Reservations of rights by insurers

Knowing when and how an insurer’s rights should be reserved is a key skill for anyone involved in handling insurance claims – claims handlers, loss adjusters and of course lawyers.

So here are a few thoughts about reservations of rights.

Tension

Reservation of rights by insurers is a subject which evokes strong reactions. The circumstances surrounding an insurance claim can be extremely difficult for policyholder or other insured party, and an immediate reservation of rights can alienate the insured and damage the relationship of trust which should exist between the insured and its insurer. But on the other hand, insurers and their agents, including lawyers, will always have in mind the possibility that, if an insurer subsequently rejects a claim without having reserved its rights, the insured may argue that because of the way the claim has been handled, the insurer is not entitled to do this. I’m going to talk about this tension. In order to do that, I need first to briefly sketch the legal principles underpinning reservations of rights.

Legal principles underpinning a reservation of rights

The principles in play are familiar ones: affirmation or waiver, and estoppel. At the same time, this area is bedevilled by linguistic confusion – the label ‘waiver’ is sometimes used to apply to both concepts, partly because it is convenient shorthand – it’s much easier to say – and I do this myself – that an insurer has waived its rights than to say that is or has become estopped from exercising its rights. Some of the older cases are less precise in their use of language, too, so it can be dangerous to rely on the labels they use. 

It’s useful to remember, here, that the law of insurance contracts is a branch of contract law, and that although it has specific features such as the duty of utmost good faith – and now the duty of fair presentation – the answer to many questions can be found in the general law of contract. And this means that we can look to the general law of contract for the legal principles underpinning this area, and for the labels or terminology.

So, one the one hand, there is ‘waiver by election’, which in insurance cases is often referred to as waiver, or as affirmation.

And on the other hand, there is ‘waiver by estoppel’, more commonly referred to in insurance cases as estoppel.

Waiver and estoppel were considered in detail by the Court of Appeal in an insurance case in Kosmar Villa Holidays plc v Trustees of Syndicate 1243[1][2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489. in 2008. This is the key case on reservation of rights by insurers, and the following outline draws heavily on the judgment of Rix LJ.

Both doctrines – waiver or affirmation on the one hand, and estoppel on the other – require that the party with the relevant contractual right who is alleged to have lost it – typically the insurer – made an unequivocal representation[2]Estoppel by convention, which does not involve any representation, is not relevant in the present context., by words or conduct, that they did not, in future, intend to enforce that legal right against the other party to the contract – here, the policyholder or other insured making a claim under the policy.

It’s always a good idea to be sure that you know the ordinary meaning of a term before you start to think about its legal meaning, and according to my Oxford English Reference Dictionary, unequivocal means ‘not ambiguous, plain, unmistakeable’.

The need for an unequivocal representation means that silence and inaction are not enough to give rise to a waiver or estoppel – they are by their nature equivocal (at least in the absence of a ‘duty to speak’ – which I’m going to come to in a moment).

So the two concepts are similar – but there is a key difference: in the case of estoppel, the insured also has to demonstrate that it relied on the unequivocal representation in such a way that it would be inequitable for the insurer to go back on the representation. This is sometimes referred to as ‘detriment’ or ‘detrimental reliance’. This is not a requirement for affirmation or waiver – only for estoppel.

That’s a brief sketch of the basic legal principles underpinning reservations of rights. I think good way into this subject is to remember what Rix LJ said in the Kosmar Villa Holidays case:[3]At para 80 (Rix LJ).

What a reservation of rights does is expressly to preserve a situation where otherwise it might be held that something unequivocal had occurred’.

I also like the phrase which Leggatt J used in Involnert Management Inc v Aprilgrange Ltd[4][2015] EWHC 2225 (Comm), [2015] 2 Lloyd’s Rep 289. – that a reservation of rights is ‘an obstacle to finding an unequivocal communication of a decision[5]At para 179. – in that case, a decision by insurers to affirm a policy when they might have avoided it for non-disclosure.

If I’d been writing this piece before the decision of the Court of Appeal in Ted Baker v AXA[6]Ted Baker plc v Axa Insurance UK plc [2017] EWCA Civ 4097, [2017] Lloyd’s Rep IR 682. in 2017, I would have stopped here and moved on to discuss the practical aspects of reservations of rights. I’ll do that in a moment – but first I need to say something about Ted Baker v AXA.

In that case, the Court of Appeal recognised that there may be an estoppel based on a ‘duty to speak’. Christopher Clarke LJ said that:[7]At para 82.

‘… whether an estoppel arises is not wholly dependent on whether the person sought to be estopped has made some representation express or implied. It may arise if, in the light of the circumstances known to the parties, a reasonable person in the position of the person seeking to set up the estoppel (here, TB) would expect the other party (here the insurers) acting honestly and responsibly to take steps to make his position plain.

