Provisions of the Enterprise Bill 2015 propose to reform the law of late payment of insurance claims. The reform may have little effect on marine insurance in general. However, in the case of claims under maritime liability conventions, insurers need to be wary of their obligations to claimants exercising a right of direct action.

 

Costa Concordia

In major shipping casualties, such as the Costa Concordia pictured above, there can be thousands of claimants under maritime liability conventions. Reforms to the law of insurance contracts in the UK may change how these cases are managed by the insurers of shipowners’ liabilities. (Italian Navy file photo)

 

The Enterprise Bill 2015                   

The Enterprise Bill 2015 is the third piece of legislation in the recent reform of insurance law in the UK, following the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015. The Enterprise Bill 2015 had its final reading in the House of Commons on 9 March 2016. It seems likely that Royal Assent will be given to the Bill in its current form.

 

Late Payment of Insurance Claims

It is well-known that in the UK there is no action for damages for late payment of damages.[1] This principle has a particular significance for insurance law in the UK, where the indemnity paid by an insurer is characterized as a payment of damages for breach of contract, rather than payment of a debt. The result of this approach is that an assured cannot claim damages from an insurer that delays payment of an indemnity.[2]

This situation has come under fire from the judiciary, most famously in Sprung v Royal Insurance (UK) Ltd.[3] The Law Commission proposed a reform of the law, which was eventually left out of the Insurance Act 2015, but now looks set to pass in a limited form through the Enterprise Bill 2015.

 

Proposed Reform

The proposed change to the law involves an amendment to the Insurance Act 2015 to introduce an implied term to all insurance contracts that insurers shall pay claims within a “reasonable time”. What constitutes a “reasonable time” is not defined in the Bill but the concept is guided by a non-exhaustive list of factors. Insurers will always be granted time to investigate and assess a claim.

In line with several other major reform provisions of the Insurance Act 2015, non-consumer parties will be able to contract out of the implied term, subject to the transparency requirements of Section 17 of the Insurance Act. Insurers must therefore be careful to implement new processes to ensure that the implied term is not breached, or that the implied term is excluded in the proper manner. Exclusions that do not meet the requirements of Section 17 will be void.

With regard to P&I insurers, the relationship between shipowner and club will remain subject to the pay to be paid rule. However, once a shipowner has paid a claim, the clock will begin to run on the insurer’s obligation to pay within a reasonable time.

Any insurer that fails to pay an insurance claim within a reasonable time in breach of the implied term may be liable for damages. Subject to the rules of causation and remoteness, such damages may include loss of business or other opportunity caused by a lack of cash flow.

 

Maritime Liability Conventions and Rights of Direct Action

One area of law that is untested is the nature of the obligations insurers have to claimants under the various maritime liability conventions. Several conventions afford a right of “direct action” to allow claimants to seek payment directly from a shipowner’s insurer. These include:

  • Civil Liability Convention 1992
  • Bunker Oil Pollution Convention 2001
  • Athens Convention relating to the Carriage of Passengers and their Luggage by Sea 2002
  • Nairobi International Convention on the Removal of Wrecks 2007
  • International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea 1996 (not yet in force).

These conventions make it compulsory for shipowners to have insurance (or other financial security) for particular categories of liability. More often than not, this compulsory insurance is provided by the P&I market.

Shipowners, their insurers and claimants need to be careful to identify how the nature of a claimant’s action under a right of direct action is characterised. If the action is characterised as a claim under an insurance contract (i.e. for damages), the implied term may come into play. It seems unlikely that the operation of the implied term could be excluded, on the basis that the transparency requirements of Section 17 of the Insurance Act 2015 cannot be complied with vis-à-vis claimants who are not known to the insurer at the time the contract is made. Insurers may therefore be placed in a position where, even though they may have excluded the implied term with respect to the assured, they still have an obligation to pay direct action claimants within a reasonable time or be exposed to damages claims.

Alternatively, but less likely, the action may be characterised as an action for payment of debt, rather than damages, which could lead to serious consequences. These include attracting the application of the Late Payment of Commercial Debts (Interest) Act 1998, providing the basis for statutory demands and winding-up applications and, in certain circumstances, even consequential damages.

 

Conclusions

  • Proposed reform will imply a term into all insurance contracts that claims must be paid within a reasonable time.
  • The implied term may be contracted out of in non-consumer insurance contracts.
  • In the case of claims for compensation under maritime liability conventions, the consequences for insurers of late payment of claims may be harder to avoid and more serious.

 

If you wish to discuss any of the points raised in this article or maritime liability conventions and the Insurance Act 2015 in general, please contact Alex Macinnes or Tobias Alexander.

 

[1] The President of India v Lips Maritime Corporation (The Lips) [1988] AC 395, per Lord Brandon at 425.

[2] Apostolos Konstantine Ventouris v Trevor Rex Mountain (The Italia Express (No 3) [1992] 2 Lloyd’s Rep 281; Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2013] EWHC 1666 (Comm).

[3] [1999] 1 Lloyd’s Rep IR 111 at 118-119.