February 2012
Delayed claims – a right to damages?
Should insurers pay compensation for late payment of (or wrongly declined) claims?
The Law Commission is consulting on this recommendation. It is also seeking views on the rights arising following a fraudulent insurance claim. The proposals have the support of a majority of stakeholders and are open to consultation until late March 2012.
The current consultation is the second of a series of three reviews which seek to reform insurance contract law. In the current paper, the Law Commission sets out proposals for clarifying and updating four areas, the first two of which are of most general interest:
Damages for late payment of claims.
Insurers’ remedies for fraudulent claims.
Insurable interest.
Premiums and policy formalities for marine risks.
In respect of the first element, a policyholder cannot presently recover damages in English law for the late payment or the wrongful refusal of a claim. The Commission, which has the support of insurance stakeholders, considers the current position to be ‘arcane and wholly indefensible’. It therefore recommends statutory reform to redefine an insurer’s principal contractual duty as being to pay valid claims within a reasonable time (with that period very probably varying depending on the type of policy, the circumstances of the claim and the quality and medium of the notification).
Defining the insurer’s obligation in this way would mean that failing to pay within a reasonable time would amount to a breach of the contract and therefore provide the insured with a right to damages, which would of course be in addition to the entitlement to the proceeds of the claim.
Turning to fraudulent claims, the Commission wants to clarify the law, again by statute, in order to confirm that a fraud by a policyholder in the making of a claim would invalidate that current claim only. This would mean that previous claims validly made could not be reopened and repaid to the insurer. The Commission proposes that the insurer should, however, be entitled to recover the reasonable costs of investigating fraud from the dishonest policyholder.
Clearly these reforms go far beyond the narrow field of property insurance. However, businesses buy insurance specifically to protect their property and business interests. Any unreasonable delay following a loss – for example a fire on commercial premises – can erode that protection and foreseeably give rise to further cost and expense. Consequently it seems fair to recommend, as the Commission does, that an insurer responsible for any such delay should be made liable for the resulting costs.
The objective of these proposals is to clarify and simplify insurance contract law, particularly in respect of business insurance risks. The measures have been welcomed by brokers and
policyholder organisations such as AIRMIC. A fair working assumption is that these changes could be made in legislation applying, perhaps, from 2013 onwards. Between now and then points of detail including, for example, matters of limitation and questions about how lead and follow underwriters might be affected, will need careful scrutiny.
While the proposed rules on late payment may appear to extend an insurer’s financial obligations to a policyholder, in reality those insurers who meet their first party claims promptly and fairly – as they are currently obliged to do by the FSA – should have few concerns.
Alistair Kinley
Head of policy development
Out of the frying pan, but not the policy
1) The Seashell of Lisson Grove Ltd (2) Central Tax & Trustee Planning LLP (3) Andre Misso v Aviva Insurance Ltd & Ors [2011] EWHC 1761 (Comm)
Can defendant insurers deny liability on the basis of breach of warranty, given a non-invalidation clause?
This decision of the High Court (Queens’ Bench Division, Commercial Court) on preliminary issues considered the above question.
The Seashell was a fish and chip shop in Marylebone which suffered a fire. Business and property insurance policies in place contained breach of warranty clauses. The defendant insurer alleged that the frying range warranty had been breached (in respect of the business policy) and there had been misrepresentation and failure to disclose the relevant facts (in respect of both policies).
Further, a limitation clause in the business policy stated that the claim under the policy would be invalid for losses ‘wholly or partly due [to the breach]’. Whilst the claimants argued that the insurer would therefore only be released from liability for losses causally linked to the breach of warranty, the defendant insurer alleged the whole claim was automatically invalid. Similar arguments were invoked over a limitation clause in both policies which provided that the policy could be avoided if the risk of damage had increased, and where there had been non-disclosure.
The judge, Mr Justice Teare, was persuaded by the claimant’s arguments that the insurer could only escape liability for losses actually caused by the breach itself, and that the increased of risk of damage (including non-disclosure) was relevant only where it was discoverable and reportable by the insured before the incident. The claimants were therefore partially successful at preliminary issue stage, although they still had to prove their case on the facts at a later date.
