Young v Royal and Sun Alliance PLC
The Court of Session found that an insurer had not waived disclosure under the Insurance Act 2015 (“the Act”). The case is the first to be decided under the Act.
Background
A fire occurred at Mr Young’s property (“the Property”) causing extensive damage. Mr Young then claimed an indemnity from his insurers, Royal and Sun Alliance PLC (“RSA”).
RSA declined Mr Young’s claim on the basis that he had failed to disclose material information pursuant to section 3(1) of the Act. Mr Young denied making a material non-disclosure, and, in any event, argued that RSA had waived disclosure of that information, pursuant to section 3(5)(e) of the Act.
The Market Presentation
Mr Young’s insurance was arranged by his broker by way of a 20-page Market Presentation (“the Presentation”). The Presentation was completed using the broker’s software, and identified the insured as Mr Young and Kaim Park Investments Ltd (“Kaim”).
The “Details” section of the Presentation contained the following passage, which the judge referred to as the “Moral Hazard Declaration”:
“Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity:”
The Moral Hazard Declaration required the proposer to select from seven options in a drop-down menu. The answer selected was “None”.
RSA emailed the broker on 24 April 2017 in response to the Presentation (“the Email”). The Email contained a heading titled “Subjectivity”, and stated as follows:
“Insured has never
Been declared bankrupt or insolvent
Had a liquidator appointed
…”
The Parties’ positions
RSA asserted that Mr Young failed to disclose that he had been a director of four insolvent companies (“the Insolvency Information”), and, had he done so, it would not have entered into the insurance “on any terms”.
Mr Young, in response, argued that the Presentation contained no misrepresentation, as neither he, Kaim, nor any director of Kaim had ever been insolvent. Further, by referring to “the insured” in the Email, Mr Young said that RSA had waived any entitlement to disclosure of prior insolvencies or bankruptcies experienced by anyone other than the insured themselves.
RSA denied that it had waived disclosure of the Insolvency Information, as the Email did not set out any questions for Mr Young to respond to. As a result, Mr Young’s failure to disclose the Insolvency Information was unconnected to the Email. Further, RSA said that it had no knowledge of Mr Young’s prior breach of the duty of fair presentation, and, since there must be knowledge of the right before it can be waived, there had been no waiver here.
The decision – was there a waiver?
The Judge firstly referred to the pre-Act case law, which established that an assured seeking to establish waiver would need to show a “clear case” (Doheny v New India Assurance Co Ltd [2005] Lloyd’s Rep I.R. 251). This could be done in one of two ways: (1) where an insured submitted information which contained something which would prompt a reasonably careful insurer to make further enquiries, but the insurer fails to do so; and (2) where an insurer asks a “limited” question such that a reasonable person would be justified in thinking that the insurer had no interest in knowing information falling outside the scope of the question. This case concerned the latter.
In considering the issue, the Judge noted that the term “any business capacity” was capable of including other entities with which the insured was involved. The difficulty for RSA, however, was that the Moral Hazard Declaration was incomplete; although RSA had seen the answer of “None”, it did not know what the “None” referred to.
The Judge held that the Email was aimed at clarifying Mr Young’s answer to the Moral Hazard Declaration, which it achieved by stipulating the specific moral hazards that needed to be addressed. Further, the judge held that the reference to “the insured” in the Email was not limited to Mr Young and Kaim, but also covered the longer formulation contained in the Moral Hazard Declaration. So, read in this context, the judge was satisfied that no reasonable reader would have understood the Email as waiving the part of the Moral Hazard Declaration relating to “any business capacity” in which Mr Young might have acted. Accordingly, the judge held that there was no waiver.
Comments
A number of themes arise in the judgment which are of relevance to policyholders and brokers.
Firstly, the judgment illustrates the potential drawbacks of using bespoke software to place insurance. Here, it was to Mr Young’s detriment that RSA were not using the same software as the broker, the result being that RSA were unable to determine the full extent of what was being disclosed, absent further information being provided.
The judgment also demonstrates that formulations such as “any business capacity”, may, in some circumstances, be broad enough to extend to any company with which an individual insured was involved. However, it is unclear whether that same analysis would apply where insurance is taken out by a business only.
Finally, although the judgment sheds light on what is required to establish waiver, it did not consider issues of materiality or inducement, and so the question of whether RSA can make good their assertion that it would not have written the risk “on any terms” remains to be decided.
Alex Rosenfield is a senior associate at Fenchurch Law.
Damages for late payment of insurance claims: some practical aspects
The effects of an insured loss on an insured’s business can be financially devastating. It is in those times of need that policyholders turn to their insurers for help. The longer a policyholder goes without that help the worse the policyholder’s financial situation can become.
