An unpaid but insured loss can have significant, and potentially even ruinous financial consequences for a policyholder. But the need for prompt payment must be balanced against the need for insurers (and often insureds) to properly analyse and evaluate claims and, insurers would argue, to investigate and expose fraudulent claims activities.
Policyholders now can bring a claim for damages as a result of alleged insurer delay in settling a claim. The decision in Quadra Commodities SA v XL Insurance SE and Others outlines the challenges in pursuing this course of action. Here we examine the legal position and the lessons that arise from the judgment.
The Legal Position
The Enterprise Act 2016 amended the Insurance Act 2015 (“the Act”) to give insureds the right to sue for damages on the late payment of an insurance claim. Section 13A inserts an implied term into all insurance contracts entered into from 4 May 2017 that any sums due in respect of a claim must be paid within a “reasonable time”. There is no definition in the Act of what constitutes a “reasonable time” which will be inherently fact specific but section 13A(2) specifically provides that it includes “time to investigate and assess the claim.”
Section 13A(3), along with the commentary in the Explanatory Notes, sets out a non-exhaustive list of the factors a Court will take into account in determining whether an Insurer has complied with its obligation to make payment within a reasonable time. These factors are (a) the type of insurance, (b) the size and complexity of the claim, (c) compliance with any relevant statutory or regulatory rules or guidance and (d) factors outside the Insurer’s control.
So what about those claims where coverage is in dispute or subject to a complex and lengthy investigation which inevitably causes a delay in the quantification and ultimate payment of a claim?
Section 13A(4) gives an Insurer a defence to a claim for breach of the implied term where it had reasonable grounds, judged objectively, for disputing the validity or quantum of a claim. The Insurer’s handling of the claim is a relevant factor in determining whether there was a breach and if so, when. An Insurer who conducts their investigation unreasonably slowly or continues to maintain an untenable position when further information that confirms the validity of the claim is presented, may be found to have breached their obligations.
The two questions: whether an Insurer has paid within a reasonable time and whether an Insurer has reasonable grounds to dispute a claim, must be dealt with separately.
The Burden of Proof
The burden falls on the policyholder to show payment was not made within a reasonable time under Section 13A. The insured must also prove, in line with all claims for breach of contract, that it has suffered loss because of the Insurer’s delay in making payment and that the loss was reasonably foreseeable at the time the policy was entered into. The Insured must also show that it complied with its obligation to take steps to mitigate any losses caused by the Insurer’s delay.
If an Insurer raises the Section 13A(4) defence, it has the burden of proving it had reasonable grounds to dispute the claim and that its conduct in doing so was not unreasonable.
An insured must move quickly if it intends to sue for damages for late payment as a one-year limitation period applies, commencing from the date on which payment of the insurance claim is made in full – an interim payment will not start the limitation clock.
Section 13A can be contracted out of by agreement but clear, unambiguous words must be used, and the contract term must be brought to the policyholder’s attention before the insurance contract is agreed and entered into.
Quadra Commodities – The Facts
Until recently there was a lack of reported cases in which damages for late payment featured and hence, little judicial guidance on how the implied term would be defined and applied to a real-life situation. The Court has now considered the issue in Quadra Commodities SA v XL Insurance Co SE and Others .
Quadra is a specialist in the trade of agricultural commodities including grains, oilseeds, and vegetable oils. Quadra fell victim to a fraud perpetrated against it, and others, by Agroinvestgroup, a loose association of companies involved in the production, storage, and processing of agricultural products. At its simplest the storage facilities owned or operated by Agroinvestgroup issued multiple warehouse receipts in respect of the same goods to multiple buyers, including Quadra. When it came to executing physical deliveries against those receipts there was not enough grain in the storage facilities to go around.
A claim was notified by Quadra in February 2019 under its marine cargo open cover insurance policy. Insurers denied cover for a number of reasons including a lack of insurable interest and the fact that Quadra’s losses were purely financial with no physical loss of property, for which Insurers maintained there was no cover under the policy. In May 2020 Quadra issued proceedings seeking an indemnity under the policy and claiming damages for late payment under Section 13A. Whilst Quadra was successful in relation to its claim under the policy, it failed in its claim for damages under Section 13A.