Comment
The decision in this case is a cautionary tale for insurers to take great care in drafting. Non-invalidation clauses can be more powerful to the insured than originally intended. Clear wording to limit scope is required and it should also be borne in mind that the use of a variety of standard clauses can also have unintended effects. The judge recognised that this could result in more than one clause covering the same point, opening up wider non-invalidation opportunities. It also highlights the court’s increasing willingness to ameliorate where possible the potentially catastrophic effects of a breach of warranty or non-disclosure on an insured.
Elizabeth Whittingham
On the crest of a waive
Liberty Insurance PTE Ltd & Anor v Argo Systems FZE [2011] EWCA Civ
This case involved the total loss of a floating casino owned by the claimant whilst being towed from the US Gulf to India in March 2003.
Insurers provided cover for the completion of the voyage. Proceedings were originally instigated in the US against both insurers and brokers. Insurers were released from these proceedings following a jurisdiction application.
US lawyers for the insurers had written to the Insured four months post-incident rejecting the claim on the policy on a number of grounds amongst which were, misrepresentation and failure to demonstrate an insured peril. They did state in their original letter that the insurer ‘reserves its right to alter its position in light of discovery of previously undisclosed
information’.
The ‘Towcon’ terms which formed part of the towing contract contained a clause which breached a warranty in the policy of insurance that ‘no release, waivers or “hold harmless” given to tug or towers’. The breach of this ‘hold harmless’ warranty was not referred to by insurers until some seven years after the loss and in the pleaded defence to English proceedings issued against the insurer. US lawyers had stated in their original letter ‘the foregoing is without prejudice to all remaining terms and conditions of the policy’.
At first instance the judge took the view that the insurers had unequivocally represented that they would not rely upon the breach of the ‘hold harmless’ warranty. It was held that:
1 The insured was in breach of the ‘hold harmless’ warranty. 2 Insurers had waived their right to rely on the breach of warranty.
3 Insurers had affirmed the contract of insurance and could not therefore avoid the contract for misrepresentation and further could not claim damages for
misrepresentation.
The appeal concerned whether insurers had waived their right to rely upon the breach of warranty. The two issues were whether the judge at first instance was correct to conclude that the insurer had made an unequivocal representation to the insured that it would not rely upon the insured’s breach, and whether the judge had been correct to conclude that the insured had in fact relied on that representation.
The CA held that neither the US lawyer’s letter, the absence of reliance on the breach within the US proceedings, nor the seven year silence on the issue amounted to an unequivocal representation. The three facts each remained equivocal.
The appeal was allowed because the claimant had not established an unequivocal
representation by insurers that it was not going to rely on any legal rights it had as a result of the insured’s actual breach of warranty.
Comment
The judgment may provide some reassurance for insurers that they will not fall foul of estoppel arguments easily and that claimants face a great burden of proving an unequivocal representation not to rely on legal rights. However, a point of caution for all insurers and lawyers is that all correspondence post loss must be carefully drafted and that protracted litigation is no substitute for an early and thorough consideration of policy issues.
An interesting point to watch out for but which was not pursued at appeal was whether insurers could sue the claimant for damages for misrepresentation pursuant to s2(1) of the Misrepresentation Act 1967, their right to avoid the policy having been lost. At first instance the judge accepted that whilst damages may in theory be available they would not be in this
case. This is a point to watch out for and one that has not as yet been argued fully before courts.
Tracey Hardman
Professional support lawyer
Update: War War is still better than Jaw Jaw when Limitation
is Looming
Inframatrix Investments Ltd v Dean Construction Ltd [2012] EWCA Civ 64 Beware contracts which shorten limitation periods.
Following on from the November 2011 e-bulletin: the building owner’s claim for breach of contract against the defendant builder was summarily dismissed because of a clause in the contract limiting the employer’s time for bringing such a claim to one year after either practical completion or when the builder last performed services under the contract. The employer appealed to the Court of Appeal (CA) but has had no more success there than it did before the TCC judge.
The appellant claimant raised essentially the same arguments in the CA as it had done before the first instance judge but the CA agreed with the judge.
However, two new arguments were raised. First: ‘practical completion’ in the limitation clause meant ‘practical completion of the project’. The CA quickly rejected this argument pointing out that the clause itself referred to ‘practical completion of the services’ not the project.
The appellant also sought to argue that the principle that a party should not be allowed to benefit from its own breach of contract should prevent the builder from being entitled to the benefit of the limitation clause. Again this was rejected by the CA which held that the clause could only be of application if the builder had breached the contract.
