Category: Insurance

Employment tribunal claims and the Third Parties (Rights Against Insurers) Act 2010

The latest decision on the Third Parties (Rights Against Insurers) Act 2010 (‘the 2010 Act’) has come from an unexpected source.

In Watson v Hemingway Design Limited (in liquidation)[1]Employment Appeal Tribunal, 16 December 2019., Kerr J decided that an employment tribunal had jurisdiction to make a declaration under the 2010 Act as to the liability of the insurer as well as the liability of the insured. He also concluded that an arbitration clause in the contract of insurance was rendered void by employment and discrimination legislation.

Neither aspect of the decision is likely to be welcomed by insurers.

Employment tribunal jurisdiction

The judge said that the first issue – whether an employment tribunal had jurisdiction to make a declaration under the 2010 Act as to the liability of the insurer as well as the insured – was a question of statutory construction: specifically, whether ‘court’ in the 2010 Act included the employment tribunal. This followed from the fact that the jurisdiction of the employment tribunal was entirely statutory, and s 2 of the Employment Tribunals Act 1996 provided that ‘Employment tribunals shall exercise the jurisdiction conferred on them by or by virtue of this Act or any other Act, whether passed before or after this Act.’ The judge said that, if an employment tribunal fell within the words ‘the court’ in s 2(6) of the 2010 Act, the Act had conferred jurisdiction on the employment tribunal to make a declaration as to the insurer’s liability under s 2(2)(a) of the 2010 Act; and, if that was so, the 2010 Act fell within the words ‘any other Act, whether passed before or after this Act’.

The judge considered various authorities[2]Including Attorney-General v BBC [1981] AC 303, HL, Peach Grey & Co v Sommers [1995] ICR 549, CA, Vidler v UNISON [1999] ICR 746, EAT and Brennan v Sunderland City Council [2012] ICR 1183, EAT. and noted that the employment tribunal had been held to be a ‘court’ for some purposes but not for others. He concluded that the scope of ‘court’ depended on the statutory context, and that the context called for a purposive construction of ‘court’ in the 2010 Act because otherwise the statutory purpose of the 2010 Act in allowing the claimant to bring one claim rather than two would have failed in its application to employment tribunal claims.

Validity of the arbitration clause

The second issue was whether an arbitration clause in the contract of insurance was rendered void by the applicable employment legislation. Although the judge did in fact go on to consider this issue, he said that in his view it was not necessary for him to decide it because, although the insurer had relied on the existence of the arbitration clause in its grounds of resistance (defence), it had only done so ‘further or in the alternative’ to its challenge to the tribunal’s jurisdiction.

This seems questionable: the judge said that it was possible that the arbitration clause might become relevant at the next stage of the proceedings because either party might take steps to have an arbitrator appointed; but in fact the insurer had (as the judge himself found) already invoked the arbitration clause in its pleaded defence. Therefore, as soon as the judge concluded that the employment tribunal had jurisdiction under the 2010 Act, the question of the validity of the arbitration clause arose for decision.

On the second issue, the claimant argued that s 203 of the Employment Rights Act 1996[3]Section 203(1) of the Employment Rights Act 1996 provides: ‘Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports—(a) to exclude or limit the operation of any provision of this Act, or (b) to preclude a person from bringing any proceedings under this Act before an employment tribunal.’ and s 244 of the Equality Act 2010[4]Section 244(1) of the Equality Act 2010 provides: ‘A term of a contract is unenforceable by a person in whose favour it would operate in so far as it purports to exclude or limit a provision of or made under this Act.’ rendered the arbitration clause void because it excluded or limited the operation of those provisions and precluded the claimant from bringing proceedings before the tribunal under those sections ‘as against [the insurer] which has inherited [the insured’s] liability‘[5]At para 25(7)..

In setting out relevant provisions of the arbitration clause, the judge said that the clause applied where there was a ‘difference or dispute’ between the insured and the insurer ‘or any other person insured under this Policy’. The fact that the judge quoted this second phrase suggests that the judge considered that, on a statutory transfer under the 2010 Act, the claimant became a ‘person insured under this Policy’. This fits with his characterisation of the clause[6]At para 59. as ‘requiring the claimant (as statutory transferee of the rights of… the insured) to submit his dispute with [the insurer] to arbitration’.

In fact, the clause does no such thing. The claimant remained free to submit his dispute to the employment tribunal – as, indeed, he had done. Nothing in the arbitration clause affected the progress of the claimant’s claim in the employment tribunal; nor did the claimant suggest that it did.

In finding that the arbitration clause did not bind the claimant, the judge seems in effect to have accepted the claimant’s submission that the insurer had ‘inherited [the insured’s] liability’, and extrapolated from this to treat the claim by the claimant against the insurer as if it were a claim under the employment legislation.

