1 LATE PAYMENT OF CLAIMS THE NEW REGIME UNDER SLATE PAYMENT OF CLAIMS THE NEW REGIME UNDER S.13A OF THE INSURANCE ACT 2015

2 (1) BACKGROUND TO AND RATIONALE FOR S.13ALate payment of claims was identified as a problem area by the Law Commission along with a number of other areas which are now dealt with in the Insurance Act Legislation was recommended.1 There was resistance to the provision dealing with late payment2 and in consequence it was dropped from and it did not appear in the Insurance Act 2015 as originally passed. But subsequently it was revived and has come in via part 5 of the Enterprise Act 2016 as S.13A of the Insurance Act The Insurance Act 2015 came into force on 12 August 2016 and applies to contracts of insurance (and variations) made after that date. The Enterprise Act came into force only on 4 May 2017, so 13A of applies to contracts (and variations) only from that date. 1 Law Com No. 353 Chapters 24-28 2 Along with those relating to warranties (now S.10) and terms relating to loss (now S.11)

3 (1) BACKGROUND TO AND RATIONALE FOR S.13AThe essential legal reason why reform was necessary is that English law (i) regards claims under indemnity insurance as claims for damages, because the primary obligation of the insurer is to hold the insured harmless against (i.e. prevent from happening) the relevant loss or expense3 occurring and (ii) does not allow damages for late payment of damages, even liquidated damages4. In Scottish law and that of other jurisdictions, a remedy was available for late payment of an insurance claim. To some extent the position could have been ameliorated if damages for breach of the duty of utmost good faith were available; but they are not.5 The practical reason for its introduction was a concern that in some small number of cases this legal position led to some slackness or worse as regards payment of claims by some insurers; in relation to the majority it was not an issue at all. 3 The Padre Island [1991] 2 AC 1 at pp 4 The Lips [1988] AC 395 5 The Star Sea [2003] 1 AC 469

4 (1) BACKGROUND TO AND RATIONALE FOR S.13AThe case which really brought the area to the attention of the Law Commission and led to their recommendation that the law be changed in the way it has been was Sprung v. Royal Insurance6. There, Mr. Sprung owned a small family business, an SME in modern parlance. Insurers rejected a claim for damage caused by vandals to the factory and plant. Four years later they abandoned the defence, but lacking the finance himself to carry out repairs, Mr. Sprung had gone out of business within months. Several subsequent cases against insurers failed, even in Tonkin v. UK Insurance Ltd7 where the insurers undertook that they would try to be fair and reasonable whenever the insured had need of the protection of the policy and that “we will…act quickly to provide that protection.” 6 [1999] Lloyd’s Rep IR 111 7 [2006] EWHC 1120

5 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMS.13 A (1) sets out the new implied term: “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” Preliminaries Hold harmless analysis not abolished The principle that an insurer’s obligation is to hold the insured harmless from the loss and that the insurer is thus in breach from the moment of loss remains8. The implied term is supplemental, as is made clear by S.13A(5), which provides that “Remedies available for breach of the implied term (for example, damages) …”are additional to and distinct from any right to enforce payment of the sums due in respect of the claim and interest on such sums. The retention of the hold harmless principle has an impact on from when both interest and limitation will run. 8 Law Com No. 353 at 28.81; S.13A (5).

6 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMDamages now unarguably available as a remedy for breach The reference in S.13A(5) to “Remedies (for example, damages) available for breach of the implied term…” mean there is no doubt. Obligation relates to payment of sums due The “reasonable time” relates to “payment of any sums due”. It does not relate to other steps an insurer may need to take before payment can be due and thus before a claim can properly be made. For example, if insurers’ consent is required to the incurrence of defence costs or a settlement, as it is invariably9 in liability insurance, there is no obligation under S.13A to consent within a reasonable time (although that is often express or implied in any event). If there is a refusal of consent in breach of contract, then the insured will be able to recover the costs or settlement sums as damages, 10but it is not obvious that they would amount to “sums due” for the purpose of S. 13A. 9 Sometimes with minor exceptions for “emergency” costs, where there is not time to obtain insurers’ approval. 10 Forney v. Dominion Insurance [1969] 1 W.L.R. 928

7 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMAny sums due in a reasonable time Note the “any”. Where there are different limbs to a claim and the sums in relation to some limbs become clearly payable, or where in relation to a certain limb it becomes clear that a minimum sum is payable, the obligation will bite: a reasonable time can expire in relation to different limbs and different parts of the same limb of claim at different times. Claim is necessary to trigger obligation “…If the insured makes a claim”. An obvious but important point. The reasonable time is dependent upon a claim being made. The fact that technically the insurer may under the hold harmless principle be in breach of contract from the moment of happening of the insured loss does not matter.