As I’ve said, the traditional analysis is that an unequivocal representation is required for an estoppel. And it follows from this that silence and inaction are insufficient.

It’s clear that this must be qualified in the light of the Ted Baker decision. But questions remain.

There was a reservation of rights in Ted Baker. This was referred to by Christopher Clarke LJ only in passing when he set out the facts of the case. He didn’t refer to it at all when analysing the duty to speak. As a former Commercial Court judge with significant experience in insurance law, it seems extremely unlikely that Christopher Clarke LJ would have overlooked the significance of a reservation of rights. The inference is that he didn’t think that the reservation of rights was relevant – and actually this is logical if – as he said in the quotation above – a representation is not required in order for there to be an estoppel based on a duty to speak.

But the fact remains that the Court of Appeal did not deal expressly with the impact of the reservation of rights on the duty to speak, and that the Ted Baker decision leaves open the question of whether – at least in some circumstances – a reservation of rights might be relevant; whether it might somehow neutralise a duty to speak, perhaps by preventing it from arising in the first place.

When should an insurer’s rights be reserved?

I’d like now to come back to the tension I mentioned earlier: when – at what stage in the life of a claim, or in what circumstances – should an insurer’s rights be reserved?

There are two – sharply opposing – views on this:

In the first camp are those who think that an insurer should not reserve its rights until it has notice of a potential defence to the claim – for example the right to avoid or proportionately reduce a claim for breach of the duty of fair presentation, or as in the Kosmar Villa Holidays case, a late notification and potential breach of a condition precedent by the policyholder.

If nothing has happened – yet – which means that the insurer might be entitled to exercise certain rights, the purist approach is that there is no need for a reservation of rights. This has support from policyholder organisations. The regulatory requirement that insurers treat their customers fairly may also be relevant in some circumstances.

In the second, opposing, camp are people who think that an insurer should reserve its rights as soon as a claim is made and the insurer starts to investigate it.

Both camps can draw support from Kosmar Villa Holidays.[8]Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489. Rix LJ said[9]At para 80. that even where an insurer knows that an occurrence has potentially been notified late, but it is getting to grips with a new claim arising out of the occurrence, has asked questions and is waiting for answers, the situation is ‘equivocal’ – and that in such a situation there is no need for a reservation of rights, even if such a reservation ‘may be practical and wise’. He then went on to say:[10]At para 82.

‘‘It would not be good practice for insurers to rush to repudiate a claim for late notification, or even to destabilise their relationship with their insured by immediately reserving their position – at a time when they were in any event asking pertinent questions about a claim arising out of an occurrence about which they had long been ignorant in the absence of prompt notification.

Rix LJ also said that:[11]At para 82.:

Legal doctrine should not push insurers into over-hasty reliance on their procedural rights.

This looks like firm support for the purist, don’t-be-too-quick-to-reserve, camp. But Rix LJ then qualified what he had said in a way which in my view brings the matter down on the side of the prudent-to-reserve-at-the-outset-of-any-investigation camp, saying:[12]At para 83.

That said, I would certainly not like to give the impression that insurers can equivocate for long while giving the plain impression that they are treating a claim as covered by their policy, especially at a time when a decision might be required, without running at least the risk that they will be treated as having waived some requirement of their contract or their right to avoid it. Moreover, there may well be express options given to insurers under their policy the unguarded exercise of which is simply inconsistent with the right to decline cover.

There are two obvious problems for insurers in waiting to see if something emerges from an investigation. One is that the insurer or its agents have to ensure that they reserve insurers’ rights as soon as something does emerge – or risk being held to have lost those rights.

And the other problem is that no-one wants to end up in court – let alone the Court of Appeal, as happened in Kosmar Villa Holidays – arguing about waiver or estoppel.

The upshot of this is that, more often than not, in a claim of any complexity, insurers’ rights will be reserved, and this will be done at the outset of the investigation of the claim.

Practical issues in reserving rights

I’d like to look now at some of the practical issues which can arise in relation to reservations of rights.

I’ve already covered the question of when insurers’ rights should be reserved, so the next question is, if insurers rights are to be reserved, how should that be done?

On one view, nothing could be easier. After all, as Lloyd LJ said in the Court of Appeal in Barber v Imperio [13]Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).in 1993:

Every businessman knows how to reserve his rights’.

But is it really that simple?

The first point is that a reservation of rights can be effective without using the phrase ‘reservation of rights’ if the effect of the words used is clear.

For example, in a case in 1979,[14]Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep 523. Woolf J held that a loss adjuster’s use of the phrase ‘without prejudice’ was in fact a reservation of rights. [15]At 525.

