In my blog yesterday (Late payment: how much?) I considered how the case of Sprung, where an award for “late payment” was declined in 1999, would be treated under the new provisions of the Insurance Act. Although awards will be able to be made and could in certain circumstances prove to be substantial, policyholders will still need to overcome the usual hurdles of establishing a legal claim for contractual damages; causation, foreseeability and mitigation.
Policyholders will still have to show that the loss was in the reasonable contemplation of the parties, as set out in Hadley v Baxendale  EWHC. In that case Hadley contracted with Baxendale to take a broken crankshaft to the place where it was to be repaired and to bring it back again. Baxendale delivered the part late and Mr Hadley claimed that as a consequence, the mill could not operate, resulting in loss of profit. Hadley sued Baxendale for consequential losses however, the court found that the mere fact that a party is sending something to be repaired does not indicate that the party would lose profits if it is not delivered on time. The court held that the damages were too remote.
In general, contractual damages are less generous than tortious and should reflect what was in the contemplation of the parties at the point the contract was made. Damages to feelings are not recognised as recoverable for breach of contract but may be where one of the major or important objects was to provide “enjoyment, security, comfort or sentimental benefit” or “pleasure, relaxation and peace of mind”. It seems very likely that the marketing and sales materials for many policies will encompass the anticipated benefits described in the words we have extracted from two relevant judgments. Additionally the nature of an insurance contract which requires the commercial policyholder to provide information about its business and to make a fair presentation is going to increase the risk for the underwriter that there are losses that fall within the reasonable contemplation of the parties and extend the heads of damages that could be payable. Much will however depend on the nature of the insurance policy and the information provided.
The changes do, as we have observed in previous blogs, bring insurance in to line with general contractual principles. In that respect, making insurance less unusual, is commercially and reputationally to be welcomed. We are aware of market concerns that arise from this imminent change in the law which is apparently welcome news for policyholders but it is important for insurers to remember that they should not be afraid of disputing claims where there are reasonable grounds to do so.
Written by Joanne McCartney, associate