8 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMHowever, there is room for argument about what is meant by “a claim”. Mere notification of a loss or potential loss will not in itself be a claim. There are an enormous variety of communications beyond that which may or may not amount to a claim. The Courts, in the absence of specific provision, are likely to take a fairly broad approach, as they generally do, certainly in the absence of any more specific definition, in the context of what is a third party claim in the context of liability insurance. 11In reality the most general indication that the insured is looking to insurers for an indemnity is likely to suffice. There is also the potential for more than one claim in a policy which contains multiple sections of coverage. 11 Those cases are not analogous because the claim from a third party is hostile whereas a claim under an insurance contract is merely a request for payment. But the broad and undemanding approach taken there is likely to be followed. Staughton L.J. in Robert Irving & Burns v. Stone [1998] Lloyd’s Rep IR 258 at 261 thus defined a claim “…a communication…of some discontent which will, or may, result in a remedy expected from the [insured]”.

9 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMContractual requirements for a claim/payment of sums Some policies (e.g. BI policies) have detailed requirements as to what is to be submitted as part of or in support of a claim; there may be arguments therefore about whether or not a claim has been validly made/or (if the requirements are not definitional of a claim under the policy) whether any sums are properly due under the policy even if a claim is made, if such requirements have not been met. There is no restriction as to provisions defining what constitutes a valid claim for the purposes of a policy or what needs to be submitted with a claim for it to become payable; such provisions would not amount to contracting out. In practice, however, it is unlikely that insurers will set in advance unreasonable requirements as by definition such requirements will be general, and they will be interpreted by the Courts so as to operate sensibly. So the possibility of the reach of the section being significantly restricted by definitions of “claim” or claim requirements is probably not a large one.

10 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMFactors to take into account in assessing reasonable time S. 13 (A) (2) “A reasonable time includes a reasonable time to investigate and assess the claim” S.13A(2) makes specific provision for time to investigate and assess. Obvious and therefore possibly unnecessary, one might say, but this is given emphasis because “the long-term stability of the market is dependent on insurers having strong incentives to investigate claims and root out fraudulent and invalid claims.”12 It is making it clear that the legislation is not intended to curtail insurers’ ability and duty to investigate: “generally the insurer is playing catch up in terms of constructing the evidential material in order for them to forma a view about coverage”. 13The prominent presence of this provision is an important pointer and reminder for a tribunal: S.13A is not there to, and should not be allowed to, deter robust and careful investigation. 12 Law Com No. 353 at 28.26 13 Law Com No (Evidence from Zurich)

11 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMS.13A(3) “What is reasonable will depend on all the relevant circumstances..”. 4 specific examples are given in S.13A (a)-(d) of things which may need to be taken into account. Reasonable time is an objective question but is obviously totally fact sensitive; “all relevant circumstances” are those relating to the particular claim and particular insurer. The first three examples given in S.13A (3) can be dealt with quite shortly. S.13A(3)(a): Type of insurance Business interruption insurance will generally give rise to more issues than household property insurance.

