Creative Controversy, late payment and the FCA

Today, Star Wars Day, May the fourth 2017, marks the completion of the reform of UK insurance law that commenced in the middle of the noughties when the Law Commission picked up the task of reforming the Marine Insurance Act 1906. That Act oversaw and provided a framework for insurance as a product that has expanded both in value and type and to policyholders that could not have been foreseen when it was enacted 111 years ago. It largely stood the test of time and its concepts were (and are) exported internationally and so underpin the sector of the UK economy that originated in and which dominates London, EC3.

The final piece of the Insurance Act jigsaw applying to all policies commencing today is the “late payment” term and gives us the chance to review some of our earlier blogs. Continue reading

Late Payment: forewarned and forearmed…

The late payment provisions introduced by the Enterprise Act 2016 will apply to insurance policies entered into from 4 May 2017, a date that will be very soon upon us. That said, on the basis that any claim made for late payment will have to be ‘late’ as provided for by the Act it’s likely that it’s going to be some time yet before under any such policy there’s been an insurance claim made; the passage of time during which insurers have made no payment; loss sustained allegedly as a result of delay and a claim for late payment formulated. But as the insurance industry has largely recognised the time for ensuring that there’s the appropriate ‘bullets to fire’ in place to deploy by way of a defence to such a late payment claim is now. Continue reading

Late payment – how much (more)?

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 [1854] 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

Late payment: How much?

In just ten short weeks a term will be implied in to insurance contracts that means that  policyholders will be able to seek damages for late payment of insurance claims. There are limited rights to “contract out” from non-consumer contracts.

The new term (inserted by s13A of the Insurance Act) arises because insurance law in England and Wales has adopted the “hold harmless” principle, which is the legal fiction that an insurer is in breach of contract at the moment when the loss occurs.  Payment of the claim under the policy is therefore treated as damages and one effect of this is that, if an insurer fails to pay their insured’s claim, an insured cannot then recover damages on top of damages.

This problem is best illustrated by the case of Sprung v Royal Insurance (UK) Limited [1999] Lloyd’s Rep IR 111 CA.  Mr Sprung owned a family business, trading in the processing and distribution of animal products.  Mr Sprung’s factory was broken into by vandals and his machinery was damaged.  Mr Sprung made a claim with his insurers and they refused to pay.  Mr Sprung could not afford to fund the repairs to the machinery himself and the business collapsed.  Several years later, Mr Sprung brought a claim against his insurers and the court found that his insurers were wrong not to pay and awarded Mr Sprung the full amount of his claim, together with interest.  However, with considerable judicial disquiet, the Court of Appeal said that Mr Sprung could not be compensated for losing the opportunity to sell the business (a loss estimated at £75,000) on the basis that there can be no award of damages for the late payment of damages. This will now change and Sprung (No2) v Another Insurer (2018) would have a different outcome: the insurers having breached their implied term to pay a claim within a reasonable time.

The types and levels of claims that insurers might expect to see are difficult to predict and will vary depending on the type of insurance contract and whether the policyholder is a consumer or a non-consumer.  Applying the strict laws of contract (regardless of any FOS adjudication, which has always been based more on fairness), claims may range from simple distress and inconvenience for the non-corporate policyholder (a company has no feelings!)  and where damages have traditionally been modest- (moderate to low level inconvenience for example that amounts to little more than a change in routine/unnecessary admin is unlikely to attract an award in excess of £500) to substantial claims for loss of profit which could potentially be an uncapped level of loss.  As Sprung demonstrates (losses valued at £75,000), losses arising from business failure could be substantial.  Late payment of claims can be costly for SME-type businesses damaged by fire or flood, who are greatly dependent upon payment from insurers to get them back on track.  Delays by insurers can therefore have a devastating impact on business and insurers may face significant claims for business failure.

mccartney_j-115-web Written by Joanne McCartney, associate

In Joanne’s second blog tomorrow, consideration is given to the likely treatment of other heads of damage by the Courts and some of the underlying issues that arise as an unusual contract (that of insurance) aligns with commercial contract law

Late payment and potentially fraudulent claims

2017 is now upon us, meaning that implementation of the “late payment” amendment to the Insurance Act 2015 on 4 May is fast approaching. This amendment, set out at part 5 of the Enterprise Act 2016 introduces an implied term into all insurance contracts (and variations) entered into after this date that claims will be paid “within a reasonable time”.

While it is the aim of all insurers to pay claims in a timely manner, sometimes, particularly with claims where concerns arise over potential fraud, payment may be delayed while the claim is validated, potentially giving rise to a claim by an insured for late payment.

Continue reading

Fair Presentation: Insurance Act theory and practice

Inevitably it is far too soon for any cases considering the “Statute of the Year” but that does not mean that nothing has been happening in the real world. We are a mere four months post-commencement of the Insurance Act and not surprisingly, a good deal of negotiation has taken place around the terms of fair presentation and the extent of the search.

