Late payment of claims: being wrong but not unreasonable
Quadra Commodities SA v XL Insurance Company SE and Others [04.03.22]
This article was co-authored by Maeve Morrissey, Trainee Solicitor, London.
In Quadra Commodities v XL Insurance, the first decision on s.13A of the Insurance Act 2015, insurers were found not liable for damages for late payment despite the insured’s policy claim succeeding.
Section 13A Insurance Act 2015
The Enterprise Act 2016, which came into force on 4 May 2017, inserted three new sections into the Insurance Act 2015, including Section 13A. This section aimed to provide a better remedy for insureds who suffer losses as a consequence of insurers’ failure to pay valid claims in a timely fashion.
The Law Commission illustrated the need for s.13A with the case of Sprung v Royal Insurance (UK) Ltd . Insurers had refused to pay or admit liability for a straightforward property damage claim without attempting to justify their position by reference to policy terms. By the time insurers accepted liability four years after the loss, Mr Sprung, being unable to finance repairs, had been forced to close the business and lost the value of its sale. Mr Sprung was only entitled to recover interest in respect of the delay.
Section 13A(1) implies a term into contracts of insurance that insurers will pay any sums due within "a reasonable time". Consequently, insureds may now claim damages for late payment.
Quadra: the fraud
The ‘Agroinvestgroup Fraud’, which came to light in early 2019, involved various Ukrainian warehouses issuing up to six warehouse receipts - against each of which payment was demanded - in respect of the same stored grain. Inevitably there was insufficient grain available once physical delivery was required, causing different buyers to sustain losses totalling around US$80-120 million.
Quadra, the insured commodities trading group and one of the defrauded buyers, claimed an indemnity under its Marine Cargo policy in respect of cargoes of grains which were lost in the Fraud. The claim went unpaid and so Quadra commenced proceedings, including a claim for damages for breach of the implied term under s.13A.
The policy claim
Insurers sought to defend Quadra’s claim on the basis that:
- Quadra had not suffered a physical loss of its property: its cargoes could not actually have existed because the warehouses were at or near maximum capacity at the supposed times of delivery.
- Quadra could not demonstrate it had an insurable interest in any of the physical property which could be shown to have been lost.
The court found on the balance of probabilities that there were grains in the relevant quantities in the warehouses at the material times, and that Quadra’s insurable interest in those quantities was established either: (i) by paying the purchase price (as the goods were unascertained); or (ii) by the fact the Quadra had an immediate right to possession of the cargoes. The word ‘property’ in the Interest Clause was also found to embrace any property in which Quadra had an insurable interest. The loss therefore fell within the cover provided by a misappropriation clause, and Quadra’s claim succeeded.
Damages for late payment
Quadra issued proceedings 15 months after notifying the unpaid claim, alleging insurers had failed to meet their obligation under s.13A(1) to “pay any sums due… within a reasonable time”.
Section 13A(3) sets out some of the factors to consider when determining what is 'a reasonable time', which include the type of insurance, the size and complexity of the claim, and factors outside insurers’ control. The judge considered the relevant circumstances, which included the complexity of Quadra’s operations, the uncertainty of events involved in the Agroinvestgroup Fraud (exacerbated by the destruction of evidence), and the timing of ongoing legal proceedings in Ukraine. His conclusion was that a reasonable time for paying Quadra’s claim was not more than about a year from notification.
While Quadra’s insurance claim ultimately succeeded and had not been paid within a reasonable time, the court found that insurers had the benefit of the defence under s.13A(4) that there were reasonable grounds for disputing the claim. It made no difference that insurers’ reliance on those grounds was unsuccessful: their arguments on policy coverage were not unreasonable merely by virtue of being mistaken.
Section 13A(4)(b) allows the court to take account of insurers’ conduct in handling the claim. The judge rejected the insured’s submission that insurers’ overly slow claims-handling should deprive them of the ‘reasonable grounds’ defence. Even though insurers had undertaken investigations which, on a proper construction and application of the policy, were unnecessary, this was not a relevant factor in assessing insurers’ conduct. Insurers had simply been mistaken about the necessity for a wider analysis of the factual position because of their incorrect interpretation of the policy. Also, while insurers should have appointed a second surveyor and sought legal advice sooner, they had done so within the ‘reasonable time’ for paying the claim.
Accordingly, insurers were not liable for damages for late payment.
Given the context and complexity of this claim, it is perhaps surprising that the judge found ‘a reasonable time’ for payment was not more than about a year from notification, although the Judge acknowledged that no expert evidence regarding the appropriate timescales for paying different kinds of claims had been before the court.
Nevertheless, Quadra is a reassuring decision for insurers, as it appears they will not be deprived of the defence in s.13A(4) merely because reasonable points taken on coverage turn out to be wrong.
In order not to incur liability under s.13A, insurers should always seek to act reasonably in handling claims. Following the judge’s comments in Quadra, best practice should include:
- Communicating to the insured the reasons for any delay in progressing investigations.
- Considering payments on account for uncontroversial elements of claims.
- Explaining to the insured - by reference to policy terms - the reasons why insurers are unable to accept a claim in full or in part.
- Appointing loss adjusters/surveyors and legal advisers promptly, and seeking to progress factual investigations without undue delay.
- Avoiding the prolongation of litigation or any unreasonable conduct should proceedings be commenced by the insured.
In Quadra, there was no need to assess the damages claimed for late payment, but losses will be subject to the ordinary rules applicable to breach of contract claims, for example remoteness, causation, and mitigation.
Although Quadra is only the first decision on s.13A, it suggests the legislative response to cases like Sprung was proportionate. An insured who suffers consequential losses in circumstances similar to Mr Sprung will now be entitled to an appropriate remedy, whilst insurers who have good reasons for not paying on time should not be liable for damages provided they have acted reasonably. It is to be hoped that cases under s.13A continue to be handled in an even-handed way.