12 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMS.13A (3)(b) : Size and complexity of the claim Another self-evident point and no doubt generally by far the most significant of the examples given. “Complexity” is not confined to how complicated the claim itself is; “complexity” refers to complexity of assessment in general terms. So a foreign based property risk may be more complex than a domestic one.14 Complex claims, however, often comprise different parts. The fact that one part of a claim is difficult will not be a reason for not paying another, distinct part. This is logical but is also evident from S.13A(4). S.13A(3)(c) : Compliance with any relevant statutory or regulatory rules or guidance Failure to comply with any such relevant rule or guidance, of course, may well increase, if not guarantee, the chance of breach. There are many regulations now which touch on claims handling: e.g. FCA Insurance Conduct of Business Sourcebook; Lloyd’s Minimum Standards CLM. 14 Law Com No

13 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMS.13A(3)(d) Factors outside the insurer’s control An example would be where a third party fails to provide information necessary to assess a claim. An enquiry of a local authority or government department in relation to permission or licencing which could be relevant for example to a non-disclosure defence would fall into this category; so would a police or fire brigade report following burglary or fire. The same would obviously apply to any enquiry of the insured, a broker or an accountant employed by an insured. Third parties: relevance to reasonableness/factors outside the Insurer’s control. As a general caution, reliance on the actions or inactions of a third party is likely to be scrutinised carefully. In the Moss v. Sun Alliance case15 discussed below, the cause of the delay was the insurers awaiting a report from the police. Yet the Court found the insurers in breach nonetheless because enquiries could have ruled out arson by the insured much more quickly. So where third parties are involved in providing information insurers will have to be careful to chase them up and consider whether there are other ways of obtaining information. 15 55 SASR 145 at

14 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMThird parties connected with the insurance industry Particular issues arise in relation to third parties within or used by the insurance industry. There are a number of categories of third parties. All this is untested ground. Third party claims handlers In a commercial setting insurers will very often use third party claim managers/administrators. Often they will be companies dedicated to doing just that, but sometimes loss adjusters or lawyers do this. In liability insurance, the lawyer may be named as the notify party and be a claims handler. In principle, it is suggested, insurers will be responsible for the behaviour of those acting for them in handling claims. This is because there is no suggestion of escape by delegation under S.13A. Although what is a reasonable time depends on all relevant circumstances, it is an objective question and in principle the interposition of an agent for the insurer should not alter the answer to the question of what is a reasonable time. The behaviour of such persons will probably not be a factor “outside the insurer’s control” for these purposes, even if the insurers have no direct knowledge of what is being done, not least because insurers will be their principal and have a service contract with them. Insurers will likely, of course, have a remedy against such persons if their actions cause the insurers loss.

15 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMInsurer retaining control but acting on advice of third parties What if the insurer retains control and seeks advice from lawyers or loss adjusters and acts on that advice? This would apply equally to others acting on behalf of an insurer (e.g. a claims administrator) seeking third party advice. Does the fact that they have sought and acted on independent advice in denying a claim or making investigations mean that their behaviour will be reasonable ? This links to the issue of “reasonable grounds”, dealt with below. It is suggested the answer is not necessarily. If the advice is negligent or otherwise unreasonable, even if the insurer did not know it or should not have known, if the advice is followed it will lead to objectively unreasonable behaviour and that will fall upon the insurer, not the insured. However, as a matter of common sense, if an insurer takes a stance or makes investigations on legal advice or prompted by an adjuster, or if lawyers or adjusters ask questions directly on behalf of an insurer, then the source of the questions may well help to show that the enquiry was reasonable and that time which expired due to it being dealt with and answered was reasonable. It may therefore well bolster an insurers’ argument that it had reasonable grounds to dispute a claim. Nonetheless, if the enquiry is judged unreasonable, it is likely the insurer will be in breach, even if the enquiry was made on advice of a lawyer or loss adjuster.

16 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMInvolvement of other insurers It is suggested in paragraph 268 of HM Treasury’s Explanatory Notes to the Enterprise Act, dealing with examples of factors beyond insurers control within S.13A(3)(d), that : “An insurer’s decision may also be dependent on the actions of another insurer. This may arise as a result of [1] the interaction between business interruption and property insurance, or [2] in the subscription market where a follower may be dependent on the lead insurer.” Other insurers on different, but linked risks As the first example shows, where this is likely to occur as an issue is property damage and business interruption and even here in most cases there will be the same insurer. If, however, the business interruption insurer is a separate insurer only picking up BI losses caused by property damage covered by a PD Policy and is genuinely dependent upon a different insurer to confirm that property damage covered by the PD Policy has occurred, then it may be hard to criticise the BI insurer for awaiting the outcome if there is a dispute, for example, about whether or not the damage or loss which occurred was subject to an exclusion clause in the PD cover. It may be possible to say that the BI insurer should have formed their own view. However, if the effect of the breach by the PD insurer is foreseeably to cause delay by the BI insurer, then the PD insurer may well be liable for any damage caused by the BI insurer’s delay.