The Enterprise Act 2016 amended the Insurance Act 2015 (the “Act”) to create a new right for insureds to claim damages against their insurers for the late payment of insurance claims.
This article revisits this new right in a practical context with a view to encouraging all interested parties to bear its provisions in mind when dealing with insurance claims that have, or may, run on for far too long.
Damages for late payment
Section 13A of the Act now provides that it is an implied term in all contracts of insurance entered into from 4 May 2017 that payment of sums due under an insurance contract must occur within a ‘reasonable time’.
There is no guidance on what is meant by ‘reasonable time’. We wait for the courts to consider that question in this context. For now, we can say with certainty that what is reasonable in the context of contracts of insurance very much turns on its facts. Whilst not an exhaustive list, consideration will be given to the type of insurance contract, its complexity, any regulatory or third party issues and the conduct of all parties. In other words, some claims will reasonably take longer than others to investigate.
Others may be delayed as a result of the unreasonable conduct of insurers, however. It is in those cases that policyholders should seek to rely upon the right created by section 13A.
Whilst the right can be relied upon even where the claim has been paid, a decision as to whether or not to pursue such a claim should be made quickly. A one year limitation period applies and the clock commences from the date that payment is made in full.
The insured's burden
An insured will be required to prove that it has suffered actual loss as a result of the delay by its insurers.
In addition, the insured must demonstrate that its loss was reasonably foreseeable at the time the policy was entered into. That presents a higher burden than demonstrating foreseeability from the date of the breach and may also have the practical effect of limiting any recovery for late payment.
Furthermore, there is an obligation on insureds to mitigate losses caused by any delay. For example, this might include securing a line of credit during any period of delay to overcome any short term cash flow problems. In such circumstances insureds should make the insurer aware of the fact that additional lines of credit may have to be sourced contrary to the business’ intentions and solely as a result of the insurer's delay and that any losses associated with that will be sought from the insurer under section 13A of the Act. The prospect of an increased exposure to the claim may spur the insurer into action.
Effects on insurer behaviour
Insurers now have to act expeditiously when investigating the merits of a claim under their policies in order to ensure that claims are settled in a ‘reasonable’ period of time. This may present opportunities for insurers to reflect on their claims handling processes and technical skills. Such outcomes can only be seen as a positive effect of the new remedy.
Disputes may take some time to resolve and the loss caused to a policyholder whilst an unsound declinature or restriction on cover is unwound may fall within the scope of section 13A. In other words, handling claims efficiently and ensuring that claims adjusters reach the correct conclusions in a reasonable period of time (and putting in place systems and training to achieve those outcomes) will: (a) ensure that insurers avoid this additional unnecessary exposure to claims liabilities; and (b) ensure that policyholders receive the cover to which they are entitled in a timeframe to be reasonably expected.
Insurers may also be more inclined to make early commercial decisions in order to resolve claims more swiftly than a full coverage investigation or litigation might allow.
Contracting out
The insurer and insured can agree between themselves to contract out of section 13A of the Act. Such a clause would be enforced by the Courts providing that it is clear, unambiguous and brought to the policyholder's attention before the contract is agreed.
We mention this simply to emphasise that brokers and policyholders should check their policy wordings carefully to ensure that: (a) there are no such contracting out provisions; and (b) if there are, those provisions preserve a right to claim damages for the late payment of a claim and are more advantageous than the right conferred by section 13A.
An attempt by an insurer to contract out of the provision would amount to a request to be at liberty to unreasonably delay in payment of claims. That is quite a brazen request that insureds are unlikely to want to accede to.
Comment
The usefulness of section 13A of the Act to policyholders is its ability to be deployed in communications with an insurer as an incentive to resolve claims more quickly. Even if the complexity of a claim merits a period of significant investigation by the insurer, reference to section 13A, alongside drawing an insurer’s attention to financial loss caused by the delayed payment itself, may at the very least elicit an interim payment. Interim payments can in themselves keep the wolf from the door.
For those few cases where insurers are not persuaded to act by their increased exposure to damages arising from late payment, we look forward to seeing the Courts intervene to underline to insurers, at last, that delay does not pay.
James Breese is an associate at Fenchurch Law
Bluebon Ltd (in liquidation) – v – (1) Ageas (UK) Ltd (2) Aviva Insurance Ltd (3) Towergate Underwriting Group Ltd (2017)
What was the proper construction of an electrical installation inspection warranty?
Bluebon Limited (‘Bluebon’) brought proceedings against their insurers, Ageas and Aviva (‘the Insurers’), and their broker, Towergate, following a fire at their premises at the Star Garter Hotel, West Lothian (‘the Hotel’) on 15 October 2010.