It is of course correct that, once the judge had concluded that, as a matter of construction of the 2010 Act, ‘court’ included the employment tribunal, the binding nature of the arbitration clause deprived the claimant of the procedural advantage of bringing one set of proceedings. This arguably undermines his conclusion on the question of the jurisdiction of the employment tribunal. But in any event his reasoning conflates two things:

  • the claimant’s rights against his former employer – which he was, and remained, entitled to bring in the employment tribunal under s 203 of the Employment Rights Act 1996 and s 244 of the Equality Act 2010; and
  • the employer’s rights against the insurer which were transferred to him under the 2010 Act, which were – and should have remained – subject to the arbitration clause.

Notes

↑1 Employment Appeal Tribunal, 16 December 2019.
↑2 Including Attorney-General v BBC [1981] AC 303, HL, Peach Grey & Co v Sommers [1995] ICR 549, CA, Vidler v UNISON [1999] ICR 746, EAT and Brennan v Sunderland City Council [2012] ICR 1183, EAT.
↑3 Section 203(1) of the Employment Rights Act 1996 provides: ‘Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports—(a) to exclude or limit the operation of any provision of this Act, or (b) to preclude a person from bringing any proceedings under this Act before an employment tribunal.’
↑4 Section 244(1) of the Equality Act 2010 provides: ‘A term of a contract is unenforceable by a person in whose favour it would operate in so far as it purports to exclude or limit a provision of or made under this Act.’
↑5 At para 25(7).
↑6 At para 59.

Non-party costs orders against liability insurers – Travelers Insurance Co Ltd v XYZ in the Supreme Court

Yesterday, the Supreme Court handed down judgment in Travelers Insurance Co Ltd v XYZ.[1][2019] UKSC 48.] This was an application for non-party costs against liability insurers made under s 51(3) of the Senior Courts Act 1981 by claimants in the PIP breast implant group litigation.

I have previously written about non-party costs order against insurers, including commentary on the Court of Appeal decision in Travelers v XYZ, and I will be updating that post in the light of the Supreme Court decision.

In the meantime, here are my initial thoughts on the decision.

Travelers v XYZ involved a Group Litigation Order (‘GLO’), and the facts were unusual. They are summarised briefly in my earlier blog:  for present purposes, the key point is that some of the claims against the insured which were within the GLO were covered by insurance, but others were not.

Although the facts were unusual, the Supreme Court took the opportunity to review the principles applicable to non-party costs orders against liability insurers.

Much of what is in the Supreme Court decision amounts to confirmation of well-established principles from earlier authorities in relation to applications for non-party costs orders against liability insurers:

  • The proper participation of the insurer in the funding, conduct and control of the insured’s case is regulated by long-settled principles, which are in addition to the contractual terms of the policy itself. As Sir Wilfrid Greene MR said in Groom v Crocker[2][1939] 1 KB 194 at 203., insurers must act in what they consider in good faith to be the common interest of themselves and their insured.
  • There are two bases on which a non-party costs order against liability insurers might be made: intermeddling; and becoming the ‘real defendant’ to proceedings.[3]TGA Chapman Ltd v Christopher [1998] 1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.
  • ‘Exceptionality’ is not a useful test for determining whether a non-party costs orders should be made against liability insurers.[4]TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd [1999] Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).
  • In order to identify whether a liability insurer has become the ‘real defendant’ to proceedings, the principles laid down by the Court of Appeal in TGA Chapman Ltd v Christopher[5][1998] 1 WLR 12 should be applied.[6]Travelers v XYZ, paras 52 and 77 (Lord Briggs).
  • As there is no obligation on insurers to disclose policy information including limits of cover, a failure to do so is unlikely to justify a non-party costs order.[7]Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).
  • If the other ingredients for a non-party costs order are present, causation remains an important element, and it is the costs attributable to the intermeddling that the meddler is likely to be ordered to pay: if the costs would have been incurred in any event, an order is unlikely.[8]Travelers v XYZ, paras 66 and 80 (Lord Briggs).

Liability insurers will be reassured in particular by the clear statement that non-disclosure by insurers of policy limits is unlikely to justify a non-party costs order.

Key points of interest in the decision are:

  • The analysis and application of the principles relevant to intermeddlers, rather than the ‘real defendant’ principles, because the insurer had become involved in uninsured claims.[9]At paras 52 to 56 (Lord Briggs). On this basis, the ‘real defendant’ principles established in TGA Chapman Ltd v Christopher are confined to claims in which the limit of indemnity is insufficient to cover the costs of the successful party.[10]At para 78 (Lord Briggs).
  • The significance accorded by the Supreme Court to the fact that in liability insurance, the insurer’s involvement arises from a framework of contractual obligation as between the insurer and the insured: Lord Briggs said that if the insurer has not gone beyond the confines of those contractual obligations and attendant rights as explained in Groom v Crocker, ‘liability as an intermeddler may be very hard to establish’.[11]At para 55.