17 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMSubscription market/Leaders and followers The second example given seems more controversial. There are essentially two possibilities in a subscription market. Either some insurers have delegated claims handling authority to other insurers, or they have not. If there is no delegation and all insurers retain claims handling authority, then in principle each insurer should be responsible for his own position and behaviour. There may be cases where the leader is provided with information to pass on to other insurers or undertakes to consult with them, but fails to do so within a reasonable time. In such a case there might well be a defence for the followers (assuming the leader was not in any way acting for them) that they should not be responsible for the actions of the leader. Again, if that were the case, then the leader would likely be held liable in damages for the consequences of not only his own, but the other insurers’ failure to pay timeously.

18 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMIt is a possibility that in a subscription market with no leader clause where insurers or groups of insurers refuse the claim independently or over different periods of time that, because they will be severally liable, an insured might not be able to make a claim, even if he has suffered damage by reason of the overall non-payment: each insurer (or group of insurers) may be able to allege that their own non-payment was not causative of the loss. One can, however, expect the Courts to look to place the loss, where there has been an otherwise good claim for unreasonable delay in payment, on the insurance market. As regards leaders and followers where there has been delegation of claims handling authority to the leader, then in principle the decision and actions of the leader is that of the other insurers16 and if there is a breach by the leader or those acting on his behalf it will put other insurers in breach. A purpose of a “follow the leader” clause is to increase marketability17 of the insurance by making the claims process easier for the insured in having only one insurer to deal with; a corollary of that is likely to be that the mistakes of that insurer affect the rest of the market. 16 It does not matter for these purposes whether or not an agency analysis is adopted, or that of an agreement to be bound by the decisions of the leader. 17 Mance J in Roar Marine v. Bimeh Iran [1998] 1 Lloyd’s Rep 423

19 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMPrimary and Excess Layers It is almost invariably a condition precedent of excess insurance that the primary layer has either admitted liability or has been found liable. What therefore if the primary layer unreasonably refuses to pay ? The primary insurer does not act on behalf of the excess layers with whom there are separate contracts (albeit generally on the same terms as regards the substance of the risk). If the primary insurer does not admit liability or insists on taking matters to judgment, then the excess layers, if it is a pre-condition that the primary layer admit liability or are held liable, are, prima facie, not in breach. The remedy for the insured would be to claim damages from the primary layer insurers for any loss caused by the failure of the excess layers to pay. In an extreme case – suppose the primary layer take an obviously unsustainable point of construction – it would be possible to argue responsibility fell on the excess layers, but even then, there would be room for argument. Insurers and Reinsurers A number of facultative reinsurance contracts have claims control clauses which allow, often as conditions precedents to liability, the reinsurer to run litigation or require its consent prior to any admission of liability by the insurer.

20 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMWhat if a reinsurer prevents an insurer paying or settling with an insured, with the effect that between the insurer and the insured, the insurer takes an unreasonable time to pay ? In principle the insurer will be liable and will have to consider what recourse it may have under its contract with the reinsurer. There is no reason an insured, who unlike with a leader clause or a primary and excess situation, may well have no knowledge of the existence of the reinsurer, should be prejudiced or affected by the insurer’s reinsurance arrangements. If the insurer gives away control of claims handling in circumstances in which it is potentially liable for bad claims handling, that is not going to make a difference to a tribunal. But the insurer may well be left exposed because (i) he will not be in a position to make a claim for payment under the reinsurance and secure his own claim for damages, there being no sums payable yet thereunder and (ii) the reinsurers’ duties as regards claims handling may well be restricted to acting in good faith and avoiding Wednesbury unreasonableness – i.e. not taking a factor extraneous to the subject matter of the reinsurance into account and not acting arbitrarily or unreasonably in the sense that no reasonable reinsurer could possibly withhold approval18. The alternative would that the insured is left without a remedy and that, in such circumstances, will be unlikely to happen. 18 Gan Insurance Company v Tai Ping Insurance Company (Nos 2 and 3) [2001] EWCA Civ 1047 at [67] and [73]

