First decision on insurers’ liability for damages for late payment

The case of Quadra Commodities S.A v XL Insurance Co SE and Others is the first reported case that considers section 13A of the Insurance Act 2015 and insurers’ liability to pay damages for not paying a claim within a reasonable time. The court found the insured was entitled to indemnity under the policy but was unsuccessful in its claim for damages under section 13A. In particular, the court found that insurers were not unreasonable in disputing the claim despite ultimately finding that the grounds for doing so were wrong.

Background

The claim was brought by the insured (Quadra Commodities), a commodities, trading and logistics company specialising in the trade of agricultural commodities including grains, oil seeds and vegetable oils. The insured purchased grains from Agroinvest Group which were stored in warehouses in Ukraine. The insured paid for the grain on receipt of warehouse receipts. It subsequently transpired that Agroinvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. As a result, when it came to the point of executing physical deliveries against the warehouse receipts, there was not enough grain to go around.

The insurance claim

The insured claimed indemnity in respect of each of the cargoes which it said had been totally lost during the period of the policy. In particular, the insured claimed that the goods were lost either because they had been misappropriated or because there was a loss by reason of the insured’s acceptance of fraudulent warehouse receipts and, therefore, cover under the fraudulent documents clause.

Insurers declined cover on the basis that the insured (1) did not have an insurable interest in any of the goods which were lost and/or (2) there was no physical loss of property, only pure financial loss, which was not insured.

The court found in favour of the insured as follows:

• The goods were physically present in the warehouses at the time the receipts were issued.
• The insured had an insurable interest in those goods because it had made payment in respect of those goods and stood to suffer prejudice by loss of or damage to the goods.
• The insured had an immediate right to possession of the goods (although the court did find that there was no proprietary interests in the goods).

Section 13A Insurance Act 2015

The insured also made a claim for damages for alleged breach by insurers of their obligation under section 13A of the Insurance Act 2015 to pay claims within a reasonable time. A notice of loss was sent to insurers on 14 February 2019; the insured issued a claim form on 20 May 2020.

The insured contended that insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted in the insured suffering losses by reference to the return on shareholders’ equity. On the other hand, insurers said that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, insurers maintained they had reasonable grounds to dispute the claim and therefore had not breached the implied term in accordance with section 13A(4).

Given the lack of precedent, the court considered the Law Commissions’ Report and the Explanatory Notes to the legislation and ultimately concluded that there was no breach of the section 13A implied term.

The court emphasised the fact that, what was a reasonable time and whether there were reasonable grounds to dispute the claim are distinct questions. The insured bears the burden for the former and insurers, the latter. In considering what constituted a reasonable time the court considered a number of factors:

1. The type of insurance was marine cargo, and thus property insurance. According to the Explanatory Notes, property claims usually take less time to value than, for example, business interruption claims. On the other hand, the cover applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation.
2. The size of the claim was substantial, but not exceptional.
3. As to complexity, the claim was complicated by its location.
4. There were a number of factors outside the insurers’ control which meant that this claim would take some time to investigate. This included the destruction and unavailability of evidence.

The judge concluded that a reasonable time was not more than about a year from the notice of loss, meaning that that would have been a reasonable time for insurers properly to have investigated and evaluated the claim and to have paid it, assuming that the investigation had indicated no reasonable grounds for disputing it or part of it.

The judge also concluded that insurers had reasonable grounds for disputing the claim; the fact that the grounds were wrong did not mean that they were not reasonable. Under section 13A(4), if insurers are found to have reasonably disputed the claim insurers do not breach the implied term by failing to pay the claim while the dispute is continuing; however, insurers’ conduct may be taken into account. The insured argued that insurers’ conduct was a relevant factor in this case. This was rejected by the judge based on the specific facts. Although he considered that elements of insurers’ investigations were delayed (for example the surveyor’s investigation was “unduly protracted” given the number of hours’ of work involved and legal advice could and should have been taken before it was), the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout. Therefore, there was no breach of section 13A.

Comment

This is the first reported case that deals with a claim under section 13A of the Insurance Act 2015. It provides helpful guidance of the factors that might be taken into account when considering what is a reasonable time for insurers to consider and pay a claim. It will provide insurers with some comfort that, even if it is found that the grounds for disputing a claim are wrong, it is not necessarily unreasonable for insurers to do so.

Further reading

Quadra Commodities S.A v XL Insurance Co SE and Others [2022] EWHC 431 (Comm)