All round protection for brokers: how protecting the underwriter can protect your client and protect you!
Our March 2021 article ‘Insurers bound by the small print? I should cocoa!’ briefly noted that the judgment in ABN Amro considered the scope of a broker’s duty to procure cover that meets the insured’s requirements and protects it against the risk of litigation. But what does that mean in practice, and can it really extend, as was argued in this case, to a duty to explain unusual clauses to underwriters?
One of the many roles brokers perform is in relation to policy placement, which role involves advising their clients and dealing with underwriters. As part of that exercise a broker must: (i) ensure that it understands its client’s instructions and in the event of uncertainty query, clarify or confirm the instructions given; (ii) explain to its client the terms of the proposed insurance; and (iii) ensure that a policy is drawn up, that accurately reflects the terms of the agreement with the underwriters and which are sufficiently clear and unambiguous such that the insured’s rights under the policy are not open to doubt. It is well-established law that in the performance of these tasks, a broker must exercise reasonable care and skill.
If the coverage is unclear, the client will be exposed to an unnecessary risk of litigation, and the broker will be in breach of its duty.
The scope of this duty was considered in the recent ABN Amro Bank case. By way of brief factual background, the claimant bank provided instructions to its broker that it required cover against its clients defaulting under a finance agreement. The broker placed the risk with RSA under an all risks marine policy. A bespoke clause was added to the policy midway through the policy period which had been drafted by the bank’s external lawyers. The effect of the clause was to provide the equivalent of trade credit insurance.
When subsequently presented with a £33.5 million for financial losses suffered by the bank, the insurer refused cover on the basis that the clause had widened the scope of the policy beyond what a marine policy would ordinarily provide. That disputed claim resulted in litigation, as part of which the court had to consider the role of the broker and what it was required to do in order to fulfil its duty to arrange cover which clearly and indisputably met the client’s requirements, and did not expose the client to an unnecessary risk of litigation.
On the facts, it was held that:
- a reasonably competent broker would have advised its client from the outset that the credit risk market and not the marine insurance market was a more appropriate market in which to place the cover the bank had instructed it to obtain. Such advice would have enabled the bank to make an informed decision as to how to proceed;
- having gone to the incorrect market, it became important for the brokers to explain to the underwriters what the clause was intended to cover; and
- any reasonably competent broker would have specifically pointed out the clause to the underwriters and talked through the amended wording and its implications.
The broker argued that this effectively imposed an unprincipled “duty to nanny”. The court clarified that there was nothing in its reasoning or conclusions which was intended to suggest that brokers generally owe duties to their clients to explain particular clauses, including unusual clauses, to underwriters.
Rather, in order to fulfil its duty to obtain cover that met the bank’s requirements and did not expose it to an unnecessary risk of litigation, and thereby protect its client’s position, the broker needed to give information to underwriters and discuss the implications of that information. In doing so, it would avoid problems which would potentially arise in the future if underwriters did not share the bank’s understanding of the unusual clause.
As such, the requirement did not amount to a duty to protect underwriters, it was about the steps that needed to be taken to fulfil the duty of a broker to protect its own client.
Having failed to take those steps, on the facts of this case the broker was in breach of its duty and consequently liable to the underwriters and the bank for costs.
In this case, protecting the underwriter was a necessary part of protecting the client, and, in turn, protecting the broker from the consequences of failing to obtain cover that met its client’s requirements.
Authors
Webinar - D&O: life after the pandemic
Agenda
This talk will provide a recap on the types of claims that directors can face and how D&O policies can respond to them. It will also examine some of the issues arising with D&O claims, and how Covid-19 could present further challenges ahead for the D&O market.
James Breese is a Senior Associate at Fenchurch Law
Insurers bound by the small print? I should cocoa!
ABN Amro Bank N.V. -v- Royal & Sun Alliance Insurance plc and others [2021] EWHC 442 (Comm)
In the latest in a line of policyholder-friendly judgments, this recent ruling from the Commercial Court confirms that underwriters will be bound by the terms of policies they enter into whether they have read them or not.
The court found no grounds for departing from the important principle of English law that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms. Any erosion of that principle, which unpins the whole of commercial life, it was noted, would have serious repercussions far beyond the business community.
A foregone conclusion perhaps? Indeed the judge commented that prior to this case he would have regarded as unsurprising the proposition that underwriters should read the terms of the contract to which they put their names. What was it then that spurred the 14 defendant underwriters to seek to argue the contrary, apparently oblivious to the irony of their taking a point which routinely falls on deaf ears when more commonly made by policyholders unaware of implications of the small print for their claims?