21 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMOther (than third party) factors relevant to reasonableness/outside Insurers’ control Number of claims Floods, for example, often generate large numbers of claims in a particular area. Insurers cannot be expected to keep large teams on tap just to deal with rare or very rare events. Being overwhelmed by a sudden surge of claims is thus a potential reason for extending time. Other practical factors Other practical factors which affect the ability to investigate will count. Thus time of year – in Gentry v. Miller the fact that the 2 month period involved Christmas was taken into account - and non-availability of staff for other reasons can be factors. But obviously an insurer will be expected to have sensible contingency plans for staff being away for predictable reasons.

22 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMS.13A(4) “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”, then mere failure to pay alone is not a breach, but there still can be a breach. S.13A(4) (a) & (b) Under S. 13A (4)(a) the insurer, if it shows reasonable grounds for disputing a claim, does not breach the term “merely by failing to pay the claim (or the affected part of it) while the dispute is continuing, but…” This is obvious: if there are reasonable grounds for disputing a claim or the relevant part of it, disputing payment of it or the relevant part is not unreasonable. Clearly, however, for this to apply, the reasonable grounds, not just the dispute, must continue – and note there is nothing which says the implied term ceases to apply if litigation is commenced. If there were reasonable grounds for dispute for the first 3 months, but thereafter there were not, then prima facie there is no defence to a claim for unreasonable failure to pay after 3 months. In reality this provision puts an onus on insurers to show reasonable grounds continue for the duration of the period of non-payment. It was not, however, intended to be an onerous requirement. 19 Clearly acting on advice from loss adjusters and lawyers, is bound to have a considerable impact on a tribunal’s view, even if the insurer remains responsible for the course taken. 19 L.C. para

23 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMThere is a “but” at the end of S.13A(4)(a). As one would expect, having reasonable grounds for disputing a claim or part of it is not a carte blanche, even for the period during which those grounds subsist. And so S.13A(4)(b) provides that - (even) if there are reasonable grounds for disputing the claim or part of it – “ 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.” So even where there is a clear and arguable dispute, an insurer must be careful still to act reasonably in the handling. In practice if reasonable grounds are established, however, a tribunal may well be more cautious about finding a breach. Burden of Proof as regards breach. In general, like with any assertion of breach of contract, the burden of proof is on the insured. So it will be for them to establish the failure to pay within a reasonable time.

24 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMHowever, the burden of establishing “reasonable grounds” for a dispute, is as the wording of S.13(A)4 clearly shows and as discussed above, upon the insurer. So the pattern of many claims may well be something like: Two years was too long to pay this claim; it should have been paid within six months; Two years was not too long as we had reasonable grounds to dispute for that period; There were no reasonable grounds to dispute; and even if there were then at most they lasted for 8 months and/or there was in any event unreasonable behaviour as regards x or y which accounted for z months. There was no unreasonable behaviour.

25 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMWhat is a “reasonable” time ? This is clearly impossible to answer with any great precision as it is fact dependent. However some guidance can be given. For relatively complex claims the period of investigation and assessment is likely to be months and probably around six months or so. This derives some support from the English courts, where some parallel can be drawn with the principles in relation to affirmation. In Brit UW Limited v. Trenchless Solutions, insurers avoided, on complex facts, under a contractor’s combined liability policy. Carr J held that a period of 4-5 months was not enough to amount to affirmation. The assured’s “headline” submission was that, due to an of 29 August, the insurer knew all of the matters relied upon for avoidance on 30 August 2013, but did not avoid until January 2014 and that was too long.

