First reported decision on section 13A of the Insurance Act 2015 – what guidance can we take?

Section 13A of the Insurance Act 2015 implies a term into every contract of insurance that if a claim is made under the contract, the insurer must pay any sums due within a reasonable time. What will be considered reasonable depends upon the facts, and the legislation provides a helpful list of factors to be considered.

Of particular interest, s.13A(4) allows for an insurer to withhold payment while there are reasonable grounds for disputing claims, however that insurer’s conduct in handling the claim may be a relevant factor in deciding if the s. 13A implied term is breached.

Despite the Insurance Act coming into force in August 2016, the recent case of Quadra Commodities S.A. v XL Insurance Company SE and Others [2022] EWHC 431 (Comm) is the first reported decision on the application of s.13A with regards to an insurer’s conduct, specifically whether the insurer had failed to deal with the claim within a reasonable time.

Quadra Commodities S.A. v XL Insurance Company SE and Others

In brief, Quadra Commodities purchased grain stored in warehouses in Ukraine, with the intention to resell these on to third parties. Quadra Commodities relied upon warehouse receipts when purchasing, however it later came to light that the warehouses were participants in a fraud scheme, whereby receipts in respect of the same goods were issued to multiple different buyers.

Quadra Commodities sought to recover its losses from its cargo insurers under an indemnity. The insurers resisted on the grounds that there was no loss of physical property, or alternatively it was not property in which Quadra Commodities could show it had any insurable interest.

Quadra Commodities first notified its insurers of the claim in February 2019 and commenced proceedings in May 2020. Quadra Commodities insisted that there was an insurable interest and it was entitled to recover its losses under the policy. Quadra Commodities also sought damages under s.13A, arguing that insurers had taken an excessively long time to investigate and assess the claim, as well as pay any sums due. Mr Justice Butcher heard the case in the High Court.

Insurable interest

Mr Justice Butcher found in favour of Quadra Commodities after it successfully demonstrated that the cargoes were physically present in the warehouses at the time the receipts were issued, and that Quadra Commodities had an insurable interest by reason of having paid for unascertained goods, and having an immediate right to possession of those goods.

Section 13A

As to the claim under s.13A, this raised two key questions:

1. How long is reasonable for an insurer to investigate, evaluate, and settle a claim?
2. Were there reasonable grounds for disputing the claim in the first place?

With regards to the first question, Mr Justice Butcher surmised that a reasonable time in these facts was “not more than about a year from the Notice of Loss” assuming that the investigation and evaluation of a claim showed no reasonable grounds for disputing the claim.

On the second point, Mr Justice Butcher held that there were reasonable grounds for disputing the claim, even if they had not been correct.

Whilst Mr Justice Butcher found there had been various delays in the insurers’ investigations, they still occurred within a reasonable time for payment of the claim and did not constitute a breach of the s.13A implied term.

This decision will provide some reassurance to insurers that, even where the grounds for disputing a claim are wrong, this does not necessarily mean that those grounds were unreasonable. Further, when an insurer’s payment on a claim has been delayed due to coverage investigations, this does not mean there has been a breach of s.13A and will depend on the facts of the case. Here, the complexity of the case and the substantial work required to investigate the claim were both taken into account, which bodes well for insurers who may find themselves under time pressures to make a determination on claims. While s.13A may require insurers to justify the time taken to reach a decision it is clear from this case that there is some flexibility from the courts in how this will be applied to the facts.

If you wish to discuss any of the issues outlined in this article, then please contact Emily Osborne,  or another member of the Litigation and Dispute Resolution Team.