One element of this framework of rights is the established principle that, in relation to issues common to insured and uninsured claims, insurers may not[12]Unless the policy expressly permits this. apportion their contractual liability to pay defence costs.[13]Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc [2016] AC 509, paras 36 to 38.

This meant that insurers were funding the common costs of the defence of both insured and uninsured claims.  Lord Briggs noted[14]At para 63 that solicitors who were jointly instructed by the insured and the insurer played an advisory role in the insured’s decision not to disclose the limits of its insurance cover earlier, when uninsured claimants might have abandoned their claims, and successfully to resist an order for disclosure. That advice was, Lord Briggs said, ‘given in good faith without a perception by the solicitors that there might be (as the judge held that there was in fact) a conflict between the interests of the insured and the insurer’ in whether to make the disclosure.

This is an interesting remark: the good faith of the solicitors, and their failure to identify the conflict, while explaining why an insurer has strayed beyond the proper ambit of its role as outlined in Groom v Crocker, does not mean that that has not happened. Lord Briggs expressly left open[15]At para 64 the question of whether it would be right, in those circumstances, for the insurer to take responsibility for the advice.

The basis of Lord Briggs’s conclusion on this point was, in fact, simply that the advice fairly reflected the insurer’s rights, and was not therefore conduct which amounted to unjustified intermeddling in the uninsured claims for the purposes of the proceedings.[16]At para 64

How far this might be pushed in practice is unclear: Lord Briggs said that it might even have extended to the insurer’s involvement in settlement and admissions in relation to uninsured claims, although he did not reach a firm conclusion on this, and that the court should be slow to second-guess jointly instructed solicitors where they allow the insurer a role in decision-making about claims raising common issues, notwithstanding that some of the claims are uninsured.[17]At paras 73 and 83 He also recognised that, where there was a connection between uninsured and insured claim, what he described as ‘the legitimate interests of the insurer’ might justify some involvement by a liability insurer in decision-making and even funding of the defence of the uninsured claims without exposing the insurer to liability to pay the successful claimant’s costs.[18]At para 79.

Ultimately, though, Lord Briggs preferred to rest his decision on the absence of any relevant causative link in relation to the incurring of costs.[19]At para 74.

Lord Sumption, who said that he agreed broadly with Lord Briggs’s analysis of the relevant principles and their application in this case, made a series of potentially significant observations in a concurring judgment.

Lord Sumption too emphasised the importance of the insurer’s contractual right to direct the conduct of the litigation, but he developed the analysis differently. He said that this was a form of compulsory agency and was a right to direct the litigation ‘in his assured’s interest, and not his own, even though their interests will usually coincide’.[20]At para 114.

This is in contrast to the assumption implicit in Lord Briggs’s judgment that, where the interests of the insured and the insurer conflict, the insurer’s contractual right to control the litigation entitles the insurer to act in accordance with its interests rather than those of the insured. Lord Sumption said that the solicitor who the insurer appoints is the insured’s solicitor, who owes all the usual professional duties to the insured and is entitled to look to the insured for his fees, notwithstanding that his instructions come from the insurer.

Lord Sumption said that this feature in particular meant that the insurer could not be regarded as the real defendant, that this left unjustified intermeddling as the only basis on which a liability insurer might be at risk of having a costs order made against him, and that cases in which a costs order might be made against a liability insurer on this basis were ‘likely to be rare’.[21]At para 116. He added that:

  • A liability insurer has an obvious legal interest in the performance of his contractual duties under the policy and the exercise of his contractual rights.
  • That interest is limited to the defence of insured claims and different considerations may arise if he steps outside that role.
  • As Travelers v XYZ illustrated, the proper defence of claims may involve steps which directly or indirectly affect uninsured claims.
  • This is an area in which a person conducting or directing the conduct of litigation is entitled to a large margin of judgment and hindsight is not usually an adequate tool for assessing how he exercises it.
  • ‘If he acts in good faith in the interest of the assured qua the defendant to insured claims, he should not incur liability in costs.’
  • He would expect this to be equally true of the case where the potential liability of the assured is subject to a limit of cover which is exceeded, but that was not an issue which needed to be examined because it did not arise on the facts of the appeal.

Although Lords Briggs and Sumption both considered that insurers should be afforded a significant degree of latitude in decision-making in litigation against insureds which they were contractually entitled to control, Lord Sumption placed at the heart of his analysis the insurers’ obligation to act in the interests of the insured. If liability insurers do this, they should not be exposed to liability for non-party costs orders. If they prefer their own interests, they should be prepared for a less benign outcome. Which side of the line their conduct will fall if they act on flawed advice from a jointly instructed solicitor is unclear. Lord Briggs’s judgment could be interpreted as hinting that an order should not be made; and the opposite could be said for Lord Sumption’s.