26 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMThe insurer had passed on the immediately to a loss adjuster and on 13 September 2013 had received advice from the loss adjuster recommending a reservation of rights and investigations relevant to coverage and non-disclosure. Carr J said this:20 “Brit was entitled to a reasonable time to investigate as a prudent insurer. The decision to avoid was not taken lightly and, as already indicated, was an exceptional course for Brit to take. A period of four to five months to carry out investigations, take legal advice and the decision to avoid cannot be said to have been unreasonable. FBTS’ headline position therefore takes it nowhere. There would need to be much more for a defence of affirmation to be established.” A shorter period is likely to be appropriate for less complex cases. In Gentry v. Miller21 the Court of Appeal regarded 2 months as sufficient to investigate potential fraud in a consumer road traffic claim. 20 At paragraph 171. 21 [2016] EWCA Civ 141 at paragraph 28.

27 (2) REASONABLE TIME TO PAY SUMS DUE IN RESPECT OF A CLAIMThis general guidance is also supported by two Australian cases : Moss v Sun Alliance Ltd (1990) 55 SASR 145 and Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office [1998] FLR 441. In Moss the Court allowed 4 months in a property damage and business interruption claim to a small business – a general store destroyed by fire. In Tropicus the Court allowed roughly 8 months (from the settling of the property damage claim in February 1994, itself some 8 months after the damage) as a reasonable time to assess the business interruption claim in a complicated case, involving a bigger business where 30,000 orchids were destroyed by malicious acts.

28 (3) LIMITATION Limitless exposureOne of the most, if not the most, commercially important features of the new provision is something which is absent. There is no limit on the amount recoverable for breach. Insurance policies invariably have limits to their exposure. Sometimes in liability policies defence costs fall outside the limits, but costs exposure is still within insurers’ control as all such policies will give control, or the ability to control, the running of the defence to the insurer. Furthermore, that exposure is paid for by the insured: premium is assessed relative to the quantum of exposure. Now for the first time is the potential of unpaid for, uncontrolled, unlimited exposure, which may be out of all proportion to the premium or limits of the actual policy. That is bound to be of legitimate concern to the market.

29 (3) LIMITATION One way of achieving some certainty in this respect is to ensure that any claims emerge quickly. Following representations, the Law Commission decided to recommend a one year limitation period and that has been adopted in the legislation by way of the insertion of new provisions in the Limitation Act 1980, S.5A(1) and (2). Under S.5A(1) an action in respect of a breach of the term implied by S.13A “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” Under S. 5A(2) “Any payment which extinguishes an insurer’s liability to pay a sum referred to in section S.13A …is to be treated for the purposes of this section as payment of that sum”

30 (3) LIMITATION So the limitation period runs from when the insurer has actually paid sums, not from when the insurer should have paid sums, in other words not from the date of breach. Furthermore, it runs from when all sums are paid - that means all sums due in respect of the claim. There is no question of the limitation period starting from different points in relation to different payments covered by the same claim. But there may be room for argument as to whether when sums are sought under a policy with a number of heads of cover, there is one claim or more than one. The purpose of S.5A(2) is to make it clear that sums paid in satisfaction of judgment or settlement and not directly under the policy, are covered.22 22 HM Treasury Explanatory Notes to the Enterprise Act 2016 at [281]

31 (4) CONTRACTING OUT Limiting liabilityThe unlimited and uncontrolled exposure will certainly have another consequence. In non-consumer contracts23, there is the possibility of contracting out under S.16A. The extent to which there will be widespread contracting out of S.13A as a whole may be doubted, but certainly attempting to limit liability is likely to be widespread24. There is no prohibition against limiting liability but in reality the extent to which it becomes prevalent may depend on market forces. As with the other provisions of the Insurance Act from which contracting out is permitted, there is no test of reasonableness as regards the contracting out itself. So the limit of liability can be set at anything. In non-consumer contracts there are three factors to be considered as regards contracting out in this context. 23 In consumer contracts there can be no contracting out by virtue of S. 16A(1) of the Insurance Act 2015 24 Obviously limiting liability is not permissible in consumer insurance contracts

32 (4) CONTRACTING OUT First, contracting out cannot protect against deliberate or reckless breaches (where the insurer knew it was in breach or did not care whether it was in breach or not).25 Absent a deliberate or reckless breach, the term has to satisfy the requirements of S.17(2) and (3) which apply to other aspects of the Insurance Act 2015. So the disadvantageous term must be clear and unambiguous as to its effect and the insurer must take sufficient steps to bring the term to the insured’s attention before the contract. In this context particularly, such requirements are likely to be easy to satisfy, because a term limiting damages recoverable should be obvious in its effect. 25 S.16A(2) & (3)