And in a case in 2015,[16]Brit UW Ltd v F & B Trenchless Solutions Ltd [2015] EWHC 2237 (Comm), [[2016] Lloyd’s Rep IR 69 Carr J found as a fact that the words ‘reservation of rights’ were not used, but that the insured’s representatives were told clearly at the relevant meeting that insurers might not be providing cover because of a material non-disclosure.[17]At paras 175-177.

This is similar to the approach to construing insurance policy terms such as conditions precedent – there is no magic in the phrase, and what matters is the substance.

But why take the risk of not using the well-understood, conventional words?

So if the starting point is that it is prudent to use the phrase ‘reservation of rights’, or a variation of it, what else is required?

Here, less may be more – the simplest wording may be the most effective – for example:

‘Insurers’ rights are fully reserved.’

Why is this so? Well, let’s look at some examples. A simple reservation of rights is often embellished or expanded.

And so a letter from insurers or their lawyers might say something like this:

‘Insurers’ rights are fully reserved under the policy, including the right to refuse to pay a claim altogether.’

The additional words don’t add anything. But they raise an implicit question: what about the right to avoid the policy? The reservation refers to the policy – could this be an unequivocal representation that the insurers do not intend to rely on their right to avoid the policy?

So what then if the letter-writer adds more words to deal with this, and the reservation becomes:

‘Insurers’ rights are fully reserved, including the right to refuse to pay a claim altogether or to avoid the policy.’

This new wording has arguably cured one problem, but has it created another? What about the right not to avoid the policy but to reduce the payment proportionately due to a breach of the duty of fair presentation?

And on it goes.

In each case, the question of whether the reservation of rights is effective depends on the facts, and although it would be difficult to spell out an unequivocal representation from these wordings, no-one wants to have their wording tested in court.

The point here is that, in general terms, attempts to embellish a simple reservation of rights do not make it stronger, and carry an element of risk.

Let’s look at another practical issue. Does a reservation of rights need to be repeated in order to remain effective? As the relevant principles are waiver and estoppel, there are no relevant time limits. And there is no requirement that, to be effective, the reservation of rights must be repeated in every communication from the insurer.

But whether a reservation of rights remains effective if not repeated very much depends on the facts.

If the situation in relation to the claim has changed, or the insurer and insured are in frequent contact, and the insurer has not repeated the reservation of rights, its effectiveness as an ‘obstacle’ to a finding of an unequivocal representation may be reduced, particularly over time.

Challenging a reservation of rights

Let’s change gear now and think about whether a reservation of rights can be challenged.

The first point is that there is no direct means of challenging a reservation of rights. So we are looking at indirect ways in which an insured might bring pressure to bear on insurers in order to persuade them to conclude their investigations and lift a reservation of rights more quickly.

One way this might be done is commercial pressure. This might be applied to the insurer’s claims department by a large broker – or perhaps, internally within the insurer, by the underwriter if the client is a longstanding and valuable source of premium. This is more likely to be a factor in a soft market. And it is unlikely to be effective if there are serious concerns about the validity of a large claim.

In some situations pressure might be brought to bear by a complaint to the insurer’s complaints department, and if that is unsuccessful, to the Financial Ombudsman Service – the FOS – that the insurer is not treating its customer insured fairly and is breaching ICOBS[18]ICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers. in failing to complete its investigations and make a decision about cover within a reasonable period.

But many commercial policyholders are outside the FOS’s jurisdiction;[19]The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R. and the time it takes the FOS to deal with a complaint may also make this ineffective.

I’ve written previously about the possibility of a claim for damages for late payment of insurance claims due to breach of the new implied term.[20]See Damages for late payment of insurance claims. The risk of a claim for damages for consequential loss is likely to put insurers, and their agents, under pressure to conclude investigations and lift reservations of rights more quickly. And this means that the risk of a claim for damages for late payment of a claim is probably now the most powerful of these indirect means of challenging a reservation of rights.

Alison Padfield QC

Notes   [ + ]

1. [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489.
2. Estoppel by convention, which does not involve any representation, is not relevant in the present context.
3. At para 80 (Rix LJ).
4. [2015] EWHC 2225 (Comm), [2015] 2 Lloyd’s Rep 289.
5. At para 179.
6. Ted Baker plc v Axa Insurance UK plc [2017] EWCA Civ 4097, [2017] Lloyd’s Rep IR 682.
7. At para 82.
8. Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147, [2008] Lloyd’s Rep IR 489.
9. At para 80.
10. At para 82.
11. At para 82.
12. At para 83.
13. Barber v Imperio Reinsurance (UK) Ltd (unreported, 15 July 1993).
14. Victor Melik & Co Ltd v Norwich Union Fire Insurance Society Ltd [1980] 1 Lloyd’s Rep 523.
15. At 525.
16. Brit UW Ltd v F & B Trenchless Solutions Ltd [2015] EWHC 2237 (Comm), [[2016] Lloyd’s Rep IR 69
17. At paras 175-177.
18. ICOBS 8.1.1R includes: ‘An insurer must: (1) handle claims promptly and fairly; (2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’. This applies to all insureds, not only consumers.
19. The FOS can deal with complaints not only from consumers, but also from micro enterprises, and small businesses, charities and trusts: FCA Handbook, DISP 2.7.1R-2.7.3R. From 1 April 2019, the following are eligible complainants, a micro enterprise (an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m); a small business (a business with an annual turnover of less than £6.5m and either fewer than 50 employees or a balance sheet total of less than £5m); a charity with an annual income of less than £6.5m; and a trust with a net asset value of less than £5m: see DISP 2.7.3R and FCA Handbook Glossary. The FOS award limits are £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R.
20. See Damages for late payment of insurance claims.