Bluebon had purchased the Hotel in December 2007, and the relevant insurance policy (‘the Policy’) incepted on 3 December 2009, for a period of 12 months.
The Policy contained the following Electrical Installation Inspection Warranty (‘the Warranty’):
“It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”
The last electrical inspection at the Hotel had taken place in September 2003.
The insurers asserted that there had been a breach of the Warranty since no inspection had been carried out in the 5-year period immediately prior to inception, with the result that the Policy was either voided or suspended from inception.
At a hearing of preliminary issues, the Judge, Mr Justice Bryan, was required to determine the following:
- The proper construction of the Warranty – was the five-year period to be calculated from the date of the last electrical inspection, or from Policy inception?
- Was the Warranty a True Warranty, a Suspensive Warranty, or a Risk Specific Condition Precedent, and what was the consequence of a breach?
The First Issue
The Insurers argued that the natural meaning of the Warranty was that the 5-year period had to be calculated from the date of the last inspection, and, if no inspection had been carried out in the last 5 years, the inspection would have to be undertaken prior to or immediately upon inception (with there being no cover until such inspection had taken place). In support of that analysis, they said that the Warranty did not require the inspection to occur within 5 years of inception, and that a reasonable person, having all the background knowledge available to the parties, would know that inspections needed to be undertaken regularly.
Bluebon argued, perhaps optimistically, that the proper construction of the words “be inspected and tested every five years” meant “every five years starting with the date of imposition of the stipulation” i.e. from Policy inception. In support, Bluebon said that the language of the Warranty was “forward-looking”, and that if the Insurers had intended otherwise, the Policy could have stated “has been inspected and tested” or “is inspected and tested.”
The Judge found that Bluebon’s construction made no commercial sense in the context of a 12-month policy, and rendered the Warranty meaningless, since there would be no requirement for an electrical inspection until (at least) after the fourth annual renewal. This provided no protection from the risk of fire and, unsurprisingly, Bluebon’s construction was rejected. It followed that Bluebon had not complied with the Warranty.
The Second Issue
The Insurers’ primary case was that the Warranty was a True Warranty i.e. a term which took effect as a condition precedent to the existence of any cover, such that the breach rendered the Policy void from inception. Alternatively, they said the warranty was a Suspensive Warranty, which had the effect of suspending cover during the period of the breach. Neither construction required a causal link between the breach and the fire, and, accordingly, the Insurers asserted that they had no liability to Bluebon.
Bluebon, by contrast, argued that the Warranty was a ‘Risk-Specific Condition Precedent’ i.e. a term which required compliance as a condition precedent to the Insurers’ liability to provide cover in respect of risks relating to the electrical installation. Put another way, Bluebon said that unless the fire was caused by the electrical installation, their breach was irrelevant.
The Judge again rejected Bluebon’s argument, finding that it would be entirely unbusinesslike for the Warranty to suspend cover in respect of losses arising from defects in the electrical installation (pending inspection of the installation), but not for losses arising out of the fire generally. The Judge’s interpretation was that, while the Warranty was breached, there could be no cover for any losses arising out of fire.
Having regard to his findings on the proper meaning of the Warranty, the Judge found that the Warranty was a Suspensive Condition.
Insurance Act 2015 implications
Although the outcome in Bluebon may not be particularly surprising, it is interesting to consider whether it would have been decided differently under the Insurance Act (‘the Act’).
The Act does not change what an insurance warranty is, but does change the effect if breached. Under Section 11 of the Act, an insured will be protected in the event of a breach of warranty. Providing that it can show that the term was ‘totally irrelevant to the loss’ i.e. the breach “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.”
There are two interpretations of how Section 11 might have applied in Bluebon (or for that matter generally), both of which have been postulated by the Law Commission.
Under the ‘non-causation’ interpretation, the Insurers would have been entitled to rely upon the breach of the Warranty, because the absence of an electrical inspection might have made a difference, given the type of loss that occurred i.e. a fire. It would not have been open to Bluebon to argue that the fire would have started even if the electrical inspection had taken place.
Under the ‘causation’ interpretation, it would have been open to Bluebon to establish that the fire was due to some other cause, so that the Insurers would be liable under the Policy. That is because, in that scenario, the ‘circumstances’ of the loss were such that compliance with the Warranty would not have made any difference.
Of course, unless and until the true meaning of Section 11 is determined by the Courts (and, given its importance, the point is likely eventually to end up at the Supreme Court), the interpretation will doubtless remain a matter for debate.
Alexander Rosenfield is an associate at Fenchurch Law