgment:-

The judge had already concluded at paragraph 102 that the reference to “larceny” in the Risk Register, a document prepared by the brokers earlier in the history which was not shown to Fusion, was wide enough to include all kinds of theft including employee theft. Mr Nicholson contended that had the judge concluded, with the benefit of the undisclosed documents, that Mr Burbedge thought that larceny covered third party theft, e.g. shoplifting, but not clandestine employee theft without forcible or violent entry, he would have found that there was an actionable misrepresentation. We do not agree. The judge held that such a brief description of the cover as “larceny” did not amount to a material misrepresentation, which was a conclusion as to the effect of the word used, not as to Mr Burbedge’s belief in its accuracy. In any event, the cover did on its true construction extend to clandestine employee theft, even if Mr Burbedge did not believe that it did, so there can have been no misrepresentation. Furthermore, the new evidence can have no conceivable relevance to the judge’s conclusion that Mr Watts did not rely upon any misrepresentation. Insofar as Fusion now seeks to challenge that finding, that is a challenge which could have been made without the benefit of the fresh evidence. Since the fresh evidence has no relevance to the point, the delay in its disclosure cannot justify an extension of time.

The position so far as concerns Tokio Marine is even more hopeless. It was Mr Read of the brokers who presented the risk to underwriters. Mr Burbedge played no part. The judge found that the disputed cover was initially described by Mr Read to Mr Monahan of Tokio Marine in a spreadsheet. That spreadsheet included a reference to “theft not by VFEE – excess £5K”. The judge also found that Mr Monahan was sent an insurance presentation by the brokers which referred to “larceny – own premises only”.

The judge’s conclusion was:-

It is for all these reasons that we refuse permission to the Appellants to rely upon fresh evidence, refuse an extension of time for filing the Appellants’ Notice and, insofar as it is necessary in light of the foregoing, refuse permission to appeal.