Damages for late payment of insurance claims

This is an updated version of an earlier post.

Summary

All new contracts of insurance entered into from 4 May 2017 contain a term, implied by statute[1]Insurance Act 2015, s 13A., that if the insured makes a claim under the policy, the insurer must pay any sums due within a reasonable time.

This means that, for the first time in English law, there will be a generally available right to claim damages for late payment of insurance claims. This is in addition to the right to an indemnity under the policy and any interest.

The need for reform

It was always a surprising and unsatisfactory feature of English insurance law that there was no general right to claim damages for late payment of an insurance claim. But this was affirmed by the Supreme Court as recently as 2015 in The Alexandros T:[2]This summary of the law by Longmore LJ in the Court of Appeal ([2012] EWCA Civ 1714, [2013] 1 Lloyd’s Rep 217, para 1) was approved by Lord Clarke in the Supreme Court in the same case ([2013] UKSC 70, [2014] 1 Lloyd’s Rep 223, para 6).

As a matter of English law, an insurer commits no breach of contract or duty sounding in damages for failure promptly to pay an insurance claim. The law deems interest on sums due under a policy to be adequate compensation for late payment; this is so, even if an insurer deliberately withholds sums which he knows to be due under a policy, see Sprung v Royal Insurance[3][1999] Lloyd’s Rep IR 111. approving the decision in The Italia Express (No 2).[4][1992] 2 Lloyd’s Rep 281. … English law, moreover, gives no separate contractual remedy to an insured who complains that an insurer has misconducted himself before settling a claim. In either case the remedy of the insured is to sue the insurer and, if no settlement is forthcoming, proceed to judgment.

But the principle – that there was no right to claim damages at common law for late payment of an insurance claim – had long been under attack:

  • The principle was applied with ‘undisguised reluctance’ by the Court of Appeal in Sprung v Royal Insurance (UK) Ltd[5][1999] Lloyd’s Rep IR 111, CA, 118 (Evans LJ. in 1996.[6]Decided in 1996 but not reported until 1999.
  • The Court of Appeal granted permission to appeal in 1997 in a case which raised the issue but the appeal was not heard[7]Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120..
  • Rix LJ described it as ‘controversial’ in 2005, and said that if the issue reached the House of Lords the law might be clarified or changed (he nonetheless declined to grant permission to appeal, saying that was a matter for the House of Lords);[8]In Mandrake v Countrywide Assured Group plc [2005] EWCA Civ 840, at para 25. he also questioned it in extra-judicial remarks in 2009.[9]In ‘Should Sprung lose its spring?’, the Twelfth Annual Peter Taylor Memorial Address given to the Professional Negligence Bar Association on 21 April 2009. My colleague Rick Liddell of 4 New Square assisted Rix LJ in the preparation of this lecture.
  • The principle was challenged in the Supreme Court in Teal v Berkley[10]Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57, [2013] Lloyd’s Rep IR 56 in 2013, but the Court accepted reinsurers’ submission that the issue did not need to be determined in order to decide the appeal[11]See para 4 (Lord Mance). Colin Edelman and I acted for the reinsurers, instructed by James Roberts and Chris Dunlop of Clyde & Co..

In Sempra Metals Ltd v Inland Revenue Commissioners,[12][2007] UKHL 34, [2008] 1 AC 561. the House of Lords held that the loss suffered as a result of the late payment of money was recoverable at common law, subject to the ordinary rules of remoteness which apply to claims for damages; but the question of whether Sempra might permit a claim for late payment under a contract of insurance remained undecided.

Other possible routes to an award damages for late payment of insurance claims were also blocked: breach of the duty of utmost good faith by insurers does not sound in damages;[13]See Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, HL; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd, The ‘Star Sea’ [2001] UKHL 1, [2003] AC 469. The Law Commission considered introducing a right to damages for breach of the duty of good faith as an alternative to the new implied term, but was persuaded by insurers that this might lead to the development of US-style bad faith claims, and that this would be undesirable: see the Report, paras 26.60-26.63. and an implied term that insurers handle claims with reasonable speed and efficiency was rejected by Mance J in Insurance Corpn of the Channel Islands Ltd v McHugh[14][1997] LRLR 94. as neither obvious nor necessary for business efficacy, and inconsistent with the scheme and express terms of the relevant policies.[15]At 136-137.

