Is an Insurer Responsible for Damages Where Payment of a Claim is Delayed?
Quadra Commodities SA v XL Insurance Company SE and Others (1) is the first reported decision on the effect of section 13A of the Insurance Act 2015 (2) (the “Act"), which introduced an implied term into all contracts of insurance obliging insurers to pay any sums due in respect of a claim within a reasonable period of time. If an insurer breaches that obligation, policyholders are now able to claim reasonably foreseeable damages arising from the breach according to normal principles of contract law.
Importantly, however, the Act does not define what is a “reasonable period of time” is, leaving many policyholders in doubt as to how long an insurer might drag its feet in determining a valid claim before a claim for damages could be said to arise. This decision is the Court’s first opportunity to scrutinise that issue.
The Facts
Quadra Commodities S.A (“Quadra”) made a claim against its insurers (“Insurers”) under a marine cargo insurance policy for an indemnity in respect of cargoes of grain which were lost due to what has become known as the ‘Agroinvest Group Fraud’.
The fraud, which first came to light in early 2019 and affected the Ukranian agribusiness, involved the Agroinvest Group issuing multiple warehouse receipts in respect of the same goods to different buyers, with some reports suggesting up to five or six receipts may have been issued for the same grain. So, when it came to the point of executing physical deliveries against those warehouse receipts, there was not enough grain to go around, including to Quadra Commodities.
Insurers did not pay Quadra’s claim and proceedings were issued in the High Court for losses of USD 5.7m and a claim for damages for an alleged breach by Insurers of their obligations under section 13A Insurance Act 2015, claiming that Insurers’ conduct of the claim had been ‘wholly unreasonable and its investigations either unnecessary or unreasonably slow’.
Insurers sought to defend the claim on the basis that (a) there was no loss of physical property – Quadra’s loss was purely financial, in respect of which it was not insured; and (b) insofar as any property was lost, Quadra did not have an insurable interest in it. Insurers denied that they were in breach of their obligations under section 13A of the Act and contended that a reasonable time to investigate the claim was ‘a considerable time’, which should have extended beyond the time at which the proceedings were commenced by Quadra.
The Judgment
Insurable Interest
Mr Justice Butcher found that there were goods corresponding to the warehouse receipts for the cargoes and that Quadra had an insurable interest in those goods because (a) they were being treated by all concerned (whether for fraudulent motives or not) as stored for Quadra as part of their business and for which they had paid; and (b) Quadra had an immediate right to possession of the goods with regards to the warehouses.
In light of those findings, Butcher J determined that Quadra’s loss was caused by ‘misappropriation’ which was covered under the insurer’s policy and therefore found that Quadra’s claim under the policy should succeed.
Damages for late payment
Having found in Quadra’s favour on the question of policy liability, what remained for Butcher J was to consider whether insurers should be liable to Quadra for any damages flowing from an unreasonable delay in paying Quadra’s claim. Answering that question involved consideration of two main issues:
- First, what was a reasonable time within which insurers should have paid Quadra’s claim; and
- Second, whether insurers had reasonable grounds for disputing the claim (even though Butcher J ultimately concluded that those grounds were flawed).
Section 13A’s Provisions
Section 13A of the Act does not define what a “reasonable time” is, but it does state that it includes a reasonable time to investigate the claim (3). It also states that what is reasonable will depend on all the relevant circumstances and gives the following as examples of the factors which may need to be taken into account when considering an insurer’s liability for damages:
- The type of insurance involved;
- The size and complexity of the claim;
- Compliance with any relevant statutory or regulatory rules or guidance;
- Factors outside the insurer’s control.
Butcher J: What is a “reasonable time”?
In relation to the first issue, Butcher J made reference to a Law Commission Report prepared prior to implementation of Section 13A of the Act, and the Explanatory Notes to the Enterprise Act (which introduced Section 13A into the Act) which give further guidance on the factors affecting the above examples which may influence a Court’s interpretation of what is considered to be a reasonable time for payment of a claim.