Conclusion
As with the first instance decision the CA has shown that it will take a robust approach to the terms of a contract agreed between two commercial entities. If a party agrees to an onerous condition in such circumstances it should make sure that it abides by it.
Peter Fitzpatrick
Partner
Policy: Disclosure and the peril of un-pleaded issues
Jones v Environcom Ltd (Also known as Woodbrook v Environcom Ltd) - [2011] EWCA Civ
1152
The peril of late pleading.
Environcom (E) was in business as waste recyclers of electrical goods and equipment including refrigerators. E made use of a tool called a plasma cutter to remove bolts securing fridge compressors. Some of the refrigerators contained pentane gas which is highly flammable. The claim stemmed from a fire at its premises on 16 September 2007. E’s insurers disputed liability, having avoided the policy due to non-disclosure. At the trial the judge found that the dangerous combination of the plasma cutter and the pentane was the probable cause of the fire and at least some of the previous fires that had occurred at E’s premises.
E commenced proceedings against its insurance brokers, MS Plc t/a Miles Smith Insurance Brokers (M) alleging that it had been negligent in failing to advise E properly as to E’s disclosure obligations and therefore caused it to lose the security of its insurance policy. It
was found that M had breached its duty to advise E about proper disclosure but E had failed to prove that it had suffered any loss. The judge found that given E’s risk profile and history of previous fires it was simply uninsurable on the basis of proper disclosure.
On appeal E sought to advance the new argument that it had suffered a loss as a result of M’s failure to properly ensure that E’s working practices were correct and that E would have taken steps to improve its risk profile; E claimed M was directly responsible for the fire loss as without M’s negligence and failure to advise the fire would not have occurred.
E’s appeal was dismissed. The Court of Appeal found that E would need permission to amend its statement of case in order to pursue the appeal due to the long-standing and fundamental principle that a new point of law which was not presented to the court at trial could only be raised on appeal where there was no possibility of any injustice occurring. E’s new case was not a new point of law but a complex fact-sensitive issue which had not been properly pleaded or analysed. Were the appeal to succeed the matter would have to be returned to the trial court. Recent jurisprudence supported the position that even in the trial court permission to amend a statement of case to introduce a late pleading was unlikely to be granted.
Comments
The general lesson to be learnt is to ensure that each case is fully prepared. This case demonstrates that despite considerable procedural changes in recent years the basic principle remains that a case is decided on the basis of the statements of case.
Nicola Jones
Trainee solicitor
Caveat emptor: limitation of liability clause
Shared Network Services Ltd v Nextiraone UK Ltd
[9 December 2011 Mr Justice Flaux Commercial Court (unreported)]
Contracting parties should be alive to the consequences of limitation of liability clauses.
The parties entered into a contract for the supply of a remote network operations centre service which contained a provision limiting the liability of the provider (Nextiraone Ltd (N)) to 50% of the service charges paid in the 12 months preceding the claim regardless of the form of the claim. The customer (SNS) brought proceedings seeking €1.7M for losses said to have been suffered as a result of N severing a virtual private network. N defended the claim (and sought summary judgment) on the basis that as SNS had not in fact paid any service charges in the 12 months immediately preceding the claim SNS was not entitled to any compensation.
SNS countered that as it was claiming damages for repudiation of the contract (and not ordinary damages for breach of performance of the contract) the contractual limitation clause did not apply to the claim and / or that the exclusion clause was unreasonable under the Unfair Contract Terms Act 1977.
In relation to the UCTA argument SNS accepted that the clause had appeared reasonable when it had entered into the contract but that, faced with N’s complete (and deliberate) failure to perform its contractual obligations, it was wholly unreasonable given that it meant it had been unable to earn any income when it had anticipated that the contract would enable it to earn significant sums.
The court granted N’s application for summary judgment. It held that damages for repudiatory breach of contract were covered by the limitation of liability clause particularly since it
expressly covered all claims ‘regardless of the form of claim’ and that there was nothing inherently unreasonable about the clause which had to be assessed at the time of the contract not the claim and that at that time SNS had considered the clause to be reasonable. It also pointed out that despite the allegation of deliberate breach by N no such claim was actually pleaded.
Commentary
Courts are often reluctant to interfere with the commercial arrangements agreed by two businesses and this case is a good example of that. Exclusion clauses in contracts involving consumers are likely to be deemed unreasonable but between commercial entities they are not. Extreme care needs to be taken before embarking on a subrogated claim which might be affected by such a clause.
