Insurance Contract Law: Enterprise Act 2016, A new remedy of damages for late payment (and a note on fraud) Rhys Clift, Partner, Hill Dickinson LLP

Transcription

1 Insurance Contract Law: Enterprise Act 2016, A new remedy of damages for late payment (and a note on fraud) Rhys Clift, Partner, Hill Dickinson LLP 1

2 APPLICATION AND IMPLICATIONS? Will the contract you use to cover maritime and transport risks be impacted by reform to English insurance contract law? 2

3 OUTLINE: BUSINESS INSURANCE Background: the path to reform (A note on fraud) Current state of law on damages; in a nutshell What are (were) the problems? Would a contractual solution have worked? (possibly) The Enterprise Act 2016 (to amend the Insurance Act 2015): a new right to damages Consequences? Conclusions 3

4 BACKGROUND: PATH TO REFORM Marine Insurance Act 1906 Twelve year project A codification of the law, developed by Judiciary (over about 150 years) Originally designed to apply to marine insurance business only 4

5 BACKGROUND: PATH TO REFORM Insurance Act 2015 Ten year project (following at least 30 years of discussions/proposals) Radical the first attempt by Legislature to amend the law (rather than evolution in hands of Judiciary) Specifically designed to apply to all classes of insurance (marine and non-marine), variations, reinsurance and retrocessions Enterprise Act 2016 Radical. today) A wholly new remedy (primary focus for

6 BACKGROUND: PATH TO REFORM Joint Law Commission Review Products:- 1. Consumer Insurance (Disclosure and Representations) Act, 2012 (a driver for change) 2. Insurance Act, 2015 (incepted 12 th August 2016), principally for business insurance, marine and non marine (and reinsurance) 3. Enterprise Act, 2016 (incepts 4 th May 2017) Likely effect(s)? 6

7 BACKGROUND: THE REFORMS Four main changes:- 1. Amendment to the law on Placement (duties and remedies) 2. Amendment to the law on Warranties and other terms 3. Amendment to the law on Fraudulent claims 4. Amendment to the law on Damages But note: contracting out (in some respects) And note: amendment of the Third Parties (Rights Against Insurers Act 2010 but not for today) Talk focusses on business insurance Summary?: Changes said to be largely insured/member friendly. But are they? 7

8 FRAUDULENT INSURANCE CLAIMS Amendments largely to clarify the law (old law said to be confused and contradictory) Now No liability to pay the fraudulent claim/can recover sums already paid Can by notice treat contract as terminated from the date of the fraud No need to return the premium Claims pre-fraud still covered For group insurance, fraud by a person covered by, but not party to, the contract gives insurers the right to terminate as against the fraudster only 8

9 CURRENT STATE OF THE LAW Can the law ever be simplified to enhance speed? Probably not Certainty is plainly a desirable objective. But: it is a pipe-dream to think that [marine] insurance law could ever be simplified to the point where no argument could arise and no lawyers would ever be necessary in drafting or in interpreting insurance contracts [Marine] insurance law will remain an arcane area, whatever legal reforms may be introduced, and its smooth operation will continue to depend upon the skill and knowledge of the professionals who mainly engage in it (Lord Mance, 2010, JHC Old Library) It will always take time to resolve cases, some longer than others, marine and non-marine; factual and legal 9 complexity. Some delay is inevitable

10 CURRENT STATE OF THE LAW Common law imposes duty on insurer to hold insured harmless, that is to protect assured against loss occurring (even if in reality insurer can do nothing about incidence of fire, burglary, flood, storm) If event occurs, insurer is in breach and liable to pay damages (Fanti/Padre Island,1990) The law does not (on typical policy) give rise to action for debt Damages are available for late payment of debt (Sempra Metals, 2007), but not damages on damages (The Lips, 1988) Only remedy (in absence of clear contractual right/term) is interest, discretionary (Alexandros T, 2012) 10

11 CURRENT STATE OF THE LAW In marine insurance ss. 67 and 68 MIA 1906 apply to same effect: The sum which the assured can recover in respect of loss on a policy is the measure of indemnity The measure of indemnity is either the sum fixed by the policy or the insurable value of the subject matter insured. No more. SS.67 & 68: this is the definitive of extent of liability of insurer for loss (Italia Express, 1992) 11

12 CURRENT STATE OF THE LAW Nor is there action in damages for breach of duty of good faith by insurer (cf Section. 17 MIA 1906) Only remedy for such breach WAS avoidance (somewhat one sided?) (Banque Financiere v. Westgate, 1991 (gemstones)), but note the new proportional remedies in Insurance Act 2015 But compare: certain US states where action for bad faith is a feature of high percentage of claims; purpose is punitive not compensatory (and a major factor in terms of bargain, cost of cover (premium), cost of defence and claims strategy?) 12

13 CURRENT STATE OF THE LAW Position the same in respect of non marine insurance Sprung v Royal Insurance, 1999: a driver for change Claim rejected, assured fails financially, assured goes bankrupt. No compensation. Several attempts (cases) to obtain compensation for delay attempted since. All failed: e.g. ICCI v. McHugh 1997: clear there is (presently) no implied duty to conduct negotiations, assess claim, pay sum due with reasonable diligence and expedition. 13

