The recent judgment of Mr Justice Butcher in Quadra Commodities v XL Insurance & Ors provides the first reported decision on the application of section 13A of the Insurance Act 2015 concerning damages for unreasonable delay in payment of an insurance claim.
Whilst the insurer was not found liable for additional damages on the facts of this case, it would be wrong to conclude that section 13A is impotent, as many insurers may have hoped. The judgment explains the relevant factors which the Court will consider and could in other cases lead to additional damages for policyholders. As such, it is certainly worth policyholders considering whether they may be entitled to additional damages as a result of delay and/or poor conduct by their insurers in handling their claims.
The case concerned a fraudulent scheme in which the same consignment of grain was sold multiple times over to separate parties. When the deadline came to deliver the grain, there was not enough for everyone who believed they had bought it, and the fraud was then exposed. One of the parties who had purchased the grain was the insured, who claimed their losses under a policy of marine cargo insurance on the basis that either:
- The goods had been misappropriated, which they contended would be covered under the Misappropriation Clause, or
- There had been a loss of the goods by virtue of the acceptance of fraudulent receipts innocently accepted by the insured, which they contended would be covered under the Fraudulent Documents Clause.
Insurers disputed the claim on the basis that there had been no loss of physical property and the insured's loss was a purely financial one, for which they were not insured. They further argued that even if physical property had been lost, the insured had no insurable interest in that property. The issues were therefore:
- What was the subject matter of the insurance? and
- Did the insured have an insurable interest in that subject matter?
The insured claimed that the subject matter of the insurance was:
- Its interest in "the adventure", being the successful storage, transportation and delivery of the goods,
- Alternatively, the goods themselves, in which it contended it had an interest.
Mr Justice Butcher found that the subject matter of the insurance was not "the adventure", but the goods themselves. He went on to find that the insured was however correct in contending that it did have an insurable interest in those goods, that this interest was within those insured by the policy, and that the goods had been misappropriated. Accordingly, the insured succeeded based on their alternative argument and the insurers were liable to indemnify them.
In addition to its claim for indemnity, the insured also claimed additional damages due to an unreasonable delay in payment of the claim by insurers under S13A Insurance Act 2015.
S13A implies a term into every insurance contract that the insurer will pay claims within a reasonable period of time. If the insurer breaches that term the insured is entitled to recover damages resulting from the insurers breach.
Whilst this has been enshrined in statute for some time now, in the absence of any jurisprudence and with damages for late payment being a previously unfamiliar concept under English insurance law, there has been considerable speculation as to how the provisions would be applied by the Court. As the first decision on S13A, the judgment provides a helpful guide as to the circumstances in which the Court might find that insurers have unreasonably delayed payment and award policyholders additional damages.
In deciding whether the insurer has breached the implied term or payment within a reasonable time Mr Justice Butcher considered the wording of the statute itself, but also the Law Commissions' Report from which the recommendations to introduce a statutory form of redress for late payment emanated, as well as the explanatory notes which accompany the statute. He explained that there were a series of questions that need to be answered:
What would be a reasonable time for insurers to investigate and pay the claim?
- The judge held that the burden of proof lies on the insured to prove what a reasonable time would have been, emphasising that this was a separate consideration as to whether the insurers had reasonable grounds for disputing the claim. He noted this may be a difficult for the insured to produce evidence on themselves. There was in this case no evidence from brokers or experts, although the judge did not suggest that this was necessary.
- The fact that the insurers may have been slow or lethargic in handling the claim does not in itself answer the question.
Relevant considerations as to what a reasonable time would be are:
- The type of insurance
- In this case it was marine cargo/property insurance, which is generally more straightforward to assess than, for example, Business Interruption. However, the cover afforded by this particular policy applied to various different transport and storage locations across different countries, which the judge considered could give rise to potentially complex fact patterns and more difficult investigations.
- The size and complexity of the claim
- The claim size was substantial, but not exceptionally so in the context of the type of policy.
- The claim was however a complex one to investigate as it involved a sophisticated fraud and there were relevant parallel legal proceedings and recovery efforts in Ukraine. A further complicating factor was the insured's decision part way through the investigation to elect to opt for English rather than French law to apply to the dispute (in this case the insured had the right to choose).
- Whether there were any statutory rules or guidance which applied – here there were none.
- Whether there were factors outside of the insurer's control which prolonged the investigation.
- There were a number of such factors here, including the destruction and unavailability of evidence in Ukraine (connected to the fraud) and the that there were legal proceedings ongoing in Ukraine concerning the fraud, the outcome of which was relevant and which the insurers reasonably wanted to wait to see.
Bearing all this in mind, the judge found that a reasonable time in which to pay the claim would have been not more than a year from the Notice of Loss, assuming that the investigations had not uncovered a reasonable basis on which to dispute it, either in full or in part.
It seems clear that a reasonable period might well be shorter in other more straightforward claims concerning narrower cover.
Did the insurers have reasonable grounds for disputing the claim?
- It was held that the burden of proof here is on the insurers to prove that they did.
- The judge found that the insurers did have reasonable grounds (it did not matter that they were ultimately unsuccessful). Potentially significantly, he noted that insurers' had reasonable grounds throughout their investigation and did not prolong or conduct the litigation unreasonably. This implies that there may have been a different result if there had not been reasonable grounds to dispute the claim throughout (perhaps because fresh evidence at some point should have overridden any reasonable concerns), or if the insurers had not conducted the litigation reasonably and expediently.
Was the insurers' conduct of the claim so poor that they should be found to have breached the obligation to pay within a reasonable time?
- The judge considered whether the insurer had carried out unnecessary investigations but found that this was not a relevant factor here, when the investigations undertaken were linked to the insurers' grounds for disputing the claim and they did have reasonable grounds.
- The judge found that there had been unnecessary delay by the insurers in investigating the claim. However, he considered that because those delays occurred within what he found would have been a reasonable period of time for the investigation and payment of the claim, and that there was a reasonable basis to challenge the claim throughout, those delays did not in themselves amount to a breach.
Whether an insured can claim S13A damages will be fact specific based on each case.
The fact that insurers were not held to have unreasonably delayed payment in this case was due to the relative complexity of the claim, the fact that the insurers had a reasonable basis on which to contest it, and that the conduct of the insurers, whilst poor in some respects, was not so poor as to override the other factors. The same will not be true in all cases. Policyholders who consider their insurer has unreasonably delayed paying their claims should consider pursuing their insurer for additional damages suffered as a result, particularly where they believe the insurer has conducted the investigation of the claim poorly or did not have a reasonable basis on which to challenge it.