Insurance Claims

12.  Insurance Claims

12.1   Target

Obviously, the person aiming at the target, the person claiming, must be a person insured under the policy. In the case of a company, this may be not only the company itself but also officers and employees of the company. In the case of a partnership, it is desirable that cover extends, as it may well, not only to current partners but also to former partners, as well as the persons named in the policy schedule such as employees.

When a person insured makes a claim, one of the first questions to be answered is against which insurer to bring the claim. Where the claimant has only one liability insurer, the answer is simple. However, when people are seeking to contract relatively large amounts of insurance, liability insurance included, one question to be considered is the excess: what part (if any) of the risk they are to retain themselves. A second question is what the monetary limit of the cover is to be. When obtaining liability insurance, people often do obtain it from a number of insurers, each insurer taking a proportion of the risk.917 In such a case, having contracted the insurance, the claimant must consider which insurer to target.

Next, to recover from the (appropriate) insurer, the claimant must establish the amount of the loss and that it was a consequence of an insured event.918 Finally, the insurer must indemnify the claimant—unless meanwhile the insurer can establish a defense, perhaps an exclusion,919 or that cover was vitiated,920 or simply that the loss claimed has not been established.

12.2   Information—In Good Faith

When making a claim the insured must supply the insurer with the information on the basis of which the insurer will decide how to respond. This obligation follows not only from the underlying duty of cooperation921 but also from the duty of good faith.922

Whenever the insured supplies information required by the insurer in order that the insurer may make a decision about the cover, the insured must observe a legal duty of good faith, a duty which continues throughout the insurance period at a level appropriate to the information and the decision in question.923 As regards a particular claim the duty of good faith ends when the claim has been met by the insurer or has been rejected in terms that make it clear that there is no more room for negotiation and that the insured must accept the rejection or commence proceedings.924

Hence the duty arises when the insured gives the insurer notice of loss, and in this connection, it has been long accepted that policyholders making claims must make “full disclosure of the circumstances of the case”.925 Moreover, in view of the generally mutual character of the duty,926 it is at least arguable that the insurer owes a corresponding duty to the insured claimant, for example, a duty to disclose adjusters’ reports.927

The strictness of the duty of disclosure (and thus of the duty of good faith) varies according to the phase in the relationship. It is “the relationship between the parties which is one of utmost good faith, and that there may be incidents of that relationship which require different duties, with different duties, in different contexts.”928 Disclosure at the time of first contracting, for example, is required in respect of all material information. At other times, the level of duty “becomes more elusive.”929 When a claim is made the rule is clearly different from that when insurance is first contracted. Innocent misrepresentation or nondisclosure at the time of claim does not defeat a claim; for that there must be fraud.930

12.3   Dealings With Third Parties

In practice, the insurer may have to deal not only with the insured but also with the third party with a liability claim against the insured. On the one hand, the insured will need to know from the insurer whether the third party’s claim is covered. At the same time, the insured may still have a commercial or professional relationship to maintain with that person. On the other hand, the concern of the insurer will be to handle the claim in a manner that reassures the insured without, however, prejudicing the possibility of taking points later about whether the claim is covered by the policy. At the same time, the insurer has an obvious interest in seeing that the insured’s defense to the third party’s claim is handled in such a way as to minimize the insured’s liability to the third party in case the insurance does indeed have to pay.

Sooner or later, the insurer will have to decide whether to exercise the right, found in most liability policies, to take over the insured’s defense of the third-party claim.931 The insurer may prefer a strategy of “masterly inactivity,” whereby the insurer does not take over the defense but does not deny liability to the insured either, but may mean that the insurer is liable to the latter for the continuing costs of the defense.932 In any event, the insurer will need information about the circumstances surrounding the claim and should not overlook that it may eventually face direct action by the third party.933

12.4   Assessing Claims

In these circumstances, the insurer is advised to demand to see and approve communications between the insured and the third party and seek an undertaking that what is stated by the insured is correct. This gives the insurer some idea about what is going on and gives the insured some reassurance that the matter is being handled properly.934 Alternatively, the insurer might exercise the right to take over the defense by appointing a solicitor to conduct the defense. Part of the mandate of the solicitor, who will owe professional duties to both insurer and insured,935 will be to investigate the circumstances surrounding the third party’s claim. The insured is obliged to cooperate—usually by a term of the policy as well as by the general duty of continuing good faith.936 Only when the insurer has the facts will it become apparent whether there are likely to be issues with the insured about the scope or validity of the cover. With this possibility in mind, the insurer who takes over the defense is advised to make an express “reservation of rights” under the policy.937

