First case on the implied term to pay claims within a reasonable time – section 13A Insurance Act 2015

The judgment in Quadra Commodities S.A. v XL Insurance Company SE and Others [2022] EWHC 431 (Comm) is notable as the first to consider the application of s.13A Insurance Act 2015 relating to the implied term that insurance claims must be paid within a reasonable time. The judgment also provides some clarity as to what constitutes an insurable interest.

Background

The Claimant is a commodities trading and logistics company, specialising in the trade of agricultural commodities. Under a series of purchase contracts, it acquired cargoes of grain from Agroinvestgroup, an association of companies involved in the production, storage and processing of agricultural products.

The Claimant dealt with two entities in the Agroinvestgroup –  Agri Finance SA (Agri Finance) and Linepuzzle Ltd (Linepuzzle). The Claimant would buy grain from Linepuzzle and then sell it to Agri Finance to assist those entities with the financing of commodities under purchase contracts.

By January 2019, the Claimant had entered into purchase contracts under which it had paid 80 per cent of the price towards a number of the cargoes stored at various warehouses in Ukraine.

The case concerned a claim by the Claimant under its Marine Cargo insurance underwritten by the Defendant insurers (the Policy). The Claimant's claim arose as it was an innocent victim of the 'Agroinvest Group Fraud' (the Fraud). The Fraud involved multiple fraudulent warehouse receipts being issued in respect of the same goods to different buyers, including the Claimant. When the time came physically to deliver the goods against the warehouse receipts, the quantities in the warehouses were insufficient.

The Policy covered declared shipments and storage operations attaching during the relevant policy period. The Policy was an All Risks cover and included cover, amongst other things, for all physical loss directly caused to the insured goods by misappropriation (under the Misappropriation clause) and cover for physical loss of or damage to goods insured through acceptance of fraudulent shipping documents (under the Fraudulent Documents clause).

The Claimant claimed under the Policy for the lost cargoes on the basis that "the subject matter of the insurance was the adventure consisting of the successful storage, transportation and delivery of goods which it purchased", or alternatively that the subject matter insured was goods. In short, the Claimant argued it was entitled to recover the goods it had lost either because they had been misappropriated (and the claims fell within the Misappropriation clause) or because the loss was covered under the Fraudulent Documents clause.

The Defendants denied liability on a number of grounds:

• There was no loss of physical property. The Claimant’s loss, they contended, was a purely financial loss, in respect of which it was not insured;
• Insofar as any property was lost, the Claimant had no insurable interest in the property. Specifically, it was denied that certain of the cargoes had existed because, at the time those cargoes were said to have been delivered to two of the warehouses, those particular warehouses were either storing goods equivalent to their maximum capacity or very near to that maximum capacity;
• There was no Misappropriation of any goods which were covered by the Policy, and the Fraudulent Documents Clause was inapplicable.

The Claimant also claimed the costs it had incurred in seeking to safeguard and recover the goods, or reduce its loss under the Policy. Further the Claimant made a claim for damages for alleged breach by the Defendants of their obligations under s.13A Insurance Act 2015.

Decision

The key issues addressed in the judgment can be summarised as follows:

What was the subject matter of the Policy?

There was a dispute between the parties as to how the subject matter of the insurance provided by the Policy should be characterised.

The judge disagreed with the Claimants that the Policy was "an insurance on [its] interest in the adventure, namely the successful storage, transportation and delivery of goods purchased by [it] for onward sale to third parties" and that it had insurance in respect of "the success of the storage operations".

The judge agreed with the Defendants that the insurance was an insurance on property. The judge found it significant that the Policy was described as a 'Marine Cargo' policy and various terms in the Policy referred to the insurance being on property or applied to 'goods' and 'shipments'.

Did goods exist which were the subject matter of the Policy?

The Claimant argued that if it was wrong on its principal case (as the Policy covering the 'adventure' of storage and transportation) and the subject matter of the insurance was property, it had a sufficient interest in the goods which were lost to recover under the Policy.