Alison Padfield QC

Notes

↑1 [2019] UKSC 48.]
↑2 [1939] 1 KB 194 at 203.
↑3 TGA Chapman Ltd v Christopher [1998] 1 WLR 12, CA; Travelers v XYZ, para 36 (Lord Briggs, with whom Lady Black and Lord Kitchin agreed.
↑4 TGA Chapman Ltd v Christopher [1998] 1 WLR 12, 20, CA; Citibank NA v Excess Insurance Co Ltd [1999] Lloyd’s Rep IR 122, 131 (Thomas J); Travelers v XYZ, paras 33 and 34 (Lord Briggs).
↑5 [1998] 1 WLR 12
↑6 Travelers v XYZ, paras 52 and 77 (Lord Briggs).
↑7 Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398, CA, 406, col 2 (Auld LJ); Travelers v XYZ, paras 67 and 81 (Lord Briggs).
↑8 Travelers v XYZ, paras 66 and 80 (Lord Briggs).
↑9 At paras 52 to 56 (Lord Briggs).
↑10 At para 78 (Lord Briggs).
↑11 At para 55.
↑12 Unless the policy expressly permits this.
↑13 Travelers v XYZ, para 13 (Lord Briggs), referring to New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd [1997] 1 WLR 1237, PC, approved: International Energy Group Ltd v Zurich Assurance plc [2016] AC 509, paras 36 to 38.
↑14 At para 63
↑15 At para 64
↑16 At para 64
↑17 At paras 73 and 83
↑18 At para 79.
↑19 At para 74.
↑20 At para 114.
↑21 At para 116.

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.

Articles page update

I’ve just updated my articles page to add two articles:

  • Is the grass always greener? – an article on the obligations of SIPP providers following R (Berkeley Burke SIPP Administration Ltd) v Financial Ombudsman Service Ltd – written with Diarmuid Laffan of 4 New Square and published in the New Law Journal in January 2019
  • Cyber games – an article on cyber insurance published in the New Law Journal in June 2018

Thanks as ever to Jan Miller, the editor of the New Law Journal, for permission to use the articles here.

Alison Padfield QC

The Third Parties (Rights Against Insurers) Acts (again)

Regulations have just been passed to plug the latest legislative gap inadvertently opened up by the Third Parties (Rights Against Insurers) Act 2010. I have previously written about the need to plug earlier gaps, and the resulting delay in the 2010 Act coming into effect (here, and here).

The Regulations are the Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018.

One of the problems with the Third Parties (Rights Against Insurers) Act 1930, and one of the reasons for reform, was that where the insured defendant is a company which has been struck off the register, a claimant has to restore it to the register for the purpose of obtaining judgment against it. This is because, without judgment against the insured company on liability and quantum, no claim can be made against the company’s liability insurers under the 1930 Act.[1] For cases to which the 1930 Act still applies[2], which include many long-tail disease cases, the company must still be restored to the register; but for cases to which the 2010 Act applies, it is no longer necessary to do this.

In removing a procedural hurdle for claimants, the 2010 Act created a problem for liability insurers. Now, under the 2010 Act, a liability insurer may have to pay an indemnity on behalf of an insured company without the claimant having restored that company to the register. And if a company has not been restored to the register, its insurers cannot exercise their right of subrogation – by bringing a claim in the name of the defunct company – to recover from a third party damages they have paid to the claimant.

It is open to the insurers themselves to apply to court[3] to restore the company to the register – but unlike an application by a claimant in a personal injury claim, to which no time limit applies[4], insurers may apply to restore a company to the register only if it has been dissolved in the previous six years[5].

The 2018 Regulations address this by amending s 1030(1) of the Companies Act 2006. The effect of the amendment is to allow 2010 Act insurers to apply ‘at any time’ to restore a company to the register in order to bring a subrogated claim in respect of the company’s liability for damages for personal injury.[6]

The regulations were made on 2 November 2018. They come into force later this month.[7]

Alison Padfield QC

  1. See Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363, CA; Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, HL. ↑
  2. See Redman v Zurich Insurance plc [2017] EWHC 1919 (QB), [2018] 1 WLR 280. ↑
  3. See s 1029 of the Companies Act 2006. ↑
  4. There was a time limit, but this was removed in 1989 following the decision in Bradley v Eagle Star Insurance Co Ltd in the House of Lords: see ss 651 and 653 of the Companies Act 1985, as originally enacted and as amended. ↑
  5. See s 1030(4) of the Companies Act 2006. ↑
  6. The 2018 Regulations are made under s 19(8)(a) and (9) of the 2010 Act. ↑
  7. On the 21st day after the day on which they were made: see reg 1. ↑

No limits? Non-party costs against insurers

The jurisdiction to make a costs order against a non-party was first recognised in 1986.[1] There is now a wealth of guidance on non-party costs, including well-developed principles in relation to insurers, although the appellate courts continue to emphasise that this is an exercise of discretion, and that these are guidelines, ‘not… a rule-book’[2]. This means that, as new factual scenarios arise such as the PIP breast implant litigation[3], the boundaries of non-party costs orders against insurers continue to be tested.