There is a statutory cause of action for late payment under a policy of insurance, but this is only of limited application. It arises under ICOBS 8.1.1[16]ICOBS 8.1.1 imposes obligations on insurers in relation to claims handling, including an obligation to handle claims promptly and fairly. and s 138D of the Financial Services and Markets Act 2000.[17]This provides that contravention by an authorised person of a rule made by the Financial Conduct Authority (‘FCA’) is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. This ‘can perhaps be described as an express cause of action for breach of statutory duty’: Green v Royal Bank of Scotland plc [2013] EWCA Civ 1197, para 28 (Tomlinson LJ). The rules made by the FCA include ICOBS. It is available where the insured is a ‘private person’. This means an individual – not only a consumer – and any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind.[18]See s 138D(6) of FSMA and Regulation 3(1)(a) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, reg 3(1). This exception has been construed widely: see Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92, paras 48 and 70 (David Steel J). The statutory cause of action is separate from the jurisdiction of the Financial Ombudsman Service (‘FOS’), and unlike the FOS, is not subject to a financial limit.[19]The FOS award limit is £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R. In practice, this statutory cause of action was little-used in insurance cases. It has not been abolished, but is really now a dead letter in insurance claims.

Which contracts of insurance will be subject to the new implied term?

The Insurance Act 2015 was passed on 12 February 2015 and entered into force on 12 August 2016. This date is familiar to anyone involved in insurance claims, but it is not the relevant date for the new right to damages. The new right to damages for late payment of insurance claims applies only in relation to contracts of insurance entered into on or after 4 May 2017.[20]See s 28(2) of the Enterprise Act 2016, which inserts a new s 22(3A) into the Insurance Act 2015. The Enterprise Act 2016 was passed on 4 May 2016, and provides that the provisions in relation to damages for late payment enter into force one year later, on 4 May 2017: see s 44(3) of the Enterprise Act 2016. For policies entered into before that date, the old law continues to apply.

The new implied term

The implied term is introduced by s 13A(1) of the Insurance Act 2015. This provides:

It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time.

What is ‘a reasonable time’?

It follows from the way that the implied term is expressed in s 13A(1) that the right to payment within a reasonable time arises only if the insured makes a claim. As one might expect, ‘[a] reasonable time includes a reasonable time to investigate and assess the claim[21]Section 13A(2) of the Insurance Act 2015., and what is reasonable will depend on ‘all the relevant circumstances’. The statute lists some ‘examples of things which may need to be taken into account’. These are:[22]See s 13A(3) of the Insurance Act 2015.

  • the type of insurance’ – for example, travel insurance, or business interruption insurance;
  • the size and complexity of the claim’ – for example, a straightforward claim for storm damage to roof of house, or a major fire involving an insured in financial difficulties and suspected of arson. The Law Commission suggest in their July 2014 Report[23]At para 28.32. The wording of s 13A is identical to the wording of clause 14 in the Law Commission’s draft Bill and therefore the subject of its July 2014 Report. that a claim may be complicated by its location, and that if, for example, an insured peril occurs abroad, its investigation may be more difficult;
  • compliance with any relevant statutory or regulatory rules or guidance’. This might lead to allegations of breach of ICOBS even where the statutory cause of action under s 138D FSMA does not arise – for example, there is an obligation under ICOBS 8.1.1(2) to ‘provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress’;
  • factors outside the insurer’s control’. An obvious example would be delay caused by the insured itself, perhaps in failing to provide information sought by the insurer. The Law Commission suggest[24]See the July 2014 Report at para 28.38. that this might extend to a situation where there were unusually high numbers of claims, for example due to widespread flooding, and insufficient numbers of loss adjusters or surveyors available in or around the affected area.

Delay in paying a disputed claim

The insurer does not breach the implied term ‘merely by failing to pay the claim (or the affected part of it) while the dispute is continuing’, but:

  • the burden is on the insurer[25]If the insurer shows that there were reasonable grounds…’: s 13A(4). to show that there were ‘reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable)’;
  • if it can do so, then ‘the conduct of the insurer in handling the claim may be a relevant factor in deciding whether the term was breached and, if so, when.[26]Section 13A(4), Insurance Act 2015.

