Since May 2017 it has been possible in English law for an insured to get damages from insurers for losses caused by their unreasonable delay in paying a claim. Yet it has taken nearly five years for the first case involving so-called ‘late payment damages’ to come before the Courts.
Andy Stevenson looks at the decision in Quadra Commodities SA v XL Insurance Company SE & Others (March 2022) and what it tells us about the scope of the legislation (Section 13A Insurance Act 2015) and applying it in practice.
Back in 2016/2017 there was a lot of discussion in the UK insurance market about whether the new Enterprise Act 2016 (which introduced Section 13A into the Insurance Act 2015) was going to lead to a sea-change in claims handling.
Created in response to a perceived unfairness – that unscrupulous insurers could deliberately delay paying claims in order to leverage a better deal with their insureds (or even wait for the insured to go bust) – Section 13A gave insureds a statutory right to recover losses caused by an insurer ‘unreasonably’ delaying payment. It applied to any contract of (re)insurance entered into after 4 May 2017 and, despite a number of safeguards designed to allow insurers to continue investigating claims and taking advice, there was nevertheless unease as to how the new legislation would affect future insured/insurer relations.
It is impossible to know how much insurers have paid out by way of late payment damages since 2017 or whether the Act has had a material effect on claims-handling. However, it is clear that no cases have come to Court for determination before March 2022. The decision in Quadra is therefore the first to show how Section 13A is to be applied and to outline what does / does not constitute ‘unreasonable’ delay.
Quadra was a Swiss company in the business of purchasing quantities of grain under various contracts. It paid for the grain when the sellers presented receipts issued by Ukrainian warehouses stating that the grain was present. In reality the warehouses were involved in a fraud where multiple receipts for the same goods were issued to different buyers. When it came to delivering the grain the buyers had paid for against the warehouse receipts there was not enough to go around and Quadra ended up suffering a substantial loss.
Quadra had bought a cargo insurance policy from the Defendant insurers and duly made a claim on it in February 2019, following the loss. The Defendants denied liability on various grounds (eg that there was no loss of physical property, alternatively that there was no insurable interest) which lead to Court proceedings being brought in May 2020. Quadra included within those proceedings a claim for Section 13A late payment damages on the ground that it had sustained further losses by reason of the insurers’ alleged unreasonable delay in paying the main claim. The insurers denied liability for that and generally.
The first part of the judgment deals with insurers’ liability defences. It is not necessary to go into those into detail here, save to say that it was held that insurers did have an obligation to indemnify Quadra for its lost goods.
Turning to the Section 13A claim, Quadra claimed it had suffered losses “by reference to the return on shareholders’ equity” for the 2019 and 2020 years of account because “the Defendants’ conduct of the claim was ‘wholly unreasonable, and its investigations either unnecessary or unreasonably slow’”. Insurers denied liability, first, on the ground that “a reasonable time” in Section 13A meant “a considerable time” in the context of the present case. And, second, because – per the defence in Section 13A(4) – they had reasonable grounds for disputing the claim and that, where this is the case, a defendant is not liable under the Act for merely failing to pay the claim whilst the dispute continues.
The Judge analysed the claim in the following way:
- Looking at the chronology of the claims-handling;
- Confirming the respective burdens of proof;
- Assessing what was meant by ‘reasonable’ in this case; and
- Assessing whether the Section 13A(4) defence applied.
As to (a), as above Quadra had notified the claim to insurers in February 2019. It appears that no formal written denial of liability was issued but, by May 2020, Quadra had formed the view that insurers were not willing to pay the claim and commenced High Court proceedings. The judgment records that in the intervening period there was considerable activity: requests to Quadra for documents and information; appointment of a surveyor/loss adjuster and more latterly lawyers on both sides; an issue about the appropriate law and jurisdiction (French or English); and various meetings between the parties and their representatives.
As to (b), the Court confirmed that the burden is on the insured to establish that there has been unreasonableness. The burden on showing that the ‘reasonable grounds for dispute’ defence in Section 13A(4) applies falls on insurers.
Regarding (c), the starting point is the (non-exhaustive) list of criteria in Section 13A(3), which includes:
- Type of insurance. This was a cargo/property claim which was held to be generally quicker to value than, say, a business interruption claim. Having said this, the claim involved multiple contracts and different locations in different countries which was bound to make investigation more difficult;
- Size and complexity of the claim. This was deemed a large claim but not exceptionally so for cargo insurance. However, it was held to be complex by reason of the location, missing documents/evidence, legal proceedings in Ukraine and the law and jurisdiction issue; and
- Factors outside insurers’ control. Overlapping with the above, it was held that the missing documents/evidence and Ukraine proceedings in particular were factors outside insurers’ control and had to be taken into account.
The Judge held that, having regard to the above, a period of “about a year” would have been a reasonable time for insurers properly to have investigated and evaluated the claim and to have paid it, assuming that the investigation had indicated no reasonable grounds for disputing it or part of it.
As to that latter part – ie (d) – he held that insurers were correct in asserting that there were reasonable grounds for disputing the claim. This is even though he had already established that they were wrong to deny liability.
Finally, he assessed whether insurers’ conduct generally affected the assessment. Quadra had alleged that insurers had carried out unnecessary investigations and done them too slowly. It was held that, whilst there was some force in the latter, these occurred within the year-long period in which it was reasonable to investigate and that there were always reasonable grounds for disputing the claim.
As such, whilst Quadra won on its main claim for cover under the cargo insurance, it lost on its additional claim for late payment damages under Section 13A Insurance Act 2015.
As the first judicial decision on a ‘late payment damages’ claim, Quadra is undoubtedly important. Though it turns on its own facts, it is useful in illustrating both the approach the Courts will take and the weighing of factors/evidence that go to determining ‘reasonableness’.
Eyebrows may be raised in some quarters by the finding that a coverage decision on a claim of this nature should have been made in “about a year”, however, probably less surprising is the recognition – enshrined in the legislation – that insurers are entitled to investigate claims fully and take professional advice. As long as they do not abuse that right.
Last, the case is interesting for the fact that the specific loss said to have been caused by insurers’ unreasonable delay was ‘the return on shareholders’ equity’. Alas, we shall have to wait for a future case to find out whether this is a valid head of claim.
Andy Stevenson, Partner / May 2022