Basic ingredients

The basic ingredients for a non-party costs application are that:

  • An insurer has funded litigation
  • The litigation has been lost and an adverse costs order has been made against the insured
  • The insured is unable to pay the costs

Jurisdiction

The jurisdiction to make an order for costs against a non-party costs arises under s 51of the Senior Courts Act 1981. This provides that costs in civil proceedings are ‘in the discretion of the court’, and that the court shall have full power to determine by whom and to what extent the costs are to be paid.[4]

‘Exceptional’

Balcombe LJ said in Symphony Group plc v Hodgson[5] that an order for payment of costs by a non-party will always be ‘exceptional’, but this is liable to mislead in the context of applications for non-party costs orders against insurers. As Phillips LJ said in T G A Chapman Ltd v Christopher[6] in relation to liability insurers, it must be rare for litigation to be funded, controlled and directed by a third party motivated entirely by its own interests, and although this is not extraordinary in the context of the insurance industry, that is not the test. The test is whether these features are extraordinary in the context of the entire range of litigation which come before the courts – and Phillips LJ said that he had no doubt that they were.

Solely or predominantly

Phillips LJ referred in Chapman v Christopher to a third party motivated ‘entirely’ by its own interests, reflecting the facts of that case. But in most cases, a liability insurer can credibly say that it is acting at least partly in the interests of its insured, and in Cormack v Excess Insurance Co Ltd[7], the Court of Appeal made clear that that is not sufficient to prevent a non-party costs order being made. In Cormack v Excess, Auld LJ referred[8] to what Sir Wilfrid Greene MR said in Groom v Crocker[9] about insurers being entitled to decide how to conduct the litigation provided that they did so in what they bona fide – in good faith – considered to be the common interest of themselves and their insured, and said that it might be sufficient for a finding of exceptionality that an insurer’s self-interest, though not its exclusive motivation (or effect) in its conduct of litigation, predominated over that of the insured to such an extent and in such circumstances that it strayed beyond this.

Auld LJ said that it was relevant to ask whether the insurer, when its insured was approaching or at risk of exceeding the limit of his indemnity cover, behaved solely in its own interest as if it were the defendant to the proceedings. It is important to recognise that, as Auld LJ said, this issue is distinct from the question of the reasonableness or justification of a tactical decision in litigation, such as whether to pursue or maintain a defence to an action. Once the defence has failed and an application for non-party costs is being considered, those are irrelevant considerations.

‘The’ real party or ‘a’ real party

The non-party need not be ‘the’ real party to the litigation; it is enough that they be ‘a’ real party. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd[10], Lord Brown said[11]:

‘Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation… Consistently with this approach, Phillips LJ described the non-party underwriters in T G A Chapman Ltd v Christopher… as “the defendants in all but name”. Nor, indeed, is it necessary that the non-party be “the only real party” to the litigation…, provided that he is “a real party in … very important and critical respects”’.

Liability insurance

Liability insurers invariably fund and take over the defence of the proceedings, and benefit from them, but something more than this is required for a finding on an application for non-party costs that the non-party liability insurer has not merely funded the proceedings, but substantially also controlled or at any rate was to benefit from them so that it is appropriate for an order to be made.

(1) Controlling the litigation

In Citibank NA v Excess Insurance Co Ltd[12], Thomas J said[13] that there were two aspects to the conduct of litigation:

  • First, obtaining information to draft the defence, instructing an expert, considering the statements of case, disclosure of documents, preparing witness statements, providing information to counsel, etc.
  • Secondly, the giving and receiving of advice and the taking of the decisions as to whether to defend the case through to trial or to attempt to settle the litigation.

Thomas J said that although the involvement of the actual defendant in the first of these activities was a factor, ‘the decisive factor as to who has the conduct of litigation must be the control and direction exercised through the giving and receiving of advice and the taking of the decisions’.

(2) Benefitting from the litigation

Where a defence is run sensibly and reasonably for the benefit of both the insured and insurers, and the court is unlikely to view the insurer as benefiting from the litigation to the extent required for a non-party costs order, and is unlikely to exercise its discretion to make an order in that situation. Simply benefiting from the litigation is not enough: this is why the issue of whether insurers have allowed their interests to predominate over that of the insured is so important in this context. Consider for example the facts of two of the cases referred to above:

  • Chapman v Christopher: The defendant, Mr Christopher, lived at home with his mother and had no assets. He did though have liability insurance with a limit of indemnity of £1m under his mother’s household insurance policy. The claimants’ warehouse and factory were extensively damaged in a fire which was caused by Mr Christopher’s negligence: he had thrown a lighted match which landed in an open tin of beeswax which immediately caught fire. The insurers were the defendants in all but name: by reason of the Third Parties Rights Against Insurers Act 1930, they were contingently liable to the claimants up to the policy limit of £1m. They took the decision to contest the litigation and subsequently conducted the defence, in an attempt to avoid or reduce their liability to the claimants. Phillips LJ described this as a ‘paradigm case for the exercise of the court’s discretion under s 51 to make a costs order against a non-party’.
  • Cormack v Excess: The insured were civil engineers with a reputation to protect, and the Court of Appeal accepted that the decision to defend was not taken entirely by the insurer, and that, until liability was determined, the proceedings were not defended solely for the benefit of the insurer. However, once liability was determined, and the judgment exceeded the limit of indemnity, the proceedings in relation to quantum were defended entirely for the benefit of the insurer. The insurer was ordered to pay the claimant’s costs of the quantum stage of the action.

