Insurance Law Reform Seminar
On Wednesday, 2nd June, 2010, a seminar on “Insurance Contract Law: Damages for Late Payment and the Insurer's Duty of Good Faith” took place in the Raeburn Room, at the University of Edinburgh. The seminar was jointly hosted by the Scottish Law Commission, the Edinburgh Centre for Commercial Law and the Centre for Private Law.
The aim of the seminar was to consider the possibilities for reform of insurance law arising out of the Law Commission’s and the Scottish Law Commission’s Issues Paper on Damages for Late Payment and the Insurer's Duty of Good Faith.
The conference was chaired by Lord Penrose (a former Court of Session judge and author of the report on Equitable Life). It was well attended by a variety of persons including the Chairman of the Scottish Law Commission, Lord Drummond-Young (who also sits in the Commercial Court), Scottish Law Commissioners, practitioners, a representative from the insurance industry, academics and postgraduate students.
Three main papers were presented, followed by a lively discussion. The first paper was delivered by Mr David Hertzell, a Law Commissioner, who looked at “Post contractual duties and damages for late payment”. The key case in this regard was Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep IR 111, a decision of the Court of Appeal, which effectively only allowed interest on a claim by Sprung where his insurers had declined to pay his claim, and, as a result of their non-payment, his business had collapsed. The complex issues were synthesised with great clarity by Mr Hertzell. The English law rule in Sprung is out of line with other jurisdictions, including Scotland, and the question was: should English law be amended to “fall into line”, and allow claims for damage arising from non-payment: not just interest?
One issue of particular importance was the place of the London insurance market in an international context. In a sense, London is two markets: the domestic market, and the international market through Lloyd’s of London.
Mr Hertzell suggested that one option could be to impose on insurers the approach taken by the Financial Services Authority in their handbook (Insurance: Conduct Of Business sourcebook (“ICOBS”)), rule 8.1, in relation to the “nature of the duty” and handling claims.
After a vigorous debate, and taking into account the dual nature of the London market, the general view of the audience of about twenty seven was that the law should be changed by legislation. To wait for the issue to be changed by case-law would be futile. This is due to the low number of cases reaching the courts because of other dispute resolution mechanisms (such as, the Financial Ombudsman Service in consumer cases), and, potentially, deliberate out of court settlements, in order to avoid the issue being brought (and the law possibly being changed), as well as insurers taking a commercial view of matters regarding settlement. (It is to be noted that the Financial Ombudsman has a broad jurisdiction to make awards (i.e., what is “just and appropriate”), under Part XVI (especially, s 229(2)) and Schedule 17 of the Financial Services and Markets Act 2000.)
The second paper was delivered by Professor Hector MacQueen, a Scottish Law Commissioner, who discussed “Private Law Aspects of Damages for Late Payment and the Insurer’s Duty of Good Faith”. In a wide-ranging, and thoughtful, paper, Professor MacQueen supported the Scottish position, although acknowledged that the basis for doing so was not “clear cut”. Professor MacQueen canvassed various options in relation to “good faith”, including the issue of whether good faith is “a shield or a sword”. In conclusion, Professor MacQueen, after looking at solutions in contract, delict, so-called “Melville Monument” liability for pre-contractual expenses and unjustified enrichment, felt that the basis for liability was good faith. He acknowledged that this was not a precise concept, and suggest a non-exclusive list of factors, not dissimilar to the list of “unfair terms” found in Schedule 2 of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999 No 2083).
This proposal met with general approval. An interesting contribution in the debate came from a life assurer who noted that, owing to adverse press publicity regarding payment of claims, people in the United Kingdom, were, generally, underinsured. He welcomed the idea of clarity in this area from an assurer’s/insurer’s perspective, which could also have positive effects in restoring faith in the insurance market and, thus, lead to an increase in life assurance cover being purchased.
The third paper was presented by Mr Lex Dowie, an insurance litigator of over thirty years’ experience, who is currently Director of Insurance Litigation for Eversheds LLP. In a punchy, and very practical, talk, Mr Dowie noted the effect of fraudulent claims had in relation to insurers paying claims, and re-asserted that insurers should have the right to investigate claims. Mr Dowie also observed that there can be genuine disputes between an insurer and an insured as to the scope of the policy, which is perfectly normal. The problem was not one of “good faith” by insurers in relation to paying claims within a reasonable time, and giving reasons for refusal, but was one of how one proves “bad faith” by insurers. Mr Dowie felt, in these circumstances, that interest only should be imposed where the insurer has genuine doubts about claims.
During the discussion, in response to questions, Mr Dowie said that where the insurer has acted in “bad faith”, a long delay in paying a claim, or a cynical non-payment to wear down an insured, then they should be required to compensate the insured, and he did not rule out exemplary damages along the lines of Canadian case law.
The discussion followed the three papers and touched upon the issues raised above, as well as various others:
One point noted was that it seemed fraught with difficulty to use and extend the Marine Insurance Act 1906, which was a codification of the then common law, to non-marine cases, an issue that could be solved more appropriately by a separate codification of the law for these other areas of insurance. It was also noted that whilst section 17 of the Marine Insurance Act 1906 gave discretion to the innocent party to avoid the contract, this would not by itself exclude the use of other remedies. A clarification however would be useful.
In discussing the appropriate remedy for late payment, the expectation of most people, including those in the insurance industry, seemed to be that the purpose of insurance is to pay a valid claim, rather than, according to the current English rule in the Sprung case, to prevent the loss occurring – a promise that cannot be fulfilled. If the duty was to pay a valid claim, then the basis for damages for late payment would be breach of contract. However, what would constitute breach of contract? Surely, it is in the interest of all insured parties, the pool who has to pay any accepted claims ultimately, that claims are investigated to an appropriate level. A balance would have to be stuck between the interests of the insured claiming and the pool of insured parties, so that payment of loss caused by justified investigations could be kept to a minimum.
Thus, a claim for breach of contract for late payment would necessarily require some element of bad faith or an unreasonable or unjustifiable length of time by the insurer. In order to help with the classification of a breach, guidelines of best practice regarding investigation practices, timescales and information duties could be drawn up to be used as basis for an evaluation. Whilst proper investigation should in no way be discouraged, it should not be a consideration that interruption cover could have been purchased, as many businesses may be able to self-insure a for short period of time of interruption. Once a breach of contract was established, the normal rules as to remoteness of damages would have to be applied, requiring foreseability of damage at the time of contract, such that the time of contract could mean the annual renewal of cover.
A very helpful summary of proceedings was undertaken by Ms Lindy Paterson, a partner in Dundas & Wilson LLP. Ms Paterson observed that whilst many different approaches and viewpoints had been advanced during the discussions, and it was clear that further debate was needed, some general consensus had crystallised:
(1) The general feeling of the delegates was that the law on the insurer's duty of good faith would be best served if it were replaced by codification in legislation – based on the greater accessibility and clarity arguments.
(2) Moreover, most delegates expressed the view that there was a gap in insurance law when it came to some aspects of the content of the insurer's duty of good faith. It was thought that it would be best to repeal section 17 of the Marine Insurance Act 1906, and to spell out the content of the insurer's good faith along the lines suggested by the Law Commission and Scottish Law Commission in their report.
(3) Finally, there was unanimous support for the proposition that the insurer's duty of good faith should be inderogable, i.e., that it should not be possible to contract out of it in the insurance contract.
The seminar, which last a full afternoon, was full of lively debate in an area which is going to be a very challenging one for the two Law Commissions.
David Cabrelli, Parker Hood, Simone Lamont-Black and Laura Macgregor