Quadra Commodities – The Decision
Quadra provides the first reported judicial analysis of how a Court will approach the question of whether an Insurer has breached the implied term to pay a claim in a reasonable time and how this sits alongside the Insurer’s defence under Section 13A(4) where there are reasonable grounds to dispute the claim. As a starting point the Court emphasised that whilst sometimes difficult, the issue of what was a “reasonable time” in which the claim should have been paid under Section 13A(1) must be separated from whether there were reasonable grounds to dispute the claim (Section 13A(4)). Both questions are highly fact specific.
The Explanatory Notes to Section 13A themselves state that property claims (in this case, marine cargo) usually take less time to value than other losses, so the Court’s sympathy was with Quadra. The size of the claim was “substantial but not exceptional in the context of marine cargo insurance” again, an apparent point in Quadra’s favour. But there were also significant complicating factors outside the Insurers’ control including the nature and complexity of the widescale fraud perpetrated by Agroinvestgroup, the destruction and unavailability of evidence, the on-going local investigation and the existence of legal proceedings and recovery efforts in Ukraine. Weighing all of this up, the Court considered a reasonable time in which to investigate, evaluate and then pay the claim was not more than a year from the first notification of loss, assuming the investigation had indicated no reasonable grounds for disputing it or part of it.
The Court then had to consider whether Insurers had reasonable grounds for disputing cover for the claim and therefore that the Section 13A(4) defence was applicable. This question was resolved in favour of Insurers with the Court commenting that the fact the grounds for disputing the claim were ultimately found to be wrong, did not automatically imply the grounds were unreasonable. The Court commented additionally that there was no evidence of unreasonable conduct or prolongation of the dispute by Insurers. Whilst the Court had sympathy for Quadra’s contention that Insurers’ investigation and claims handling had been slow, it did not amount to a breach of the Section 13A implied term because the delay occurred within what the Court considered to have been a reasonable time for payment of the claim and there were throughout reasonable grounds for disputing the claim.
The Future of Late Payment Claims
Where does this leave the balancing act of an insured’s interest in prompt payment of claims on one hand and an Insurer’s interest in properly investigating and evaluating a claim on the other? Will Section 13A ever really bite? Quadra provides the first judicial consideration of Section 13A so it is perhaps not surprising to see a fairly cautious approach from the Court in its application – especially in the current context of well publicised delays in the settlement of Covid-related business interruption claims and cladding claims.
Whilst the decision may be unwelcome news to policyholders, the ruling in Quadra does provide useful insight to what will be judged to be a “reasonable time” for payment of a claim. Whilst this question is clearly fact sensitive, even in a complex claim with significant complicating factors the Court may not have sympathy for an Insurer who takes more than a year to evaluate and pay a claim – not a significant period of time in the landscape of large and complex claims.
For insurance brokers, loss adjusters, solicitors and other claims professionals advising an insured there are some practical considerations that arise in the context of a potential late payment situation:
Those advising an insured should keep in mind whether in all the circumstances, Insurers are progressing the assessment of a claim efficiently and moving towards payment of the claim within a reasonable time. This will be fact sensitive but consideration should be given to the list of factors set out in Section 13A(3) and the Explanatory Notes.
If during the claims handling process an insured is sustaining financial hardship, loss of business or an additional financing burden due to the delay in receiving an insurance payment, the insured should be advised to carefully document this and consider what steps it ought to be taking to mitigate such losses, again keeping a complete paper trail of steps taken and costs incurred.
If an insured might have grounds to seek damages for late payment under Section 13A they would be well advised to seek legal advice particularly given the short one-year limitation period which runs from the date on which the insurance claim is paid in full by Insurers.
A further potential benefit of Section 13A might be its usefulness as an argument to deploy as an incentive to Insurers to progress claims investigation and quantum assessments expeditiously.
Finally, if the complexity of both the factual and coverage situation might allow a significant period for an Insurer’s analysis and determination of both cover and the adjustment of the loss, highlighting the risk of, or actual, financial loss arising to an insured may result in an interim payment pending final assessment.
For further information, please contact:
Clare Feist – Claims Advocate
Lockton Companies LLP
T: +44 (0)20 7933 2888