How long can insurers take to pay a claim?

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Quadra Commodities S.A. v. XL Insurance & Co [2022] EWHC 431 (Comm) is the first reported case to consider insurers’ liability to pay damages for late payment of indemnity, under Section 13A of the Insurance Act 2015. The decision is relevant to all insurers and reinsurers.

Background

The claim arose following the Defendant insurer’s declination to indemnify the Claimant, Quadra Commodities S.A (“Quadra”), under a marine cargo policy.  The circumstances were that the Claimant commodity trader was a victim of fraud whereby it purchased cargoes of grain from sellers who held receipts for the same provided by the warehouses in which the grain was stored. The warehouses were producing receipts for multiple entities to sell the grain but there was insufficient cargo to satisfy the receipts they had issued. When Quadra sought to take delivery of its grain, there was insufficient inventory. The bulk of the trial therefore concerned, for the purposes of insurance liability, whether or not grain was physically present and whether the insured had an insurable interest in it. The insured succeeded in proving that it was entitled to be indemnified under its policy. In passing we note that this type of warehouse receipt fraud, and the coverage issue it gave rise to, is a common one.

However, the point of general interest to all insurers was that: as well as seeking an indemnity for the lost grain, Quadra brought a claim against its insurer under s13A of the Insurance Act (‘the Act’) for damages in addition on the basis that the Defendant insurer did not pay sums due in respect of the claim within a reasonable time.

s. 13A Insurance Act 2015 – damages for late payment

s. 13A of the Act implies a term into insurance contracts that the insurer must pay any sums due within a reasonable time. It follows that damages are available for breach. But what is a ‘reasonable time'?

s. 13A(3) of the Act says that a ‘reasonable time includes a reasonable time to investigate and assess the claim’ and that ‘what is reasonable will depend on all the relevant circumstances … [such as] … (a) the type of insurance (b) the size and complexity of the claim (c) compliance with any relevant statutory or regulatory rules or guidance (e) factors outside the insurer’s control.”

s. 13A(4) of the Act adds that: “If the insurer shows 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) (a) the insurer does not breach the term implied by subsection (1) merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but (b) the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when.”

Judgment

Following a very complex trial on liability, it was held that Quadra was entitled to an indemnity under the policy. The insured argued that it was entitled to payment of damages, in addition to its indemnity, because the insurers’ conduct of the claim was “wholly unnecessary or unreasonably slow.” Insurers responded that a reasonable time was a ‘considerable time’ and that in any event it was not in breach because it had reasonable ground for disputing the claim. In considering this, the Court had to decide what a reasonable period of time was. The onus was on Quadra to prove that the Defendant had not made a payment within this period.

Factors within Section 13A(3) were applied to the facts to determine the reasonable period:  

  1. The type of insurance - Marine Cargo policies can elicit complex factual matrices due to the cover potentially involving many locations and difficult logistics.
  2. The size and complexity of the claim – the Judge found that on the facts there were several complicating factors. At 142(b) of the judgment these were set out:

“I consider that the origins of the claim in the Agroinvestgroup Fraud, the uncertainty as to what had happened at the Elevators, the destruction of documents, and the existence of legal proceedings and recovery efforts in Ukraine were significant complicating factors, as was the fact that Quadra elected during the course of the investigation to opt for English rather than French law”

  1. Compliance with any relevant statutory or regulatory rules or guidance – none were relevant on the facts.
  2. Factors outside the insurer's control – There were factors outside of the insurer’s control including “the destruction and unavailability of evidence as to what had happened at the Elevators, and the fact that legal proceedings were commenced in Ukraine in 2019 and that it took some time to see what the results of these would be.”

In the circumstances Mr Justice Butcher concluded that payment within a year of the notice of the loss was a reasonable period, notwithstanding the Defendant’s argument under Section 13(4) that it had reasonable grounds to dispute the quantum of the claim.

Turning to whether Section 13(4) was made out, the Judge held that insurers did indeed have reasonable grounds to dispute the quantum of the claim, albeit the disputed indemnity did not ultimately fall in their favour. Quadra contended that Section 13(4)(b) was applicable, and that the insurer breached Section 13A(1) despite its reasonable grounds for disputing the claim due to its conduct in handling the investigations.

Considering guidance given by the Explanatory Notes to the Enterprise Act, the Judge found that the Defendant’s behaviour was not unreasonable. Whilst the Defendant’s response was too slow at times, this did not amount to a breach of the Section 13A implied term.

The insured was awarded its indemnity payment, but its claim under s.13A for damages for late payment failed.

Comment

This Judgment in relation to Section 13A of the Insurance Act serves as the first illustration of the Law Commission’s intentions behind the provision. Firstly, it is worth nothing that insurers should not be disincentivised to investigate claims which they consider invalid or fraudulent. The report produced by the Law Commission notes that the “long term stability of the insurance market is dependent” on this. Section 13(4) provides protection in this regard allowing insurers benefit of the doubt where they can show they had reasonable grounds to dispute the claim.

Secondly, the Judgment highlights that a refusal by insurers to indemnify may be held to be incorrect but can still be reasonable nevertheless. This means that delay in indemnifying is not a breach of S13A if it is an incorrect, but reasonable denial of liability by an insured. That is subject to the proviso that the insurer’s conduct must have been reasonable in investigating the disputed claim.

Whilst the Court found that there was some force in the allegation that insurers had been too slow in handing particular aspects of the claim (such as delays in instructing surveyors and taking legal advice) insurers were not in breach of s. 13A because 1) the delayed events occurred within the overall determined “reasonable period” of one year after the notice of the claim and 2) there were reasonable grounds to dispute the claim throughout the process.

The decision will be welcomed by insurers that handle complex and high value claims. In the circumstances of this case, a year from notification to denial was a reasonable time. Insurers will wish to note that the court did examine and criticise particular delays by the insurer in instructing experts and in instructing lawyers to provide a legal opinion. The delays were not significant enough to amount to a breach of s. 13A, but the case illustrates how the Court can examine and question the time taken for insurers to progress the handling of a claim, through each of its relevant stages. Unexplained delays may attract criticism and, in serious cases, damages.

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