Peter Fitzpatrick
Partner
A burning issue: waste warranties
Sant Products Ltd v (1) Royal Sun Alliance Insurance Plc (2) Allianz Insurance Plc (3) Norwich Union Insurance Plc (4) AXA Insurance PLC (Queen's Bench Division District Registry, 11 October 2011)
Policy holders must ensure that they comply with any waste warranties if they wish to retain the benefit of their insurance cover.
This case concerns Sant, a family run company, against its insurers for indemnity under its combined liability policy for material damage and business interruption caused by a fire at its business premises. Insurers rejected the claim on the basis that the insured had breached a condition precedent under the policy regarding both the storage of waste materials and the burning of waste outside its premises.
The point to be decided was whether the insurers could prove that the insured was burning waste at the time of the fire, or routinely as a matter of general practice. Insurers argued that the fire has been started by an employee of the insured who had regularly been seen by witnesses starting fires in the rear yard of the premises. Insurers called witness evidence from employees of neighbouring premises who all gave evidence that they had seen this occur and had in the past complained to the local council.
The insured refuted the allegations and, whilst there was strictly no onus upon the insured to provide an alternative explanation for the fire, it contended that the fire was probably caused by an unknown arsonist who was on the industrial site earlier that same day looking for work. The claimant did, however, accept that it had in the past started fires in the yard to dispose of cardboard waste material but argued that as a result of a formal written notice by the
environmental officer of Sandwell Metropolitan Council they were unlikely to risk further fires.
The court rejected the claimant’s submissions and accepted the insurers factual evidence as ‘accurate, truthful and reliable’. The court found that it was common practice for the claimant to burn cardboard at its premises despite complaints and warnings by the local council and neighbouring premises. The court held that insurers had proved well beyond the threshold of the balance of probabilities that the insured was in breach of the condition precedent of the policy by burning waste on the day of the fire and of doing so regularly. The key lay in the quality of the insurer’s factual evidence. Whilst such evidence was contested by the claimant it followed that if the court accepted the factual evidence as being true then a breach of condition precedent would be established.
Comment
The judgment highlights the burden on the insurer to clearly prove a breach of condition precedent in order to decline indemnity and the importance of obtaining clear, accurate and full witness statements as soon as possible.
Helen Westran
Jackson reforms: latest update
During a parliamentary debate on the 30 January 2012 it was confirmed by the Minister, Lord Wallace, that the timetable for implementation of the Jackson measures has slipped to April 2013.
The Hansard extract below sets out the current position:
[the Jackson reforms] are important measures and we want to implement them as soon as possible in order to control the costs of civil litigation [and] will require the making of new regulations and changes to the Civil Procedure Rules. We wish to make sure that we get the details of these regulations and rules right, and that will inevitably take some time. We are also conscious that stakeholders will need appropriate notice of when the changes will be implemented and how the details will affect them. We have already announced that the legal aid provisions in Part 1 will be implemented in April 2013, subject to parliamentary approval. For these reasons, I can inform the Committee that, subject to parliamentary approval, the Government intend to implement the Jackson provisions in Part 2 in April 2013 as well.
Ministers argued vigorously against amendments to carve out exceptions to or otherwise water down the core 'Jackson' proposals on the non-recovery of additional liabilities in civil litigation generally. Among the areas debated by Peers were: clinical negligence claims, disease claims (especially asbestos-related conditions), judicial review, professional negligence actions, financial services claims, international human rights / toxic torts (eg, Trafigura), defamation and group/collective actions.
Amendments relating to these areas were not pressed, so the government policy overall (non-recoverability) remains intact. The fact that the amendments were not tabled or voted on also serves a procedural purpose: if there has been no vote on the point, the matter may be revisited in subsequent stages of the Bill's passage. Hence BLM expects to see some of these questions resurface in the next few weeks when they may well be put to a vote.
Alistair Kinley
Head of policy development
Editors
Catherine Hawkins, partner
catherine.hawkins@blm-law.com
Mark Benson, partner
mark.benson@blm-law.com
Warren King, partner
warren.king@blm-law.com
Berrymans Lace Mawer LLP 2012 Disclaimer
This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of Berrymans Lace Mawer. Specialist legal advice should always be sought in any particular case.
Information is correct at the time of release.