(3) Conflict of interest

Where solicitors are on the record for the insured in proceedings, and are acting under a joint or dual retainer for the insured and for the liability insurer, it seems that a failure to recognise or deal appropriately with a conflict of interest, and as a result to allow the interests of the insurer to predominate over those of the insured, will strongly incline a court to exercise its discretion in favour of making a non-party costs order.

XYZ v Travelers

In XYZ v Travelers, the PIP breast implant litigation, the insured went into insolvent administration. A mixture of insured and uninsured claims were being pursued in group litigation, and the effect of the Group Litigation Order (‘GLO’) was that the more uninsured claims which were pursued, the lower the proportion which the insurer would have to contribute to the insured’s liability for common costs. The insured wanted to disclose to the claimants whose claims were uninsured that that was the case, but were advised by the legal team appointed by insurers not to do so. There was a conflict of interest, which no one recognised at the time. The Court of Appeal said that this was not decisive, but they did agree with the judge that a non-party costs order should be made.

(1) ‘Asymmetry’

One particular feature which made the case ‘exceptional’ was the ‘obvious asymmetry’ in insurers’ position: if the insured had succeeded on the preliminary issues then all claimants (whether insured or uninsured) would have been liable equally to contribute towards the insured’s costs which, ultimately, would have been to the insurer’s advantage; but failure on those very same issues meant that, unless a non-party costs order was made, insurers were ultimately liable for only approximately 32 per cent of the claimants’ costs. This asymmetry arose because of the terms of the GLO.

(2) Non-disclosure of the insurance position

In Cormack v Excess, Auld LJ said[14] that as there was no obligation in litigation to disclose the limit of indemnity, it was difficult to see why an insurer should be penalised in costs for not doing so, and that a court should be cautious before regarding a failure to disclose the extent of cover as sufficiently exceptional to justify the making of a non-party costs order. In Travelers v XYZ, while they based their decision on the asymmetry they identified between the position of the claimants and the insurers referred to above, the Court of Appeal identified a number of reasons why Auld LJ’s observation did not apply:[15]

  • It was not alleged in Cormack v Excess that the failure to disclose the cover limit had any causative effect on costs. In Travelers v XYZ, by contrast, the judge was satisfied that, if the lack of insurance had been disclosed, costs would not have been incurred.
  • The non-disclosure in Cormack v Excess was the cover limit. The non-disclosure in Travelers v XYZ was the non-existence of any insurance at all.
  • The policy itself and the pre-action protocols in Travelers v XYZ required any response to a letter of claim to include details of the insurance policy.

Underlying and linking all these points seems to be a single factor, which is that the claims, both insured and uninsured, were subject to a GLO:

  • The GLO gave rise to the asymmetry in relation to the recoverability of costs
  • The GLO gave rise to the conflict of interest between insurers and the insured about the desirability of disclosing the fact that some of the claims were uninsured, and in turn to the flawed advice given to the insured by the legal team not to disclose that fact
  • The GLO formed the basis for Thirlwall J’s case management decision[16] that the insured should provide her with information about its insurance position
  • The GLO resulted in the common issues of both insured and uninsured claims being tried together, so that the insurers were funding the costs of defending all the claims, including the uninsured claims

Against this background, although the information about the insurance position provided to the judge was not disclosed to the parties, the Court of Appeal said that it must have been obvious to the insured and to insurers that the perception of the uninsured claimants was that all of the underlying claims were insured.[17] In these circumstances, it is unsurprising that the Court of Appeal decided that ‘on balance’ the flawed advice given by the legal team appointed by insurers in relation to the disclosure of the insurance position was relevant to the insurers’ liability for costs, although not decisive, and that it was not unjust for the insurers to bear some responsibility for the advice given under the joint retainer[18].

BTE insurance

The same principles apply in relation to before the event (‘BTE’) legal expenses insurers as to liability insurers. Unlike liability insurers, BTE insurers will not usually control the proceedings, or have an interest in the result of the litigation save insofar as it affects their liability to pay costs. They are therefore not generally balancing their interests with those of the insured, and will not usually be exposed to a risk of a non-party costs order.[19]

ATE insurance

After the event (‘ATE’) legal expenses insurance has features which are distinct from BTE insurance: ATE insurers decide which cases to insure after the cause of action has arisen, and the recoverability of the policy premium may depend on the outcome of the litigation.