In brief, the claimant bank, ABN Amro, was seeking an indemnity of £33.5 million under a policy placed in the marine market that unusually, and perhaps unprecedentedly, contained a clause the effect of which was to provide the equivalent of trade credit insurance, and not simply an indemnity for physical loss and damage to the cargo. As such, when the cargo, which in this instance comprised various cocoa products, was sold at a loss following the collapse of two of the leading players in the cocoa market and the default by them on their credit facility, the bank incurred losses that it contended were covered by the policy.
The underwriters submitted that the non-standard nature of this clause was such that clear words would have been required to widen the scope of cover beyond physical loss and damage, given the presumption that marine cargo insurance is limited to such loss. The court however found that, applying the well-established principles of legal construction, the wording of the clause was clear, and therefore its natural meaning should not be rejected simply because it was an imprudent term for the underwriters to have agreed, given the adverse commercial consequences for them.
The underwriters further submitted that they had not read the policy, and that the particular wording and its effect should have been brought to their attention as it was unfair to expect a marine cargo underwriter to understand the purpose of the clause. The bank contended that it was “frankly bizarre” for the underwriters to be essentially arguing that they, as leading participants in the London insurance market had to be told what terms were contained in the written policy wording presented to them and what those terms meant. The court agreed, finding that the underwriters could not properly allege that the clause was not disclosed to them when it was there in the policy to which they subscribed, and that further, as the bank contended, the insured was under no duty to offer the insurer advice. The insurer was presumed to know its own business and to be able to form its own judgment on the risk as it was presented.
Many other principles of insurance law were raised by this case and are covered in the wide-ranging 263-page judgment including (i) the applicable principles of legal construction; (ii) the incorporation and impact of a non-avoidance clause in the policy (it prevented the insurers from repudiating the contract for non-disclosure or misrepresentation in the absence of fraud); (iii) whether the underwriters had affirmed the policy by serving a defence that was consistent with a position that recognised its continuing validity (they had); (iv) whether mere negligence, as opposed to recklessness, was sufficient to breach a reasonable precautions clause in the policy (it was not); and (v) the scope of a broker’s duty to procure cover the meets the insured’s requirements and protects it against the risk of litigation (which duty had been breached and would have led to a liability on the part of the broker had the claims against the underwriters not succeeded).
However, the key takeaway for insurers, policyholders and commercial contracting parties alike is that a court will not step in to relieve a party of the adverse consequences of a bad bargain: the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. In other words, it always pays to read the small print.
Joanna Grant is a Partner at Fenchurch Law.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #11 (The Good). R&R Developments v AXA
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#11 (The Good)
R&R Developments Ltd v AXA Insurance UK Plc [2010] Lloyd's Rep. I.R. 521
The case concerned a question in a proposal which asked if any of the insured’s directors had ever been declared bankrupt, either personally or in connection with any business with which they were involved. The Court held that the question did not extend to the insolvency of any company with which they may have been involved. The Court also held that, by asking a limited question, the insurer had waived disclosure of the insolvency of any party other than the insured and its directors.
Background
R&R Developments Limited (“R&R”) was insured by AXA Insurance UK plc (“AXA”). Prior to inception of the relevant policy, R&R completed a proposal, which asked:
“Have you or any Partners or Directors either personally or in connection with any business in which they have been involved … ever been declared bankrupt or are the subject of any bankruptcy proceedings or any voluntary or mandatory insolvency?”
R&R answered this question (“the Insolvency Question”) in the negative. AXA contended that this was a misrepresentation, since one of R&R’s directors had been a director of a company which had gone into administrative receivership. AXA also said that R&R should have disclosed that insolvency in any event, as it was material.
The Decision
The Judge, Nicholas Strauss QC, held that the Insolvency Question was clearly worded. As a matter of simple grammar and syntax, it did not relate to anybody other than R&R and its directors. So, since R&R was solvent and none of R&R’s directors had ever been made bankrupt, the Insolvency Question was answered correctly. Three further considerations supported that conclusion:
- AXA contended that the Insolvency Question referred, in effect, to “… you or any Partners or Directors or any business in which they had been involved”. Had this been its intention, it would have been very simple drafting to achieve that result.
- On AXA’s interpretation, the disclosure required from R&R would have been unreasonably wide. In particular, the meaning of “involved” could potentially have extended to any company of which one of the directors had been employed in a junior position.
