Insurance claims and coverage

Third-party actions

Can a third party bring a direct action against an insurer for coverage?

Under the Third Parties (Rights Against Insurers) Act 1930 and the Third Parties (Rights Against Insurers) Act 2010, as amended by the Insurance Act 2015, a third party with a claim against an insured can bring proceedings against the insurer in the event of the insured’s insolvency. It is not possible to contract out of this. The rights transferred to the third party are the rights of the insured against the insurer under the contract of insurance in respect of the liability in question. Rights that are not referable to that liability are not transferred. The above-mentioned third-party actions do not apply to reinsurance contracts.

Late notice of claim

Can an insurer deny coverage based on late notice of claim without demonstrating prejudice?

In commercial policies, there is usually an express requirement to notify the insurer within a given number of days of the claim arising. The consequences of late notice will depend on whether the notice requirement is a condition precedent to the insurer’s liability. If so, the insurer will be able to avoid paying the claim even if the delay in notifying the claim did not prejudice the insurer’s position. In Taylor v Builders Accident Assurance Ltd [1997] PIQR, it was held that the delay in notifying the claim to the insurer deprived the insurer of its right to investigate and defend the claim, thus amounting to a repudiatory breach, even though the condition breached was not expressly stated as a condition precedent. The court will look at the facts in each case and consider each policy on a case-by-case basis.

Wrongful denial of claim

Is an insurer subject to extra-contractual exposure for wrongful denial of a claim?

As a general principle, English law does not provide a remedy in damages for the insured in the event of a wrongful denial of claim by the insurer. The burden of proof will be on the insured.

Defence of claim

What triggers a liability insurer’s duty to defend a claim?

The notification by the insured of an event or circumstance within the terms of the policy for which the insurer may be liable triggers the insurer’s duty to defend a claim.

Indemnity policies

For indemnity policies, what triggers the insurer’s payment obligations?

To succeed in a claim on an indemnity policy, the insured must demonstrate to the insurer that the insured is under a legal liability to one or more of those claiming against the insured and that the loss in question is covered by the policy (Peninsular & Oriental Steam Navigation Co v Youell [1997] 2 Lloyd’s Rep 136, CA).

Incontestability

Is there a period beyond which a life insurer cannot contest coverage based on misrepresentation in the application?

Subject to any provision to the contrary in the terms of the policy, there is no general incontestability period beyond which a life insurer cannot contest coverage based on misrepresentation in the application for coverage.

Punitive damages

Are punitive damages insurable?

Subject to the terms of the insurance policy, as a matter of general principle and public policy, damages awarded by a court, whether ordinary or punitive, are insurable.

Excess insurer obligations

What is the obligation of an excess insurer to ‘drop down and defend’, and pay a claim, if the primary insurer is insolvent or its coverage is otherwise unavailable without full exhaustion of primary limits?

Subject to a contractual provision to the contrary, an excess insurer will not be under a duty to ‘drop down and defend’ or pay the claim unless the primary insurer’s limit of cover is fully exhausted.

Self-insurance default

What is an insurer’s obligation if the policy provides that the insured has a self-insured retention or deductible and is insolvent and unable to pay it?

In Teal Assurance Co Ltd v (1) WR Berkley Insurance (Europe) Ltd; (2) Aspen Insurance UK [2013] UKSC 37, the Supreme Court held that a requirement in a policy for the insured to have ‘paid’ the amount of the self-insured retention or deductible before the insurer indemnifying the insured under the terms of the policy did not mean that the insured had to have made a monetary payment. Instead, the word ‘paid’ should be understood as being used as a measure of liability incurred

Claim priority

What is the order of priority for payment when there are multiple claims under the same policy?

There is no particular order of priority for the payment of claims in circumstances where multiple claims are presented under the same policy. Each case will depend upon the exact wording of the policy.

The court will look at the reality and facts of each case (see Mabey and Johnson Ltd v Ecclesiastical Insurance Office plc [2004] Lloyd’s Rep IR 10 as per Morrison J).

Claims are usually paid in chronological order once they have been fully proved.

Allocation of payment

How are payments allocated among multiple policies triggered by the same claim?