Continue reading

Late Payment: Yes but no but…

“Next year” is nearly upon us and in 2017 the “late payment” amendment to the Insurance Act 2015 introduced by the Enterprise Act 2016 will apply to policies entered in to (or variations) from 4 May. Time will pass incredibly quickly yet there are steps that should be considered now in relation to policy wording if the underwriter wishes to contract out of the new implied term.

Continue reading

Insurance Act 2015; a little less arbitration

Four months have passed since the Insurance Act became law in August.  Too early for any major court decisions but, nonetheless, time enough for a few preliminary observations.  Despite some initial doubts and wobbles, the market has largely taken the new law in its stride.  Policies have been updated, training sessions have been provided and processes have been refreshed.  Some have focused on gaining market advantage, whilst others have taken a more technical approach. As with all change some have adapted better than others.  In some cases risk managers have been surprised at what their reasonable search revealed and underwriters by what their old policies contained.  Generally however, more thought seems to have been given to the placement process and in addition, the better prepared brokers have examined their role, procedures and what liabilities they can assume.

The Insurance Act is principles based but the facts behind any disputes will be infinitely variable.  Was the presentation fair, was the search for information reasonable, were individuals “senior management”, was the warranty a risk migration term or did it define the risk?  All of these questions could give rise to new test litigation.  If the Insurance Act follows CIDRA then the nature of disputes may alter too, moving away from misrepresentation and non-disclosure towards post-loss conditions, the extent of cover and the effect of policy terms.

We should expect some significant litigation over the next few years which will give further guidance to the market.  However, many policies contain binding arbitration clauses which, as several senior judges have observed, hinder the development of the common law.  The process may therefore take longer than would be ideal.  Whatever the courts eventually decide whether the Law Commissions will have achieved their aims of improving practices to support the UK insurance industry abroad and assist its reputation at home may not be known for some time yet.

Written by David Hertzell, consultant

Late payment, supplier responsibilities and contractual terms

Insurance law reform has been a long process with Law Commission consultations starting in the mid “noughties”, through CIDRA in 2012, the Insurance Act in early 2015 and the long haul of implementation to commencement already now more than 100 days ago.  So it is all too easy to relax, having passed the finishing line but equally important to remember that full implementation will take place when the “late payment” clause comes in to effect next year.

Continue reading

Insurers’ empty promise?

In exactly six months, on 4 May 2017, the final piece of the Insurance Act 2015 jigsaw falls in to place when the “late payment” implied term will apply to all policies entered into after that date. The relevant sections (inserted at part 4A of the Act) are, ironically, a late change to the 2015 legislation. They were enacted in the Enterprise Act 2016 because the provisions did not fall within the technical ‘non-controversial’ definition that would otherwise have allowed them to be taken forward in the Law Commission’s initial Insurance Bill.

The new implied term on “late payment” addresses the problem that arises from a quite bizarre legal fiction: that an insurer’s contractual promise is to prevent the insured peril from occurring. So, for example, underwriters are regarded as promising to prevent the Royal Clarence Hotel in Exeter from burning down or to prevent the RMS Titanic from sinking.

The insurers’ empty promise arises from the analysis that the insurer is to “hold harmless” the policyholder from loss. Thus the very claim or loss itself is technically regarded as a breach of contract and the proceeds of the claim paid by the insurer are, at law, the damages flowing from the breach of contract. As there can be no recovery of damages on top of damages, the insured is therefore not entitled to recover any sum greater than the correct amount due on the claim (plus interest). No consequential losses are recoverable regardless of how of egregious the insurer’s delay or failure to pay might be.

The new policy term implied by the 2016 Act does not revoke the ‘hold harmless’ principle which remains relevant in that the event of the loss is the trigger date for the six year limitation period for claiming under the policy (for breach of contract). What the 2016 Act does is to allow the policyholder to make a claim for losses consequential on the insurer’s failure to pay the (valid) claim “within a reasonable time”.

So what are the issues that arise from this new implied new term that applies 265 days after the mainstream insurance law (with commencement of the Insurance Act 2015 on 12 August 2016) has changed? Are there any lessons to be learned from the 18 month period that was allowed for implementation of the 2015 Act itself?

BLM will consider a number of issues in the months leading up to commencement of the “late payment” term on 4 May next year:

  • first we will look at the issues that arise from claims outsourcing, where late payment could arise from the fault of a party in the insurer’s supply chain
  • in December we will consider whether insurers may contract out and the options available if they chose to do so
  • in January we will consider complications that could arise from investigating fraud and whether they might give rise to a “late payment” claim
  • we will then consider the sums that might be payable in the event of a successful “late payment” claim, and will conclude by
  • considering the tactics and strategies that might be considered when dealing with such claims.

Terry Renouf, partner, BLM

Written by Terry Renouf, partner, BLM