- Looking at the proposal as a whole, and particularly the fact that a further question asked “Had any losses … or … any claims …. made against you (in this or any existing or previous business”), it was clear that the questions were targeted solely at R&R and its directors.
The Judge also rejected AXA’s secondary argument. Although AXA had in its mind the concept of other businesses with which R&R’s directors were involved, it chose not to ask about them. Therefore, by asking a limited question, R&R was entirely justified in thinking that AXA had waived its right to that information.
Comments
The decision is a helpful endorsement of the ‘natural and ordinary meaning’ rule of interpretation. AXA tried to argue, in effect, that words needed to be implied into the Insolvency Question which would significantly change its meaning, and that that should be done for its own benefit. Quite rightly, the Court gave short shrift to that argument.
Alex Rosenfield is a Senior Associate at Fenchurch Law.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #9 (The Good). UK Acorn Finance Ltd v Markel (UK) Ltd
Welcome to the latest in the series of blogs from Fenchurch Law: 100 Cases Every Policyholder Needs to Know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#9 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is UK Acorn Finance v Markel.
Issues
This case considered the scope of contractual discretion exercised by an insurer under an Unintentional Non-Disclosure clause and whether that discretion had been exercised in a fair and arbitrary way when considering whether a misrepresentation made by the insured was fraudulent or intended to deceive.
Background
UK Acorn Finance Ltd (“UKAF”) was a bridging finance lender who had obtained judgments in default in excess of £13m following allegedly negligent overvaluations on a number of agricultural properties. The Judgments were obtained against Westoe 19 (formerly named Colin Lilley Surveying Ltd (“CLS”)) who had entered into liquidation.
UKAF issued a claim against Markel pursuant to s.1 and s.4 of the Third Parties (Rights Against Insurers) Act 1930 for indemnity under a professional indemnity insurance policy issued by Markel in favour of CLS.
Markel sought to avoid the policy on the basis of alleged misrepresentations and non-disclosures made by CLS prior to renewal regarding the work it had done with sub-prime lenders. Before the Court, a lot of emphasis was placed upon whether or not the question raised by the Markel prior to renewal regarding work done with sub-prime lenders was understood by the insured and what was actually meant by “sub-prime lenders”. The term was not defined in the policy or within the renewal documentation. It was apparent that a lot of correspondence had been passed between Markel, CLS’s broker and CLS on this issue but ultimately, CLS confirmed it did not do work with sub-prime lenders.
Insurance dispute
The policy contained an Unintentional Non-Disclosure Clause (“UND clause”) which stated:
“In the event of non-disclosure or misrepresentation of information to Us,
We will waive Our rights to avoid this Insuring Clause provided that
(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive…”
Relying on the UND clause, Markel alleged that misrepresentations made by CLS regarding its work with “sub-prime” lenders were fraudulent and/or intended to deceive and consequently, avoided the policy and declined the claim.
The Court’s decision
Whilst there were a number of issues for the Court to determine in relation to whether the alleged misrepresentations were warranties, inducement and waiver, the crux of the Court’s decision was whether, in light of the UND clause, Markel was entitled to avoid.
The Claimants argued that it was for the Court to decide, as a matter of fact, whether the representations relied upon by Markel were free from any fraudulent conduct or intent to deceive, i.e. by the Court stepping into the shoes of the decision-maker. Markel disagreed and argued that the Court’s role should be limited to determining whether Markel’s decision to avoid the policy was one that was open to a reasonable decision-maker to make on a Wednesbury unreasonableness basis.
Construction of the UND clause was considered in light of numerous authorities and in particular, the Supreme Court judgment of Braganza v BP Shipping Limited [2015] UKSC 17. The nature of the UND clause is one by which “one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts” – as per Lady Hale in Braganza.
Following Braganza, where such a term is present in a contract permitting one party to exercise a discretion, there is an implied term that the relevant party “will not exercise its discretion in an arbitrary, capricious or irrational manner” (Mid Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200.
When seeking to imply a Braganza implied term to give effect to the UND clause, the Court identified the need for consideration of the principles applicable to implied terms, as set out in Marks and Spencer Plc v BNP Paribas securities [2015] UKSC 72. Those principles are, namely:
i. Terms are to be implied only if to do so is necessary to give the contract business efficacy or if it was so obvious that it goes without saying;
ii. The term is a fair one or one that the court considers the parties would have agreed had it been suggested to them; and
iii. No term may be implied if it would be inconsistent with an express term.