In Herridge v Parker[20], Mr Recorder James Thom QC, sitting as a judge of the County Court, held[21] that ATE insurance was in the public interest as it facilitated access to justice and that, by analogy with the case-law in relation to solicitors acting under conditional fee agreements, an ATE insurer would not be ordered to pay costs as a non-party simply by virtue of issuing a policy which was insufficient, either because the policy was avoided, or because the limit of indemnity was exceeded.

The judge also observed that an ATE insurer who chose to prolong the proceedings for the purposes of seeking to negotiate a favourable exit might well be acting in a sufficiently self-interested way to become a ‘real party’. In those circumstances, a non-party costs order might be made against the insurer in respect of the additional costs. The same logic would apply if a BTE insurer acted in this way.

Subrogated claims

Where insurers have funded a subrogated recovery, they will usually pay the costs if the action is unsuccessful. But if they do not, an application for a non-party costs order may be made against them, and the same principles applied as on an application against liability insurers. ‘What has been sauce for the goose would have been sauce for the gander’, as Phillips LJ said in Chapman v Christopher, in which although the focus was on the position of the liability insurers who had funded the unsuccessful defence, both parties were ‘litigants in name only’, as the claim itself was brought by underwriters exercising subrogated rights.

Alison Padfield QC

  1. In Aiden Shipping Co Ltd v Interbulk [1986] AC 965, HL. ↑
  2. Petromec Inc v Petroleo Brasileiro SA Petrobras [2006] EWCA Civ 1038, para 10 (Laws LJ); Travelers Insurance Co Ltd v XYZ [2018] EWCA Civ 1099, para 30 (Lewison LJ; Patten LJ agreeing). ↑
  3. Travelers Insurance Co Ltd v XYZ [2018] EWCA Civ 1099. ↑
  4. Section 51(1) and (3). ↑
  5. Symphony Group plc v Hodgson [1994] QB 179, CA. ↑
  6. [1998] 1 WLR 12, CA. ↑
  7. [2002] Lloyd’s Rep IR 398, CA. ↑
  8. At 406, cols 1 to 2. ↑
  9. [1939] 1 KB 194, CA. ↑
  10. [2004] UKPC 39, [2004] 1 WLR 2807. ↑
  11. At para 25. ↑
  12. [1999] Lloyd’s Rep IR 122. ↑
  13. At 133, col 1. ↑
  14. At 406, col 2. ↑
  15. At para 44 (Lewison LJ; Patten LJ agreeing). ↑
  16. XYZ v Various [2013] EWHC 3643 (QB). ↑
  17. At para 42 (Lewison LJ; Patten LJ agreeing). ↑
  18. At para 45 (Lewison LJ; Patten LJ agreeing). ↑
  19. See Murphy v Young & Co’s Brewery [1997] 1 WLR 1591, CA. ↑
  20. [2014] Lloyd’s Rep IR 177. ↑
  21. At paras 89-96. ↑

BILA lecture – No limits? Non-party costs orders against insurers

On 20 July 2018, I will be giving a lecture to the British Insurance Law Association on non-party costs orders against insurers. These orders can be made under s 51(3) of the Senior Courts Act 1981.

In the lecture, I will be explaining and discussing:

  • The courts’ jurisdiction to make costs orders against non-parties under s 51(3)
  • Situations where liability or legal expenses insurers may be at risk of non-party costs
  • The impact of policy limits
  • Non-party costs and the Third Parties (Rights Against Insurers) Acts 1930 and 2010
  • The insurer’s conduct and the incurring of costs
  • Recent case-law including:
    • Travelers v XYZ [2018] EWCA Civ 1099 (liability insurers)
    • Herridge v Parker & Allianz [2014] Lloyd’s Rep IR 177 (legal expenses insurers)

Do come along if you can. After I’ve given the lecture, I’ll write a blog post on this topic.

[***Update: the blog is now here.***]

Alison Padfield QC

Damages for late payment of insurance claims – counting down to 4 May 2017

***An updated version of this post is now available here: Damages for late payment of insurance claims.***

Summary

The Enterprise Act 2016 received royal assent on 4 May 2016. From 4 May 2017, a term will be implied by statute into new policies of insurance, and variations to those policies, 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, there will be a generally available right to damages in English law for late payment of insurance claims. This is in addition to the right to an indemnity under the policy and any interest. The limitation period for a claim for damages for late payment will be one year from the date of payment of the indemnity by the insurer.

The need for this reform

It is a surprising feature of English insurance law that there is no general right to damages for late payment of an insurance claim. This was recently confirmed in the Supreme Court, in a case about jurisdiction (The Alexandros T). This summary of the law by Longmore LJ[1] was approved by Lord Clarke in the Supreme Court[2]:

‘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 [1999] Lloyd’s Rep IR 111 approving the decision in The Italia Express (No 2) [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.’

