How might a claim for damages for late payment under an insurance contract succeed

Section 13A of the Insurance Act 2015 implied a new term into contracts of insurance from 4 May 2017. The term requires that insurers "must pay any sums due in respect of [a] claim within a reasonable time". Section 13A recognises that a breach of the term may give rise to additional losses for which the insurer may be liable to compensate the policyholder. While considered a useful tool for policyholders, the extent to which it is successfully deployed in practice might be debated.

In this article, Policyholder Disputes partner James Breese and associate Arjun Dhar examine the two decisions in which the courts have considered this remedy:

1. Quadra Commodities S.A. v XL Insurance Company SE and Ors [2022] EWHC 431 (Comm) ("Quadra"), and
2. Delos Shipholding S.A. and Ors v Allianz Global Corporate and Specialty S.E. and Ors [2024] EWHC 719 (Comm) ("Delos").

Neither decision favours the policyholder in respect of their claim for damages for late payment, but this article examines how policyholders might navigate through those decisions to succeed in a claim for damages for late payment.

Section 13A

Section 13A 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.
• A reasonable time includes a reasonable time to investigate and assess the claim.
• What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account -
  1. The type of insurance,
  2. The size and complexity of the claim,
  3. Compliance with any relevant statutory or regulatory rules or guidance,
  4. Factors outside the insurer's control.
• 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) -
  1. 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
  2. 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.
• Remedies (for example, damages) available for breach of the term implied in subsection (1) are in addition to and distinct from -
  1. Any right to enforce payment of the sums due, and
  2. Any right to interest on those sums (whether under contract, another enactment, at the court's discretion or otherwise).

The Explanatory Notes to the Enterprise Act 2016, which implemented section 13A, provide some guidance on its application. Mr Justice Butcher refers to some of the relevant factors in his decision in Quadra.

Quadra

The claimant, Quadra, was insured under an all-risks marine cargo open cover policy, which included cover for (1) fraudulent documents: "physical loss or damage to goods … through the acceptance by the Assured … of fraudulent shipping documents" and (2) misappropriation: "all physical damage and/or losses directly caused to the insured goods by misappropriation".

Quadra fell victim to a fraud perpetrated by the Agroinvest group of companies, which sold the same grain multiple times to different buyers, including Quadra. Having been unable to inspect or take possession of its grain, Quadra claimed an indemnity under its insurance policy under the misappropriation clause or alternatively under the fraudulent documents clause. Quadra claimed additional damages under section 13A for the defendant insurers' conduct of the claim being "wholly unreasonable, and its investigations either unnecessary or unreasonably slow".

The fraud was uncovered in around January 2019, and a notice of loss was provided to insurers on 13 February 2019. Legal representatives and loss adjusters were not instructed until January and February 2020, respectively, following a letter before action from Quadra in December 2019. Proceedings were issued in May 2020.

Mr Justice Butcher ruled that Quadra was entitled to an indemnity but denied its claim under section 13A. Mr Justice Butcher noted the following:

1. "The fact that, in some respects, the Defendants' actual conduct of the claims handling can be said to have been slow or lethargic, does not itself answer the question of what was a reasonable time."
2. No expert or detailed comparative evidence was adduced.
3. In determining that the conduct was slow, it was found that: a) the investigation was unduly protracted given the number of hours spent on it; b) there was a delay in instructing loss adjusters and legal representatives; and c) there was a delay to releasing investigation reports to Quadra.
4. Property claims usually take less time to value than, for example, business interruption claims.
5. Relevant factors in determining whether there was any delay were the origins of the claim, that the claim related to fraud, the uncertainty around the underlying facts, the destruction of documents, the existence of legal proceedings, recovery efforts in another jurisdiction, the application of foreign law and the unavailability of evidence. Many of these factors were outside the insurers' control.
6. Notwithstanding the list of factors above, it was found that "a reasonable time was not more than about a year from the Notice of Loss … assuming that the investigation had indicated no reasonable grounds for disputing it or part of it".
7. As to the final point, Mr Justice Butcher decided that "the fact that I have found those grounds were wrong does not indicate that they were not reasonable". He continued: "Quadra did not… contend that that bases on which the Defendants had defended the claim in the action were not reasonable grounds to do so. Nor is there any question here of unreasonable conduct or prolongation of the litigation by the Defendants."

There was therefore no breach of the implied term pursuant to section 13A(4)(a).