The court found that the Claimant had shown, on the balance of probabilities, that goods corresponding in quantity and description to the lost cargoes were physically present at the time the warehouse receipts were issued. The Claimant had taken physical delivery of two parcels of goods which provided some corroborative evidence that goods existed. That was the case even though the warehouse operators that issued the receipts appeared to have been complicit in the Fraud and the warehouse receipts were fraudulent, in the sense that multiple receipts for the same goods were apparently issued to different traders.

The court found that, in order for the Fraud to succeed, it was essential that the warehouses had within them enough of the goods to match the quantity sold to any trader so that the goods could be inspected. If there had been insufficient goods, the Fraud would have likely been uncovered much earlier when traders sent inspectors to the warehouses to verify the existence of the goods.

Did the Claimant have an insurable interest in goods covered by the Policy?

Given that the court held that there were goods in the warehouses corresponding to the warehouse receipts at the time the receipts were issued, the next question was whether the Claimant had an insurable interest in those goods.

The court accepted the Claimant's argument that it had an insurable interest because it had entered into contracts to purchase goods which were to be transferred or delivered to it at the warehouses upon presentation of warehouse receipts, and had agreed to pay, and had paid, the purchase price for those goods. Therefore, they had a right in relation to the goods derivable from “a contract about the property” (in the language of Lord Eldon LC in Lucena v Craufurd [1803] 2 Bos and Pul (NR)269 at 321).

This was the case whether or not the Claimant had obtained a proprietary or possessory title to the goods, and irrespective of any potentially competing interests of other traders in the goods. Those goods, or part of them, were treated by all concerned as stored for the Claimant as part of the Claimant’s business. Under the purchase contracts, the Claimant had made payment in respect of such goods. The Claimant might be prejudiced by the loss or damage to the goods which there were in the warehouses (if the goods were lost then the Claimant could not assert whatever rights it had to get possession of the goods).

The court found that the three usual features of an insurable interest in property as defined by s.5(2) Marine Insurance Act 1906 were present, namely: (i) the assured may benefit by the safety or due arrival of the insured property or be prejudiced by its loss or damage or detention, or in respect of which he may incur a liability; (ii) the assured stands in a legal or equitable relation to the adventure or to any insurable interest in such adventure; and (iii) the benefit, prejudice or incurring of liability must arise in consequence of the legal or equitable relation of the assured to the property or adventure.

Support for the conclusion that the Claimant had an insurable interest by reason of its payment of the purchase price in respect of unascertained goods even if they were not its property, was provided by the authority of Cumberland Bone Company v Andes Insurance Co 64 Me 466 [1874]  which stated:

“If it were essential to the existence of an insurable interest that the assured should have a legal title to the property upon which the insurance is affected, the case would present a different and perhaps more difficult question. But such is not the law. An equitable interest suffices.”

The Claimant had argued that it had an insurable interest on two other bases and the judge set out his conclusions on these even though it was not necessary given his finding that the Claimant had an insurable interest by virtue of having paid the price or part of the price under its purchase agreements.

The Claimant had argued it had an insurance interest on the basis of an immediate right to possession of the goods.  The judge accepted this could give rise to an insurable interest and did in the present case. The Claimant also argued that it had a proprietary interest in the goods. On this point the judge disagreed. He considered that no title passed in any of the cargoes because the requirements of s.20A(1) Sale of Goods Act 1979 were not complied with.

Were the goods lost by an insured peril and if so which?

The next question for the court was whether the Claimant’s loss was covered under the Misappropriation clause or the Fraudulent Documents clause.

The judge found that there was loss caused by misappropriation as defined in the Policy. This gave rise to an actual total loss in respect of the cargoes, in that the Claimant had been irretrievably deprived of them at the time of the commencement of the proceedings.

The judge did not consider that the loss was covered under the Fraudulent Documents clause, not least because the physical loss of the goods was not caused by the Claimant’s acceptance of fraudulent warehouse receipts. The judge reasoned that if there were no relevant goods before the Claimant received the warehouse receipts, then they were not lost by acceptance of those receipts and equally if there were relevant goods in storage at the time of issuance of the receipts, the acceptance of the receipts cannot be said to have caused their physical loss.