Based upon the wording of the UND clause, in particular that the insured is to demonstrate to the satisfaction of the insurer that the misrepresentation was innocent and free from any fraudulent conduct or intent to deceive, the Judge concluded that it was wrong, as a matter of principle, to conclude that the Court could substitute itself for the contractually agreed decision-maker, as observed by Lady Hale in Braganza.
On the basis that Markel had a power to exercise a discretion or form an opinion as to relevant facts (i.e. whether the misrepresentations were innocent or fraudulent), the Judge considered it was necessary to imply a Braganza term in order to eliminate the possibility of the defendant making decisions in an “arbitrary, capricious or irrational manner”. The Judge considered that such an implied term was necessary to give the UND clause business efficacy and because the necessity for implication of such a term is so obvious that it goes without saying. The implied term did not contradict the agreement of the parties; on the contrary, it was giving effect to that which both are treated as having intended. As such, the test in Marks and Spencer Plc v BNP Paribas was satisfied.
Having determined the construction of the contract and the need for a term to be implied in accordance with Braganza, the Judge concluded the real issues which arose were three in number:
i. Did Markel, via its loss adjuster (who conducted the claims investigation):
a) fail to take into account any facts and matters that he ought to have taken into account; or
b) take into account any facts and matters that he ought not to have taken into account;
ii. would the decision have been the same even if any such errors had not occurred; and
iii. was the decision one that no reasonable decision-maker could have arrived at on the material that ought properly to have been considered.
When considering these issues in accordance with the principles identified in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, the Judge noted that it was necessary to bear in mind the often quoted direction in Re H (Minors) (Sexual Abuse: Standard of Proof) that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities”. Applying that notion to the wording of the UND clause, it required the decision-maker at Markel to bear in mind that it is inherently more probable that a misrepresentation had been made innocently or negligently, rather than dishonestly, based on an analysis of all the evidence. The more serious the allegation against the insured, the stronger the evidence of such dishonesty or fraud is required.
Whilst the Judge expressed that it would be a mistake to expect an insurance company in the position of the Defendant to adopt the same microscopic investigation as a Court, having considered all of the evidence, he concluded that Markel failed to approach the dishonesty issue with an open mind or bearing in mind that it was more likely that a misrepresentation has been made innocently or negligently rather than dishonestly. The Judge felt that too much weight was given to certain evidence, leading Markel to the conclusion that the misrepresentation was dishonest, resulting in the decision-maker failing to properly take into account other relevant evidence which should have been taken into account.
Ultimately, the decision was not one that Markel could safely arrive at if in reaching that decision, it had taken account of factors which ought not to have been considered or failed to take account of factors that ought to have been considered.
Implications for the policyholder
This decision illustrates the approach taken by the Courts when applying the principles in Braganza where one party to a contract has a discretionary power to make a decision as to a matter of fact, in particular in relation to Unintentional Non-Disclosure clauses. Insurers will need to be mindful of the need to act in a manner which is not arbitrary, capricious or irrational and should take extra care to ensure that sufficient evidence is obtained to support a conclusion where the allegations made are severe. The decision is a useful tool for policyholders who have made innocent misrepresentations to insurers prior to inception and renewal but also serves as a reminder that in circumstances where questions asked by an insurer are unclear or ambiguous, the insured and its broker should make effort to ensure they fully understand the questions being asked to avoid any later disputes.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #7 (The Good). Woodford and Hillman -v- AIG
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#7 (The Good)
Woodford and Hillman -v- AIG [2018] EWHC 358
There are few cases dealing with coverage issues under D&O policies. This isn’t necessarily because D&O policies are rarely the subject of dispute. It is more likely a reflection of the fact that if directors have to fund hefty legal costs in defending complex civil, criminal or regulatory actions because insurers are being difficult about costs or refusing outright to pay them, their personal finances are depleted to the point where suing the insurer is out of the question (and the Financial Ombudsman’s service is no help because that avenue of remedy is closed off to company directors). The consequence is that insurers’ obligations to fund defence costs are rarely scrutinised in court.
Occasionally, though, directors will take D&O insurers on, notwithstanding the power imbalance and the personal financial risk. Two such directors were Mr Woodford and Mr Hillman. They had been directors of the Olympus Corporation. They left in 2011 when Mr Woodford blew the whistle on a financial scandal.
In 2015 Olympus launched proceedings against them in the High Court in London for £50m, claiming that their involvement in an Executive Pension Scheme while at Olympus breached their duties as directors.
Olympus had D&O cover which covered past directors. Woodford and Hillman notified the claim to the D&O insurers, AIG, seeking an indemnity.
