News

December 20, 2018

The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #5 (The Ugly). AIG v Woodman

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.

#5 (The Ugly)

AIG Europe Ltd v Woodman & Ors [2017] UKSC 18

This decision represented the first time for almost 15 years in which an aggregation clause had been considered by the UK’s highest court.  We have categorised it as “ugly”, not because we believe it was wrongly decided, but because it represents a missed opportunity by the Supreme Court to clarify an area which, absent that clarification, remains a likely source of disputes between policyholders and insurers.

AIG v Woodman arose out of a professional negligence claim against a firm of solicitors by 214 investors, who had invested in one or other of two developments, one in Turkey and one in Morocco.  A firm of solicitors (“the Solicitors”) were instructed in respect of both developments, and were meant to have a system whereby the investors’ money was only to be released to purchase the development land once adequate security was in place.

Both developments failed.  It transpired that, owing to the Solicitors’ negligence, the security had been wholly inadequate. The investors lost a total of £10m, and sued the Solicitors

The Solicitors had professional indemnity insurances with AIG, with a limit of £3m per claim. The question therefore was whether, in light of the aggregation provision in the policy (“the Aggregation Clause”), the Solicitors were facing one, two or 214 claims. The Aggregation Clause, taken from the SRA Minimum Terms & Conditions, aggregated all claims arising from:

“(i)       one act or omission;

(ii)        one series of related acts of omissions;

(iii)       the same act or omission in a series of related matters or transactions;

(iv)       similar acts or omissions in a series of related matters or transactions …”

It was limb (iv) which was relevant here.

At first instance, the Commercial Court held, and the parties subsequently accepted, that each claim had arisen out of a similar act/omission.  However, that still begged the question of whether each such similar act/omission had occurred “in a series of related matters or transactions”.

The decisions below

At first instance, the Commercial Court held that the Aggregation Clause required the transactions to be interdependent in order for them to be “related”.  On that basis, the claims did not aggregate and there was ample cover to satisfy the investors’ claims.

The Court of Appeal disagreed.  It said that the requirement for interdependence was going too far.  Instead, what was necessary, for transactions to be “related”, was an “intrinsic” relationship – a relationship of some kind between the transactions relied on, rather than a relationship with some outside connecting factor, even if that extrinsic relationship were common to the transactions.  However, the Court of Appeal declined to say whether there was, indeed, an intrinsic relationship here between the various transactions, and decided to remit that issue to the Commercial Court.

The Supreme Court

The Supreme Court allowed AIG’s appeal, and held that the Court of Appeal’s requirement for an intrinsic relationship between the transactions was “neither necessary nor appropriate”, and represented an unwarranted gloss on the terms of the Aggregation Clause.  Instead, it held – somewhat lamely, it might be thought – that the word “related” simply required a “real connection” between the transactions, “or in other words they must in some way fit together”.

On that basis, it was held that all the transactions involving the Morocco development were sufficiently inter-connected, and, likewise, all those involving the Turkey development; but it was not the case (as AIG had submitted) that all the transactions in respect of both developments were inter-related.

There were accordingly two claims and two indemnity limits, and a total of £6m available as compensation for the investors.

All this, however, provides very little guidance to policyholders and insurers in dispute over whether transactions are or are not “related”, other than where the factual situation is very similar to that in Woodman.  During the hearing at the Supreme Court, AIG’s QC had come close to arguing that “related” should not be given any gloss or interpretation, but that instead each time the parties to an insurance contract would themselves have to resolve, or require a court to determine, whether the transactions in question were “related”.

Lord Mance’s response was dismissive:

“Just to leave the clause as it is … is not going to help anyone very much, is it?  It is like saying ‘Brexit is Brexit’.”

It is ironic, therefore, that for the Supreme Court simply to have held that “related” requires some “real connection” was almost as unhelpful.

December 10, 2018

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