The Law Commission’s intention was to protect the ability of insurers to take a robust approach to decision-making where they suspect fraud or non-compliance with policy terms or where the precise circumstances of the loss were not clear, and to catch bad claims-handling practices, not prevent legitimate investigations by insurers.[27]Report, para 27.6. They therefore suggest that ‘something more’ must be shown before an insurer which makes a reasonable but ultimately wrong refusal to pay a claim may be found to have breached the implied term, and give the examples of:

  • an insurer which conducts its investigation unreasonably slowly, or is slow to change its position when further information confirming the validity of the claim comes to light;[28]See the July 2014 Report, paras 28.50-28.52. or
  • as examples of a deliberate or reckless breach, where claims handlers delay or reject a claim they know to be valid in order to secure a bonus payment or with a view to any internal budgets or quotas, or an insurer’s approach to a claim is blameworthy to the point of recklessness.[29]See the July 2014 Report, para 28.98.

Attempts to introduce into the House of Lords a right to allow insurers to rely on legal advice about a dispute in this context without waiving privilege in that advice were unsuccessful. This plainly has implications for the way in which insurers and their lawyers record legal advice and decisions made in the context of handling claims for policies issued/variations made from 4 May 2017 onwards. It would be prudent for the facts on which claims handling decisions are based, and the rationale for those decisions, to be recorded separately from the substance of legal advice, so that the former can be disclosed and relied on if a claim is made for late payment without having to choose between waiving privilege in legal advice, or being unable properly to defend a claim for late payment.

Delay in rejecting invalid claim does not give rise to right to damages

The implied term applies only in respect of ‘sums due’ in respect of a claim. This means that a delay in rejecting a claim which is later held to be invalid does not give rise to a right to damages for breach of the implied term.

The remedies for breach

As this is a term implied into the contract of insurance by statute, the usual remedies for breach of a contractual term are available, including damages and injunctive relief, and the usual rules as to remoteness, foreseeability and mitigation of loss will apply to a claim for damages. The basic position in relation to foreseeability, in the words of the Law Commission, is that ‘Insurers are aware that policyholders rely on insurance monies in times of crisis’.[30]Report, para 26.39.

Limitation periods

In accordance with its usual approach, the Law Commission was proposing not to make any specific provision in relation to limitation but to allow limitation to follow the general law.[31]Report, para 28.71-28.76. The general law is the six-year limited period for actions founded on simple contract.[32]Section 5, Limitation Act 1980. However, a specific limitation period was added by amendment in the House of Lords. This provides an additional one-year time limit for an action for breach of the implied term starting on the date on which the insurer has paid all the sums due in respect of the claim.[33]Section 5A(1), Limitation Act 1980. As this does not disapply the six-year limitation period, in principle either of these provisions might bar the claim for damages for late payment. Multiple limitation periods will therefore be in play in a claim for an indemnity under a policy of insurance and for damages for late payment.

Contracting out of the implied term

The parties may not contract out of the statutory implied term in consumer insurance.[34]Section 16A(1), Insurance Act 2015. For the purposes of the Insurance Act 2015, ‘consumer insurance contract’ means ‘a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business…’: see s 1 of the Consumer Insurance (Disclosure and Representations) Act 2012 and s 1 of the Insurance Act 2015. In non-consumer insurance[35]A contract of non-consumer insurance means ‘a contract of insurance that is not a consumer insurance contract’: see s 1 of the Insurance Act 2015. the parties may contract out of the implied term except where the breach is deliberate or reckless (‘did not care’).[36]Section 16A(2) and (3), Insurance Act 2015. Importantly, these restrictions do not apply to settlement agreements.[37]Section 16A(6), Insurance Act 2015.

This means that where contracting out is permitted (ie in non-consumer insurance unless the breach is deliberate or reckless), a contractual limitation on liability may be imposed, for example capping the amount or type of damages which may be recoverable.

Lawyers acting for insurers will need to consider whether they should advise insurers to enter into contractually binding settlement agreements which include an express term in relation to any entitlement to make a claim for late payment, or if that is not possible or desirable, at least provide for full and final settlement of the insurer’s liability so as to start time running for any claim for late payment.

Where the beneficiary is not an insured

The obligation to pay claims within a reasonable term applies only to ‘the insured’ making ‘a claim under the contract’, and where a contract has been entered into, ‘the insured’ is defined as ‘the party to a contract of insurance who is the insured under the contract’.[38]Section 1, Insurance Act 2015. The right to damages for late payment therefore applies only in respect of claims made by a party to the contract, and unlike in respect of fraudulent claims and contracting out, no special provision is made for late payment of claims under group policies which provide cover for persons who are not parties to the contract.

Impact of the reform

The Law Commission thought that successful late payment claims would be relatively rare, and the impact on insurers correspondingly limited.[39]Report, para 26.33. The reform will have a significant impact for policyholders like Mr Sprung for whom something goes badly wrong: they will no longer be left without a remedy. The Law Commission may be right that successful late payment claims prove to be relatively rare. The wider impact of the reform is however likely to be significant. There is potential for disruption if claims management companies move into this area, and the Association of British Insurers, which supported the reform, did so despite its concern that this might happen.[40]See the transcript of the evidence of Ms Philippa Handyside of the Association of British Insurers to the House of Lords Special Public Bill Committee on 3 December 2014, at page 20. These fears may turn out to be unfounded.