The principle that there is no right to damages at common law for late payment of damages has long been under attack:

  • It was applied with ‘undisguised reluctance’ by the Court of Appeal in Sprung v Royal Insurance (UK) Ltd[3] in 1996.
  • The Court of Appeal granted permission to appeal in 1997 in a case which raised the issue but the appeal was not heard.[4]
  • 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)[5]; he also questioned it in extra-judicial remarks in 2009[6].

In Sempra Metals Ltd v Inland Revenue Commissioners[7], 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 remains 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[8]; 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[9] as neither obvious nor necessary for business efficacy because any such term, if implied, would not apply only in respect of insurers’ conduct, but would have to be mutual, so that the reasonableness of the conduct of each party in the negotiation of the claim would have been subject to review.[10]

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[11] and ss 150 (former) and 138D (current) of the Financial Services and Markets Act 2000[12]. 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[13]. 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 (the current FOS limit is £150,000). In practice, the statutory cause of action was little-used in insurance cases. It will not be abolished, but will largely cease to have practical importance in relation to late payment of insurance claims when the new right to damages is available.

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 is not the relevant date for the new right to damages: 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.[14] 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.[15] 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’[16], 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:[17]

  • ‘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[18] 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[19] 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[20] 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.’[21]

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.[22] 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;[23] 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.[24]

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 that 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’.[25]

Limitation period

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.[26] This would have been the six-year limited period for actions founded on simple contract.[27] However, a specific limitation period was later added by amendment in the House of Lords. This provides a 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.[28] Two different limitation periods will therefore usually be in play if a claim is made both 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.[29] In non-consumer insurance[30], the parties may contract out of the implied term except where the breach is deliberate or reckless (‘did not care’).[31] Importantly, these restrictions do not apply to settlement agreements.[32]

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 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’[33]. 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.[34] The reform will have a significant impact for policyholders like Mr Sprung for whom something goes badly wrong and who 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.[35] These fears may turn out to be unfounded.

But the right to damages is likely to have a significant impact on the way in which insurers investigate and make decisions about claims. The need to record the rationale for decisions will 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

  1. The Alexandros T [2012] EWCA Civ 1714, [2013] 1 Lloyd’s Rep 217, para 1. ↑
  2. The Alexandros T [2013] UKSC 70, [2014] 1 Lloyd’s Rep 223, para 6. ↑
  3. [1999] Lloyd’s Rep IR 111, CA (decided in 1996 but not reported until three years later); see Evans LJ at 118. ↑
  4. Pride Valley Foods Ltd v Independent Insurance Co Ltd [1999] Lloyd’s Rep IR 120. ↑
  5. In Mandrake v Countrywide Assured Group plc [2005] EWCA Civ 840, at para 25. ↑
  6. In ‘Should Sprung lose its spring?’, the Twelfth Annual Peter Taylor Memorial Address given to the Professional Negligence Bar Association on 21 April 2009. Richard Liddell of 4 New Square assisted Rix LJ in the preparation of this lecture.↑
  7. [2007] UKHL 34, [2008] 1 AC 561. ↑
  8. 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. ↑
  9. [1997] LRLR 94, 136-137. ↑
  10. It would also have been contrary to an express term in the relevant policies. ↑
  11. ICOBS 8.1.1 imposes obligations on insurers in relation to claims handling, including an obligation to handle claims promptly and fairly. ↑
  12. Section 138D (prior to 1 April 2013, s 150) of the Financial Service and Markets Act 2000 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. ↑
  13. 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); applied in a series of subsequent cases including Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB) (appeal to Court of Appeal pending). ↑
  14. See s 44(3) of the Enterprise Act 2016. ↑
  15. See s 28(2) of the Enterprise Act 2016, which inserts a new s 22(3A) into the Insurance Act 2015. ↑
  16. Section 13A(2) of the Insurance Act 2015. ↑
  17. See s 13A(3) of the Insurance Act 2015. ↑
  18. 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. ↑
  19. See the July 2014 Report at para 28.38. ↑
  20. ‘If the insurer shows that there were reasonable grounds…’: s 13A(4). ↑
  21. Section 13A(4), Insurance Act 2015. ↑
  22. Report, para 27.6. ↑
  23. See the July 2014 Report, paras 28.50-28.52. ↑
  24. See the July 2014 Report, para 28.98. ↑
  25. Report, para 26.39. ↑
  26. Report, para 28.71-28.76. ↑
  27. Section 5, Limitation Act 1980. ↑
  28. Section 5A(1), Insurance Act 2015. ↑
  29. 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. ↑
  30. 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. ↑
  31. Section 16A(2) and (3), Insurance Act 2015. ↑
  32. Section 16A(6), Insurance Act 2015. ↑
  33. Section 1, Insurance Act 2015. ↑
  34. Report, para 26.33. ↑
  35. 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. ↑