AIG’s resistance to Defence Costs
AIG refused to fund Woodford and Hillman’s defence costs (£4m and counting) claiming they were not reasonable. The policy was governed by German law but disputes fell to be determined in England.
The D&O policy made AIG liable for legal defence costs “provided these are reasonable with regard to the complexity and significance of the case”.
AIG argued that their liability for costs should be determined by a costs assessment. This is an assessment by a costs judge, normally undertaken when litigation ends, to determine how much of the winning party’s costs the loser should pay. The costs judge very critically examines the costs being claimed. The party whose costs are being assessed should expect to take a hair-cut on their recovery. A discount of 30% is not unusual and full recovery is very unlikely. On any view, therefore, a referral to costs assessment, as insisted on by AIG, would have involved Woodford and Hillman being left significantly out of pocket.
The Judge held that a costs assessment was not the right way to determine AIG’s liability for defence costs. Such an assessment was appropriate at the end of litigation as part of the court’s general discretion in relation to costs. An indemnity for defence costs under a D&O policy was “very different”. The Judge said that an insurance policy is intended to indemnify the directors for defence costs. Indemnity was a contractual right which meant that the court had no inherent discretion in relation to such costs. This meant that the (discretionary) costs assessment process had no application.
Instead, the court should assess the right to defence costs in the same way it would assess any issue of quantum. The criteria set out in the policy was that the costs were payable if “reasonable with regard to the complexity and significance of the case”.
The basis for the assessment of the “complexity and significance” of the case faced by the insureds was that it:
- would involve a three-week High Court trial;
- dealt with complex issues in a specialist area of law (pensions);
- was for a significant sum (£50m);
- had reputational significance for insureds because of the seriousness of the allegations.
AIG’s particular objection was to the charge-out rates of the insureds’ city lawyers: £508 for partners and senior lawyers; £389 for mid–level lawyers and £275 for junior lawyers. The Judge held that the complexity and significance of the matter meant it was reasonable to use a City firm at the rates charged. The Judge rejected AIG’s suggestion that the Guideline Hourly rates published by the Court Service for use in a costs assessment (rates significantly lower than City lawyers charge) had no application.
AIG’s determined resistance to paying the fees did not stop there. They complained of duplicated work, excessive billing, failure to delegate appropriately, churning of costs (an allegation that AIG dropped) and engagement of two QC’s. The Judge found that the QC appointments were reasonable in the context, the fees were reasonable and AIG’s other complaints were unsubstantiated.
Woodford and Hillman were awarded all their defence costs: they had been incurred reasonably in view of the complexity and significance of the case against them.
Implications
It is standard for a D&O insurer’s liability for costs to be qualified on grounds of reasonableness. It is now clear that an insurer’s attempts to call in aid the cost assessment process with a view to chipping away ultra-critically at the defence costs claimed by insureds should not work and there are better prospects of the directors’ outlay on defence costs being matched by insurance cover. Insureds now have a case to use when firing back at insurers’ attempts to lowball them, giving them some hope of prising the insurer’s purse open that little bit wider.
Enterprise Act Angle
Woodford and Hillman had to fund their defence costs from their pension funds because the D&O insurer was not responding. They incurred significant tax consequences as a result. Had the policy been governed by English law (and had it been taken out after May 2017) they may also have had a claim against AIG for damages for breach of the obligation to pay claims within a reasonable time (an obligation introduced by the Enterprise Act 2016) equal to the tax charge they suffered as a result of accessing their pension funds. Application of the Enterprise Act might have had an impact on the insurer’s approach to the case.
John Curran is a partner at Fenchurch Law
Has the Enterprise Act Expanded the Duty of Fair Presentation?
For more than a century after the Marine Insurance Act of 1906, the law relating to insurance contracts was a territory into which parliament did not venture, ceding it instead to the courts. By 2015, though, Parliament was launching a full-scale invasion. The Insurance Act of that year replaced the old duty of disclosure with a new “Duty of Fair Presentation” and fundamentally reformed the remedies prescribed by law both for breach of the Duty of Fair Presentation (by introducing the concept of proportionality) and for breach of warranties.
A year later the Enterprise Act 2016 introduced a brand new right to claim damages from insurers for unreasonable delay in the payment of claims. On the face of it, each of the two Acts creates its own seemingly unrelated code of rights, obligations and remedies with no obvious interplay or knock-on effect. However, the question arises as to whether circumstances particular to the insured, which make the insurer vulnerable to a damages action if it delays in paying claims, are circumstances which, in the wake of the Enterprise Act 2016, fall within the Duty of Fair Presentation created by the Insurance Act 2015.