As a starting point, the insured may not recover more than the loss sustained. The insured may choose, subject to the terms of the policy, which policy it wishes to claim under. The insurer who covers the loss may then be able to seek a contribution from the other insurer under the equitable doctrine of contribution (Boag v Economic Insurance Company Ltd [1954] 2 Lloyd’s Rep 581). The obligation to contribute applies even though a co-insurer’s policy may be narrower or broader in its coverage provided that:

  • the coinsurer’s policy is in force and has not been repudiated (eg, due to a breach of the duty to disclose);
  • the coinsurer’s policy conveys the same risk as the policy under which the claim was paid;
  • the same risk under both coinsurer’s policies led to the loss;
  • the insured had the same interest in the subject matter of each insurance policy; and
  • the policies are effected by, on behalf of or provide benefit for, the same insured.
Disgorgement or restitution

Are disgorgement or restitution claims insurable losses?

There is no statutory definition of ‘insurable losses’. In Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 HB 658, it was held that to be insurable, the loss must have the following characteristics:

  • there must be an element of uncertainty about whether, when and how the loss will occur;
  • if it were to happen, the loss must have an adverse effect on the insured; and
  • the insured must have an insurable interest in the subject matter of the loss.

 

Disgorgement is available only when the insured has breached an obligation of good faith or loyalty. Consequently, disgorgement is not an insurable loss. On the other hand, restitution claims are capable of being an insurable loss.

Definition of occurrence

How do courts determine whether a single event resulting in multiple injuries or claims constitutes more than one occurrence under an insurance policy?

The terms ‘occurrence’ and ‘event’ are often not precisely defined in insurance contracts. In Kelly v Norwich Union Fire Insurance Society [1989] 2 All ER 888, the Court of Appeal held that the word ‘event’ referred to the peril rather than the damage in respect of various claims that had been made.

In AXA Reinsurance UK Ltd v Field [1996] 1 WLR 1026, the House of Lords defined an ‘event’ or an ‘occurrence’ as something that happens at a particular time, and in a particular place and way. In Mitsubishi Electric v UK Ltd Royal London Insurance (UK) Ltd [1994] 2 Lloyd’s Rep 249, the Court aggregated several separate losses as one loss, holding that all the losses arose from the same occurrence. In Lloyds TSB General Insurance Holdings LTD v Lloyds Bank Group Insurance Co Ltd [2003] Lloyd’s Rep IR 623, the House of Lords emphasised that each case must depend upon the exact wording of the relevant ‘occurrence’ clause. Further, it stressed that in clauses of this kind it is essential to focus on the question of the causes of the various losses.

In AIOI Nissay Dowa Insurance Company Limited v Heraldglen Limited and Advent Capital (No. 3) Ltd [2013] EWHC 154, a case that considered the definition of ‘event’ or ‘occurrence’ in the context of the terrorist attacks of 11 September 2001 on the twin towers of the World Trade Center in New York, Field J held that the ‘four unities’ of the circumstances and purposes of the persons responsible, cause, timing and location of the ‘event’ or ‘occurrence’ represented a useful test for establishing whether there was one or more ‘event’ or ‘occurrence’. In AIG Europe Ltd v OC320301 [2016] EWCA Cir 367, the Court of Appeal had to determine the true construction of the phrase ‘a series of related transactions’ in the aggregation clause in the standard minimum terms and conditions of solicitors’ compulsory liability insurance. The Court of Appeal held that the first instance judge had misdirected himself in saying that the transactions had to be ‘dependent’ on each other before aggregation could occur. Instead, the connection between the matters or transactions had to be an intrinsic relationship rather than an extrinsic one with a third factor.

Rescission based on misstatements

Under what circumstances can misstatements in the application be the basis for rescission?

The Insurance Act 2015 abolished ‘basis of contract’ clauses in insurance contracts. Such clauses have the effect of elevating the insured’s answers to an insurer’s questions to the status of contractual warranties. If the insured’s answers are, in fact, material misstatements, the insurer may rescind the contract. A misstatement is material if it would influence the judgment of a prudent insurer in pricing the premium or deciding whether to take the risk. The Insurance Act 2015 imposes a duty of fair representation on the insured. Where the breach of this duty is deliberate or reckless, the insurer may avoid the contract, refuse all claims and need not return any of the premiums paid. Where the breach was neither deliberate nor reckless, the insurer may avoid the contract and refuse to pay all claims but must return the premiums paid.

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