But the right to damages is likely to influence how insurers investigate and make decisions about claims. The need to record the rationale for decisions should prompt consideration at an earlier stage as to whether liability should be admitted, or part of a claim paid, while investigations of quantum or other elements are ongoing. There may also be an increased level of formality in claims handling, with insurers writing to insureds setting out in more detail the facts on which they are basing a decision, and inviting the insured to correct those facts if they think they are wrong. Insurers may also make increased use of Part 36 offers, or at least put their position formally in writing, so as to avoid any dispute as to what they offered to pay the insured at what stage, and on what terms. Where insurers confirm liability at an earlier stage, while continuing to investigate quantum, insureds will be in a stronger bargaining position when it comes to agreeing the quantum of the claim.

Alison Padfield QC

Notes   [ + ]

1. Insurance Act 2015, s 13A.
2. This summary of the law by Longmore LJ in the Court of Appeal ([2012] EWCA Civ 1714, [2013] 1 Lloyd’s Rep 217, para 1) was approved by Lord Clarke in the Supreme Court in the same case ([2013] UKSC 70, [2014] 1 Lloyd’s Rep 223, para 6).
3. [1999] Lloyd’s Rep IR 111.
4. [1992] 2 Lloyd’s Rep 281.
5. [1999] Lloyd’s Rep IR 111, CA, 118 (Evans LJ.
6. Decided in 1996 but not reported until 1999.
7. Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120.
8. In Mandrake v Countrywide Assured Group plc [2005] EWCA Civ 840, at para 25.
9. In ‘Should Sprung lose its spring?’, the Twelfth Annual Peter Taylor Memorial Address given to the Professional Negligence Bar Association on 21 April 2009. My colleague Rick Liddell of 4 New Square assisted Rix LJ in the preparation of this lecture.
10. Teal Assurance Company Ltd v W R Berkley Insurance (Europe) Ltd [2013] UKSC 57, [2013] Lloyd’s Rep IR 56
11. See para 4 (Lord Mance). Colin Edelman and I acted for the reinsurers, instructed by James Roberts and Chris Dunlop of Clyde & Co.
12. [2007] UKHL 34, [2008] 1 AC 561.
13. See Banque Financière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, HL; Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd, The ‘Star Sea’ [2001] UKHL 1, [2003] AC 469. The Law Commission considered introducing a right to damages for breach of the duty of good faith as an alternative to the new implied term, but was persuaded by insurers that this might lead to the development of US-style bad faith claims, and that this would be undesirable: see the Report, paras 26.60-26.63.
14. [1997] LRLR 94.
15. At 136-137.
16. ICOBS 8.1.1 imposes obligations on insurers in relation to claims handling, including an obligation to handle claims promptly and fairly.
17. This provides that contravention by an authorised person of a rule made by the Financial Conduct Authority (‘FCA’) is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. This ‘can perhaps be described as an express cause of action for breach of statutory duty’: Green v Royal Bank of Scotland plc [2013] EWCA Civ 1197, para 28 (Tomlinson LJ). The rules made by the FCA include ICOBS.
18. See s 138D(6) of FSMA and Regulation 3(1)(a) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, reg 3(1). This exception has been construed widely: see Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92, paras 48 and 70 (David Steel J).
19. The FOS award limit is £350,000 for acts or omissions on or after 1 April 2019: DISP 3.7.4R.
20. See s 28(2) of the Enterprise Act 2016, which inserts a new s 22(3A) into the Insurance Act 2015. The Enterprise Act 2016 was passed on 4 May 2016, and provides that the provisions in relation to damages for late payment enter into force one year later, on 4 May 2017: see s 44(3) of the Enterprise Act 2016.
21. Section 13A(2) of the Insurance Act 2015.
22. See s 13A(3) of the Insurance Act 2015.
23. At para 28.32. The wording of s 13A is identical to the wording of clause 14 in the Law Commission’s draft Bill and therefore the subject of its July 2014 Report.
24. See the July 2014 Report at para 28.38.
25. If the insurer shows that there were reasonable grounds…’: s 13A(4).
26. Section 13A(4), Insurance Act 2015.
27. Report, para 27.6.
28. See the July 2014 Report, paras 28.50-28.52.
29. See the July 2014 Report, para 28.98.
30. Report, para 26.39.
31. Report, para 28.71-28.76.
32. Section 5, Limitation Act 1980.
33. Section 5A(1), Limitation Act 1980.
34. Section 16A(1), Insurance Act 2015. For the purposes of the Insurance Act 2015, ‘consumer insurance contract’ means ‘a contract of insurance between (a) an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession, and (b) a person who carries on the business of insurance and who becomes a party to the contract by way of that business…’: see s 1 of the Consumer Insurance (Disclosure and Representations) Act 2012 and s 1 of the Insurance Act 2015.
35. A contract of non-consumer insurance means ‘a contract of insurance that is not a consumer insurance contract’: see s 1 of the Insurance Act 2015.
36. Section 16A(2) and (3), Insurance Act 2015.
37. Section 16A(6), Insurance Act 2015.
38. Section 1, Insurance Act 2015.
39. Report, para 26.33.
40. See the transcript of the evidence of Ms Philippa Handyside of the Association of British Insurers to the House of Lords Special Public Bill Committee on 3 December 2014, at page 20.