33 (4) CONTRACTING OUT Settlements : S.16A (6) “This section does not apply in relation to a contract for the settlement of a claim arising under and insurance contract.” Importantly, there is no prohibition, either in the consumer or non-consumer context, against what might operate to some extent as ex post facto contracting out. If there is a disputed claim and that is resolved, there is, by virtue of S.16A(6) nothing to stop an insurer settling on terms that the sum paid is in full and final settlement of any and all claims for breach of the implied term as to payment within a reasonable time, whatever value, if any, is given to that aspect of the claim. However, mere payment or “settlement” of an insured’s claim will not achieve this result. What is intended to be covered by “contract for the settlement” is the settlement in the sense of compromise of a disputed claim. The Courts may, for example, view with suspicion a standard form to be signed by all insured who receive payment which includes a waiver of rights under S.13A, although such a form could satisfy S.16A(6). But it is quite clear that S.16A(6) is not aimed at preventing or interfering with bona fide resolutions of disputes. In practice this means that, particularly on larger claims, it will be important to ensure that if finality is required and the possibility of a claim for late payment is a live one, there is a settlement and that it is wide enough to cover such a claim.

34 (5) DAMAGES The principles applicable are, as confirmed by the Law Commission, no different to those in relation to other contractual claims.26 Remoteness As regards the principles of remoteness, that is straightforward. It is the normal twofold rule in Hadley v. Baxendale as refined in later authorities. That is to say, in broad summary, that the loss must either (i) have arisen naturally accordingly to the usual course of things or (ii) from special circumstances communicated to the insurer before the policy was concluded, so that it can be said to within the reasonable contemplation of the insurer as not unlikely to result from the breach, for the insurer to be liable. A major potential issue is likely to be what special circumstances were communicated to an insurer and what should have been in contemplation by them. 26 Law Com No and 26.37

35 (5) DAMAGES From the insured’s view point, therefore, it may be sensible to give more rather than less financial information in order to ensure that should there be no problem; this may carry the risk of increased premium if it shows actual or contingent financial vulnerability. However, in the class of insurance most likely to give rise to claims, which is property or business interruption insurance for SMEs, the insurer is likely, by dint of the risk presentation, to know a fair amount about the insured and its financial situation : the value of property, plant, the number of premises, type of business, turnover and profitability. If, therefore, a small business suffers a major property and/or business interruption loss and the insurer fails to pay the claim within a reasonable time and either turnover and profits are affected or the business fails by reason of the insured’s deteriorated financial position, one can be reasonably confident that the failure will be regarded as within the reasonable contemplation of the insurer.

36 (5) DAMAGES But, where there is simply property insurance alone of a commercial chattel, such as a vessel operating as a ferry, there might still be need for special disclosure if an insured wants to be sure. Equally insurers may want to ask more questions in such risks now, although ascertaining potential exposure could assist its realisation. Causation and Mitigation Mitigation and causation27 apply and may be a limiting factor and give rise to considerable argument. Mitigation means an insured will have to have taken adequate steps to secure funding or any other methods of avoiding loss, rather than simply attempting to land it on an insurer. As to causation, for example, if an insurer refuses a claim and the insured does not immediately bring proceedings but seeks to persuade or perhaps delays proceedings, there may be arguments about how much the insured’s own delay has caused the loss of which complaint is made. 27 That claims would be subject to these principles, along with remoteness, and that they would offer some protection is emphasised by the Law Commission : Law Com No. 353 at 25.3 to 25.7

37 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET Claims for late payment as a litigation tactic The floodgates point is, of course, a concern. Is it going to be inevitable that almost every claim form in an insurance dispute will now contain a claim for late payment of sums due ? The risk of it becoming a prevalent litigation tactic was identified by various consultees. The Sprung case was one where the business failed. There are many other kinds of loss potentially flowing from failure to pay: increased borrowing costs due to increased indebtedness; loss of profits due to inability to maintain current level of turnover or to expand. The likelihood of some sort of financial consequence being found is quite a high one, if there has been arguably unreasonable delay. Of course, quite apart from establishing breach, as stated there will be remoteness, mitigation and causation hurdles to overcome.