In analysing what was a reasonable time within which insurers should have paid the sums due in respect of the claim, Butcher J noted that the onus of establishing that payment was made after a reasonable time is on the policyholder, whereas the burden of proof of whether there were reasonable grounds for disputing the claim is on the insurers. Those are distinct questions, although the Judge noted that it may not always be straightforward to separate them.
Butcher J noted that what was a reasonable time in which Quadra’s claim should have been paid was not easy to decide and he commented that no expert or detailed comparative evidence had been adduced. He also commented that the fact that insurers’ actual conduct of the claims handling could be said to have been slow or lethargic did not itself answer the question of what was a reasonable time within which it should have been paid.
Considering the non-exhaustive factors referred to in the Act, Butcher J noted that:
- The type of insurance was marine cargo, and thus property insurance, which the Explanatory Notes state usually take less time to value than for example, business interruption claims.
- On the other hand, the cover applied to transport and storage operations of different types and involving potentially many different countries and locations, and claims under such a cover, could involve complex factual questions and investigations.
- The size of the claim was substantial, but not exceptional in the context of marine insurance.
- There were significant complicating factors, including the origins of the claim in the Agroinvest Group Fraud; the uncertainty as to what happened at the warehouses; the destruction of documents; and the existence of legal proceedings and recovery efforts in Ukraine..
Taking the above into account, Butcher J found that a reasonable time in which Quadra’s claim should have been paid was not more than about a year from the Notice of Loss on 13 February 2019. On that point, therefore, he found for Quadra.
Butcher J: Did insurers have reasonable grounds to dispute Quadra’s claim?
On the second question as to whether the insurer could show there were reasonable grounds for disputing the claim (and therefore they had not breached the implied term to pay it within a reasonable period of time) Butcher J found that:
(a) insurers had reasonable grounds for disputing the claim and the fact that he had found at trial that those grounds were ultimately wrong did not mean that they were unreasonable reasons to delay payment of Quadra’s claim (4); and
(b) whilst Butcher J considered that there was some force in the argument that insurers were too slow in the conduct of their investigations, he did not consider that slowness to be a breach of Section 13A of the Act given that the relevant investigations were undertaken during the one-year period within which Butcher J considered had been a reasonable time to pay Quadra’s claim.
Given the above findings, Butcher J did not go on to look at the nature of the damages claimed by Quadra for late payment of its claim.
Takeaways
What is clear from the Quadra Commodities case is that all claims for late payment will turn on their own facts. However, this decision provides some useful guidance on how Section 13A will be applied by the Courts in practice.
In particular, the fact that even in a complex multi-jurisdictional claim involving fraud, a year was seen as a reasonable time for insurers to pay a claim, may give some comfort to policyholders and a wake up call to insurers to ensure that they are proactive in handling and settling claims. Indeed, recent experience suggests that many claims (even those without the complicating features of Quadra’s) are taking longer than a year to resolve.
However, that (possible) comfort aside, the Quadra Commodities decision also suggests that delay alone may not be enough to secure an award of damages. If insurers can show they have reasonable grounds to dispute a claim, a Court may well find that a delay (perhaps for longer than a year, if insurers are able to justify the credibility of their position) is reasonable. That is likely to be a low bar for an insurer to reach, so long as their coverage arguments have some credible basis, even if that basis is wrong in law.
Given that low bar (and as with so many things in insurance) prevention is likely to be better than the cure. A policyholder’s best defence to an insurer’s delay is likely to be to (a) ensure that they are proactive in articulating a credible legal basis for payment of a claim (thus ensuring that both parties are focused on the key coverage issues as early as possible); (b) to proactively (where appropriate) furnish the insurer with any key evidence relevant to determination of a claim, whether or not it has been sought; and (c) where information is sought, to be responsive to those enquiries so as to reduce the length of any hiatus between exchanges of correspondence.
Of course, a proactive policyholder cannot be the solution to every case of insurer delay. An insurer may say that the wheels can only turn so quickly. It is, however, a sensible place to start whilst the law continues to develop in this area.
- [2022] EWHC431 (Comm)
- S13A was inserted into the Insurance Act by the Enterprise Act 2017, and came into force on 4 May 2017
- S13A (2) of the Act
- S13A (4)