14 WHAT ARE THE PROBLEMS? Lack of remedy was said to be a blot on English common law jurisprudence : Professor Malcolm Clarke Its absence is said to be: Is unfair Lacks principle Rewards inefficiency Rewards dishonesty (by insurers) Leads to injustice (Sprung) Is out of step with other systems of law (e.g. China, Spain, Italy, Germany, Scotland But is delay (dishonest, reckless, incompetent, lazy, indifferent) etc. really common? 14

15 WOULD A CONTRACTUAL REMEDY WORK? IHC 2003 clause 46.7: The Leading Underwriter shall make a decision in respect of any claim within 28 days of receipt by them of the appointed average adjuster s final adjustment or if no adjuster is appointed a fully documented claim presentation sufficient to enable underwriters to determine their liability in relation to coverage and quantum Effect? 15

16 WOULD A CONTRACTUAL REMEDY WORK Yes. Lord Mance considers there will (would) be damages for breach of this obligation, because: Clause pointless without remedy Not inconsistent with ss67/68 MIA, and This is (probably) a self standing contractual obligation to pay. (So why are IHC 2003) so rare? Other factors?) But for a contract term to be effective to create self standing obligation to pay must be absolutely clear and explicit: We will always try to be fair and reasonable whenever you have need of protection of this policy and will act quickly to provide that protection Is not enough (Tonkin v UK Insurance, 2006). 16

17 DAMAGES FOR LATE PAYMENT Damages for late payment: Section 13A Insurance Act 2015 (inserted by Enterprise Act 2016) The new remedy, radical: A wholly new remedy (cf damages previously irrecoverable). Compensatory not punitive. Requires insurers/reinsurers to pay claims within a reasonable time (including time to investigate and assess claim). Thus: Section 13 A. Implied term about payment of claims (1) 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. (2) A reasonable time includes a reasonable time to investigate and assess the claim 17

18 DAMAGES FOR LATE PAYMENT What is reasonable? Depends on all circumstances of the claim. Thus: Section 13 A (3)..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:- (a) the type of insurance (b) the size and complexity of the claim, (c) compliance with any relevant statutory or regulatory rules or guidance, (d) factors outside the insurer s control. 18

19 DAMAGES FOR LATE PAYMENT No action: if the insurer/reinsurers merely denies claim or disputes quantum (alone); but conduct in handling the claim will be relevant to deciding if the term has been breached (consider impact of claims control and claims co-operation) (Section 13A (4)). Timebar: One year time bar (counting for the date of payment of the claim). Thus (by amendment to the Limitation Act 1980): (1) An action in respect of breach of the term implied into a contract of insurance by section 13A of the Insurance Act 2015 (late payment of claims) may not be brought after the expiration of one year from the date on which the insurer has paid all the sums referred to in subsection (1) of that section. 19

20 DAMAGES FOR LATE PAYMENT Contract out of new remedy? Yes (Insurance Act 2015, Section 16A (4)), but only for business (non-consumer) insurance, and NOT if deliberate or reckless, and provided: Transparency: Insurers take sufficient steps to draw disadvantageous terms to attention of customer/insured/cedants, before the contract or variation is made. Hence need to give notice in Applications, Quotes and Certificates. And correspondence? And: Clarity: terms are clear and unambiguous 20

21 CONSEQUENCES AND QUESTIONS To contract out (wholly) or not? To limit liability for damages or not? Damages claim with almost every regular claim? A catalyst for unmeritorious claims? Additional claims costs? How to reserve? Make provision (ever) for damages? Insurers need to devise new claims handling procedures to mitigate likelihood of claims, and loss if damages awarded Followers need to monitor activities of Leaders and Claims agreement parties very closely Claims for damages by Followers against Leaders? Separate representation? When? 21

22 CONSEQUENCES AND QUESTIONS Pressure to pay claims that should be investigated and perhaps denied (whole/part)? Greater (personal?) pressure on individuals handling claims? How to assess potential damages (as matter of fact)? Which are too remote (as matter of law)? Different considerations in reserving for each policy, each assured? Need to draft new exclusion clauses (but manage personnel to ensure no deliberate or reckless breach of the new implied term?) 22

23 CONSEQUENCES AND QUESTIONS But query: marketability of new exclusions? Different policy terms for different clients depending on broker economic power? A new advantage for big brokers; or big assureds? Pressure of time (on insurers and brokers) to deal with new regime if before the Act takes effect on 4 th May 2017 (new clauses, new procedures, new reserving) How will insurers demonstrate reasonable action (conduct in handling claim) without waiver of privilege (legal advice, investigators reports) 23

24 CONSEQUENCES AND QUESTIONS Will there be a reluctance ever to start process of investigating some claims, some assured? Will practical effect be to give Business Interruption Insurance to assureds who pay nothing for cover? A move away from English law? A move away from London as a place of business (to Bermuda, say?) The operation of the remedy will be ironed out in the process of litigation, once the remedy comes into force, claims are made and rejected. 24

25 DAMAGES FOR LATE PAYMENT Coda: The views of the Department of Business, Innovation and Skills (Impact Assessment May 2016) on the new remedy of damages for late payment: There are transitional familiarisation costs for insurers in Year 0 (best estimate - 202,250) and increased litigation costs in years 1-5 as the measure is tested and precedent is developed (best estimate - 100,000 per year). There are small on-going costs as insurers investigate unmeritorious claims of late payment (best estimate million per year). Accurate? A tad optimistic, perhaps? 25

26 RHYS CLIFT, PARTNER HILL DICKINSON LLP Tel: + 44 (0) rhys.clift@hilldickinson.com rhys.clift@seamediation.com