Legal Ingredients of a Claim for Damages for Late Payment
In assessing whether the information encompassed within the Duty of Fair Presentation has been broadened by the Enterprise Act, one first has to consider what is needed to found a claim for late payment.
A number of ingredients must be present if an insured is to be entitled to damages for loss caused by breach of an insurer’s duty to pay claims within a reasonable period. Aside from showing it has a valid claim under the policy in the first place, that the insurer’s delay was unreasonable, that the loss for which compensation is sought was caused by the insurer’s delay and that it has taken steps to mitigate its loss, the insured also has to show that the loss suffered as a result of the delay was foreseeable or contemplated by the parties at the time the policy was entered into.
The classic case for late payment damages is likely to be a property loss - e.g. at industrial premises where, say, a particular item of machinery is crucial to production and, unless it is quickly replaced following an insured event, the insured will suffer significant loss of production or even be put out of business. To found a claim for late payment damages, such eventualities must have been forseeable as at the date the policy was entered into. The insured would have to show, for example, that it was or should have been in the contemplation of the insurer at the time the policy was taken out that production turned on the availability of a particular machine and that the insured would rely on insurance proceeds if that machine were damaged because it would not be able to finance replacement through any other means. This means that the prospects of establishing a claim for damages will be greatly enhanced if the insured informed the insurer of these particular vulnerabilities when the policy was taken out.
Impact on the Duty of Fair Presentation
The question then arises as to whether it is simply prudent to tell the insurer about such vulnerabilities or whether the insured has a duty to do so.
The information that must be contained within the “Fair Presentation” of the risk by the insured is defined in section 7(3) of the Insurance Act 2015 as that which would “influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”.
The “risk” in question is the risk of damage from an insured peril. In our classic case it is the risk of damage to or destruction of the insured property from insured perils. On the face of it, the importance of the property to the insured’s business or the ability of the insured to raise finance for replacement of the property if damaged has no bearing on the risk of damage from an insured peril occurring (although different considerations could well apply if the insurance had business interruption cover attached to it). These particular vulnerabilities wouldn’t seem to have any bearing on the pure underwriting decision as to the susceptibility of the insured to suffer damage from an insured peril.
What these vulnerabilities do have a bearing on is the insurer’s risk of exposure to a late payment damages claim. The key point is whether the risk of exposure to such a claim is part of the “risk” contemplated by section 7(3), so that the insured has a duty to disclose such circumstances to the insurer (rather than simply being well advised to do so in order to enhance the prospects of a claim for late payment damages should such a claim become necessary).
Until the courts look at the question there is no clear answer. On the one hand section 7(3) is ostensibly dealing purely with the insured risk. This is the risk upon which the judgment of the underwriter is exercised, be that the risk of flood, fire or storm. Since the risk of exposure to late payment damages is not an insured risk and instead one to which the insurer exposes itself by its own unreasonable delay rather than by reason of some fortuity over which neither insured nor insurer has control, there is good reason for saying that section 7(3) does not extend to circumstances relevant only to the recoverability of late payment damages.
On the other hand, section 7(3) contemplates the provision by the insured of any and all information relevant to the insurer’s willingness to provide a policy at all or, if so, on what terms. It may be that an insured with particular vulnerabilities that would set up a late payment damages claim is not the sort of insured the insurer would want to write cover for at all, making such information “material”. Even if the insurer would still be prepared to write cover notwithstanding such knowledge it might be prompted to require a term in the policy excluding the application of the Enterprise Act (the Act allows an insurer to contract out when not insuring consumers) or a term that caps exposure to late payment damages or it might simply charge a higher premium.
Perhaps the most significant consideration is the provision in section 7(4) which defines as material “any particular concerns which led the insured to seek insurance cover for the risk”. In some cases the vulnerabilities of the insured that would be the basis for a claim for late payment damages may be precisely what led the insured to take out the insurance in the first place.
Conclusion
Certain brokers are recommending that their clients tell insurers about circumstances that would make them vulnerable if claim payments were delayed because it helps lay the foundation for any late payment damages claim that might become necessary. In light of the uncertainty around whether such circumstances are material to the “risk” for the purposes of section 7(3) of the Insurance Act and thus encompassed by the insured’s Duty of Fair Presentation (and since insurance policies are riddled with conditionalities as it is), insureds should err on the side of caution and include information about such vulnerabilities in their presentation of the risk.
John Curran is a partner at Fenchurch Law