Delos

Delos was the registered owner of the Capesize bulk carrier "WIN WIN" (the "Vessel"). The Indonesian Navy detained the Vessel in Eastern Outer Port Limits Singapore (an area that spanned international, Malaysian and Indonesian territorial waters) for illegally parking in Indonesian waters.

Delos was insured by the defendant insurers for war risks, including the risk of detention. Delos claimed under the policy, asserting that the Vessel was a constructive total loss by virtue of being detained for more than six months. It claimed additional damages under section 13A for the defendant insurers' delay in processing the claim. It also argued that it suffered a missed business opportunity in that the insurance funds would have been used to fund the purchase price of an Eco Capesize vessel, which they would eventually have traded at a profit.

Mrs Justice Dias denied Delos's claim under section 13A. The following aspects of her decision are noteworthy:

1. The court found that there was an undetermined point of principle as to whether a claim under section 13A is limited to damages for an unreasonable failure to pay prior to the commencement of proceedings and whether any recompense for late payment thereafter becomes subsumed into an interest award. This point was not decided.
2. Mrs Justice Dias agreed with Mr Justice Butcher that "the mere fact that a defence fails does not of itself mean that it was unreasonably taken".
3. Insurers were at a disadvantage by not fully understanding the facts, and were dependent on disclosure for detailed knowledge of the facts.
4. In relation to the loss of opportunity, it was noted that no evidence was adduced to show that the opportunity was taken any further or discussed by the claimant or that a business plan was drawn up. Mrs Justice Dias also felt that there was force in the insurers' submission that the claimant group was profitable and could have purchased the Eco Capesize vessel without the insurance proceeds if it wished.

Comment

In both cases, the court ruled against the policyholders. While tempting to assume this means the bar for the remedy is a high one, there were good reasons why these section 13A claims were denied. Nonetheless, the judges' comments provide helpful indicators of where claims may succeed.

First, it is potentially significant that both cases were defended to trial. In most cases that go to trial, it is more likely than not that any section 13A claim might appear to be in difficulty. It will often be the case that there was a reasonable basis for insurers to defend the claim (on liability or quantum) even if the defence eventually fails. However, most claims do not get to trial. The position on reasonableness will almost certainly be different in the case of a claim in which an insurer abandons part or all of its defence on liability or quantum before reaching trial.

Secondly, the factors listed in Quadra in determining the reasonableness of the time an investigation has taken are significant explanations as to why an investigation could take time on the facts of that case. Yet the court still found that the investigation should have been completed in about a year. We see vast numbers of insurance claims that take longer than a year to resolve, even without proceedings and where factors such as those in Quadra are absent. This is, therefore, a useful benchmark for policyholders, notwithstanding the fact that Quadra did not succeed.

The court might take the view that a case with simpler facts should be resolved far quicker. It seems inevitable that the point will be revisited in the context of the ongoing Covid-19 business interruption litigation, where many claims remain unpaid more than four years after the loss. In that context, the focus may turn to section 13A(3)(a). This provides that the type of insurance involved is a relevant factor in determining what is reasonable, having regard to the court's established recognition that "the purpose of business interruption insurance is to inject additional funds into a going concern to maintain it as a going concern and, in that respect, to return it to an operational state as soon as possible".

Policyholders should note that in both cases, it was confirmed that the burden of proof is on the assured to demonstrate that the insurer failed to pay within a reasonable time. However, the burden is on the insurer to show that it had reasonable grounds for disputing the claim. It is interesting that Mr Justice Butcher commented in Quadra that no expert or detailed comparative evidence was relied on by the policyholder to discharge its burden.

Where a section 13A claim is pursued, policyholders will be well advised to:

1. rely on expert or detailed comparative evidence,
2. seek regular updates from their insurers as to the progression of the investigation to understand what steps are being undertaken and agree timescales for such steps, and
3. insofar as it is appropriate, provide insurers with as much information as reasonably and proportionately possible and as quickly as possible.

These steps provide a documentary record to revert to should the need arise.

Finally, it may be reasonably foreseeable that a delay to indemnity will prevent a policyholder from making the commercial decisions it would have made if the indemnity to which it was entitled was forthcoming within a reasonable time. If that is the case or such a possibility will arise, insurers should be put on notice of that at an early stage, supported by evidence.

You can find further information regarding our expertise, experience and team on our Policyholder Disputes page.

If you require assistance from our team, please contact us.

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