38 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET To answer the question set above, the apprehension that certainly many claims that reach litigation will include a late payment claim seems to me reasonably well founded. To put matters in perspective, however, the Law Commission commissioned research28 which showed29 that there was, out of an estimated 20,000 business property claims, unreasonable delay in 2% of cases, or around 400 cases a year. It similarly showed that most cases involved losses of £5,000 with substantial losses probably less than 10%. 28 Broking Now! In association with BIBA by FWD Research, Research on Damages for Late Payment (September 2011). Referred to at Law Com No and dealt with more extensively in the Impact Assessment there referred to. 29 This is taken from descriptions of the research, not the research itself.

39 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET Claims farming/volume of claims Another aspect of the floodgates is the potential for claims farming, also referred to by a number of consultees. It may prove to be wrong, but because of the fact sensitive nature of any claim and the fairly limited opportunity for exposure and adverse consequences in consumer insurance, this would not seem likely to be much of a problem. Moreover, although insurance is arguably sold for peace of mind, there is currently effectively no potential for damages for distress and inconvenience as regards breach in the consumer (and other) contexts,30 which might be fixed upon by claims farmers. The insured where the new provision is likely to matter most are SMEs. The Sprung case itself involved an SME. However each case will depend on many different facts and there is likely to be a comparatively small volume of claims from this source. As regards larger enterprises, generally they will be more financially stable and will also have better access to funds at reasonable rates to enable them to survive the consequences of unpaid insurance losses, thus eliminating or reducing claims. 30 England and England v. Guardian Assurance [2000] 1 Lloyd’s Rep IR 404 where a claim for damages for distress and inconvenience was held not to be available to the Englands under a consumer (House and Home) Policy. Note that the Law Commission has expressed the view that they see no reason why such damages should not be available for breach of a consumer insurance contract: Law Com CP No. 201 at [278]

40 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET Relations between insurers, co-insurers and reinsurers Provisions dealing with responsibility for late payment claims as between co-insurers, including leaders and followers, primary and excess layers and insurers and (facultative) reinsurers should be considered. The potential that each of these situations gives rise to has been dealt with above. One further point. If an insurer becomes liable for late payment of damages, then although obviously it all depends upon policy wordings, certainly facultative reinsurers will not be likely to be liable to indemnify the insurer in that respect (as opposed to any arguments that their own behaviour may have caused such a breach and therefore that they are in breach of the reinsurance contract or otherwise responsible for it). The liability of the insurer forms no part of the risk undertaken; the implied term is supplemental to the hold harmless obligation which is the basis of the insurer’s liability and which defines the risk. Further, the liability arises, ex hypothesi, from the unreasonable behaviour of the insurer, not from the occurrence of the risk. The position may be different in treaty reinsurance; the wording is all important.

41 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET Monitoring of and agreements with Third Party Claims Handlers, Loss Adjusters and Lawyers. Procedures relating to and the monitoring of third party claims handlers, loss adjusters and lawyers will need to be considered to ensure they are adequate in practical terms to enable any potential issues with late payment to be avoided. Agreements with such parties will have to be considered and if necessary amended both to update procedures and explicitly to ensure that any exposure caused by these third parties is recoverable from them by insurers. Contracting out The most important practical consideration for the market is likely to be contracting out in non-consumer cases and the extent to which it will be tolerated by customers. Because of the limitless and uncertain nature of the liability, control by reference to quantum is going to be highly attractive. Giving early consideration to clauses which may achieve this will be a priority for many insurers.

42 (6) PRACTICAL CONCERNS/CONSIDERATIONS FOR THELONDON MARKET Privilege There are issues of protection of privilege where an insurer wishes to adduce evidence as to legal advice to make or bolster a reasonable grounds defence. There is already an LMA clause to deal with this. Settlement Clearly some thought should be given both to entering into such agreements in any case where there has been a claim unpaid for any length of time following demand and the wording of them – the latter to ensure that any agreement does not just cover claims for indemnity but is wide enough to cover any claim under or in connection with the policy. Adam Fenton QC