The Long Road to Reform of the Third Parties (Rights Against Insurers) Act 1930

The Law Commissions’ Command Paper on Third Parties Rights Against Insurers was presented to Parliament in July 2001, just before I started writing the first edition of my book on Insurance Claims. Thinking that this meant that new legislation was imminent, I left the section about the Third Parties (Rights Against Insurers) Act 1930 until last. In fact, the 1930 Act outlasted not only the first edition of my book, but also the second. By 2012, when the third edition of the book came out, the Third Parties (Rights Against Insurers) Act 2010 had finally received Royal Assent.[1] But it is still not in force. Why not?

A drafting error in the 2010 Act meant that a gap needed to be filled, and this required primary legislation: the new Act applied to companies in respect of which an “administration order” was in force, but not those which entered into administration without a court order. (In July 2001 when the Law Commission prepared its draft bill, an administration order was a pre-requisite for administration.)

The Ministry of Justice said in its March 2012 Report on the implementation of Law Commission proposals that implementation of the Act had been “delayed by work on other priorities”, that it had provisionally concluded that some rules of court would be necessary, and that the Act required a small amendment to cover all forms of administration. It concluded that it was unlikely that the 2010 Act would be commenced until 2013.[2]

2013 came and went. So did 2014.

In January 2015, Explanatory Notes published in relation to the Insurance Bill stated that the 2010 Act had not been commenced because it failed to cover “the full range of insolvent or defunct wrongdoers”,[3] and that the draft amendments “clear the way for the 2010 Act to come into force”.[4]

Then, in February, the Insurance Act 2015 was enacted. This filled the gap in the 2010 Act in respect of companies entering administration without a court order. At the same time, a power to change the meaning of “relevant person” was added, enabling the Secretary of State to make regulations adding to the persons to whom the 2010 Act applies (within the broad category of individuals and corporate bodies who have liability insurance and lack control of their assets due to insolvency or dissolution).  The scope of application of the 2010 Act was also enlarged by additions to the transitional provisions.

In its March 2015 Report on the implementation of Law Commission proposals, the Ministry of Justice said:[5]

“The 2013 Implementation Report indicated that the Government was working towards implementation of the 2010 Act but had provisionally concluded that it would have to be amended before it could be commenced.

Some of the necessary amendments were included in… the Insurance Act 2015. The amendments included the creation of a regulation-making power to alter the circumstances in which the 2010 Act applies. To ensure that the application of the 2010 Act is as wide as it ought to be, taking into account the scope of the 1930 legislation and developments in insolvency law, the Government is continuing to work closely with the Commission to draft the regulations with a view to commencing the 2010 Act as amended by the Insurance Act 2015 and the proposed regulations as soon as is reasonably possible.”

The Law Commission’s note on the Insurance Bill provided more detail: it envisaged that regulations would add additional methods of dissolution of a body corporate or of an unincorporated association, and add sector-specific administration procedures, including for financial services, postal and utility companies. Sixteen such sector-specific procedures were identified in the Law Commission’s note.

In July 2015, in its Annual Report 2014-15,[6] the Law Commission said:[7]

“The Insurance Act 2015 adds a new regulation-making power to the 2010 Act to keep it up to date with changes in insolvency law. The intention is to use this power to make regulations early in the 2015-16 parliamentary session so as to bring the 2010 Act into force by the end of 2015.”

Where does that leave us? In short, the gap in relation to administration has been filled, but further amendments have yet to be made by regulations, the timetable for which has slipped again; and there is no further information on the proposed rules of court.

The 2010 Act must surely be brought into force in 2016. But will it be in force by the end of March 2016, which is the deadline for the revised text of my fourth edition? According to my latest information from the Ministry of Justice, there may yet be grounds for optimism.

Alison Padfield

  1. On 25 March 2010.
  2. Paragraph 9.
  3. Paragraph 12.
  4. Paragraph 11.
  5. Paragraphs 34 and 35.
  6. Published on 20 July 2015.
  7. Page 46.