Had s.13A Insurance Act 2015 been breached by the Defendants?

The Claimant contended that the Defendants did not pay sums due to it under the Policy within a reasonable period of time which was in breach of the implied term set out by s.13A Insurance Act 2015. They argued that the Defendants’ conduct of the claim was "wholly unreasonable, and its investigations either unnecessary or unreasonably slow". As a result, the Claimant claimed damages which it calculated by reference to the return on shareholders’ equity for the 2019 and 2020 years.

The Defendants contended that a reasonable time to investigate this claim was "a considerable time", "which should have extended beyond the time at which these proceedings were commenced"; and that, in any event, there were, for the purposes of s.13A(4), reasonable grounds entitling them to dispute the claim.

The judge explained that the first question to ask was what was a reasonable time within which the Defendants should have paid the sums due in respect of the claim (noting that the onus of establishing this was on the insured)? The judge noted that this issue was distinct from the second question of whether there were reasonable grounds for insurers to dispute the claim – the onus for this question being on insurers.

On the first question, the judge considered each of the examples set out in s.13A(3) of factors that may need to be taken into account in determining what constitutes a reasonable time:

• The type of insurance:  The Explanatory Notes to the Enterprise Act 2016 (which inserted s.13A into the Insurance Act) stated that claims under business interruption policies usually take longer to value than claims for property damage. Whilst the Policy was property insurance, the judge noted that this Policy applied to transport and storage operations of different types and potentially involving many different countries and locations. Claims could involve various fact patterns and differing difficulties of investigation;
• The size and complexity of the claim: Although the claim was substantial it was not exceptional in the context of marine cargo insurance. The judge did note that this claim was complicated by its location and the origin of the claim being the Fraud;
• Compliance with any relevant statutory or regulatory rules or guidance: None were relevant here;
• Factors outside the insurer’s control: In this case, the judge noted that there were a number of factors outside the Defendants' control which meant the claim would take time to investigate. These included the destruction and unavailability of evidence as to what happened at the warehouses, the fact that legal proceedings were commenced in Ukraine and that it took some time to see what the results of these would be.

The judge noted that no expert or detailed evidence was adduced by the parties on this issue. It was concluded that a reasonable time to investigate, evaluate and settle the claim, assuming there were no grounds for disputing it, would have been “not more than about a year” from the notice of loss.

The second question was whether the Defendants had reasonable grounds for disputing the claim under section 13A(4). The judge concluded that there were reasonable (albeit mistaken) grounds for disputing the claim and that, although there was some delay in certain aspects of the Defendants’ investigations of the claim, there was no breach of the s.13A implied term.

Comment

The case is the first to consider the application of s.13A and confirms that what constitutes a 'reasonable time' within which to pay an insurance claim will be judged on a case by case basis. It was interesting that the judge noted that the parties had not adduced any expert or detailed comparative evidence on this issue and raises the question of whether parties will adopt a different approach to evidence in cases where s.13A is in issue.

Insureds should also bear in mind the judge's comment that "the fact that, in some respects, the Defendants' actual conduct of the claims handling can be said to have been too slow or lethargic, does not itself answer the question of what was a reasonable time". Even though, as here, it may be found that an insurer's investigation appears to be unduly protracted, there will not necessarily be a breach of the implied term under s.13A especially where there are reasonable grounds for disputing a claim.

The case is also a useful reminder that “if the court finds that an assured has taken out insurance to cover a particular subject matter against risks that have eventuated, it will be reluctant to find that the claim fails for lack of insurable interest.”

The judgment also confirms that, even where property in goods has not passed, payment or part payment of the price will usually give the buyer an insurable interest, because if the goods were lost or damaged and the seller became insolvent, the buyer would suffer prejudice. This highlights the importance of contemporaneous inspections and reports of inspection.