If the insured and the insurer disagree about the merits of the third party’s claim and thus about how best to respond, the issue can be resolved by reference to a third party, notably by means of the QC clause found in many policies.938 If they agree to contest the claim but lose, the insurers may be liable for the costs of the successful third party irrespective of the limit of indemnity under the policy.939

If they agree that the third party has a good claim and that it should be settled, apart from any relevant policy terms, the duty of good faith is triggered to govern the settlement.940 Usually insurer and insured have a common interest in agreeing the lowest possible settlement to be paid to the third party. Unfortunately, this does not always happen; sometimes, the insured retreats to a corner position and, like a prickly hedgehog, regards any other course as an unwarranted interference by the insurer. Sometimes insurers try to “wash their hands” of the matter perhaps in the hope that a prickly policyholder may overdo it—defend in a way which gives the insurer grounds for defending the insurance claim by reference to breach of policy conditions.941

12.4.1   Notice of an insurance claim

Assessment of the situation usually starts early. In all classes of insurance, a duty is implied by law that the insured must give the insurer notice of any loss believed to be covered by the policy in question. In the case of liability insurance, as with that of other classes of insurance, that depends on what exactly is covered; usually that indicates that the insured must give notice of a claim by a third party or of the likelihood of a claim (as the case may be) and thus of potential liability.   Basis of the duty to give notice

The legal basis of the notice requirement is either one of practicality to give the contract business efficacy942 or the general duty of good faith.943 In the case of a liability policy in particular, a condition commonly requires the insured to give to the insurer “notice in writing as soon as practicable of any circumstance of which they shall become aware which may give rise to a loss or claim against them”944 —a claim not only during the period of insurance but also later. This is to facilitate risk management by the insurer and follows from the standard extension of cover to claims actually made against the insured even after the insurance period has ended. The purpose of this notice (of suit) is different from the notice of claim, however, the rules of notice, mode, speed, and so on, are broadly the same, although the application and emphasis may differ.945   Form

Notice must be in the form required by the policy, that is, usually, in writing. If no particular form is specified by the policy, notice take any form and, although ill advised, it may be oral. Indeed it has even been accepted that “the fact that a document was not intended by an assured to constitute notice … did not preclude it from qualifying in fact as such a notice”; and that “an objective approach was required and that the subjective intentions and understandings of the party sending the notice were irrelevant.”946

Whatever the form, notice is not usually effective until received,947 received by the right person, although it is not necessary that it should have come to the actual attention of that person.948 The right person is the person in the insurance company specified by the policy as the person to notify or, if no particular person is specified, the person apparently authorized to handle claims.

Even if notice to a particular place (such as head office) is required by the policy, the local agent of the insurer is usually authorized to receive notice and to pass it on to head office; therefore, it is enough for the claimant to give notice to the local agent to be passed on,949provided that it is given to the agent in time for it to reach head office in the normal course of business within the time allowed for notice. If any person (such as an insurer) holds an agent out as a proper channel of communication, it is that person (the insurer) that bears the risk that the channel does not work as it should.950

Notice to the insured’s broker, normally the agent of the insured and not the insurer, is not effective notice,951 unless the broker has a dual role: that of acting for the insured as broker and also that of acting for the insurer for the purposes of communication.   Time

The time within which notice must be given to the insurer is usually indicated by the policy.952 A policy condition requiring notice within a stated number of days will be strictly enforced.953 More commonly it will require the insured, for example, “as a condition precedent” to the right to indemnity, to “give immediate written notice” to the insurer of any claim by a third party. Alternatively, the notice may be required “as soon as possible.” Such words are not interpreted literally. They are usually interpreted as (only) requiring “reasonable notice” or, as some policies express it, notice “as soon as reasonably practicable.” What is “reasonable” or “reasonably practicable” depends on the circumstances in which the requirement arises.954

The relevant circumstances are, on the one hand, the insurer’s concern to be in a position to assess the strength of the third party’s claim and, if appropriate, to defend it, and, on the other hand, the insured’s ability to give the notice required.955 Clearly, it is not practicable to notify events of which the insured, whether personally or through agents, is not aware. However, the insured’s awareness of a claim may come gradually and, if so, reasonable time may begin to run with a speed that increases with awareness.

In one case, it was held that the insured knew enough, if he “ought to have contemplated that it was an occurrence which might result in a claim for compensation”.956 But other cases have held that there was no duty to notify the insurer until it was “plain” that there would be a claim under the policy.957 Commonly, however, the policy will deal with the matter by requiring notice when a liability claim against the insured is “likely” or even when the insured becomes aware of circumstances which “may” give rise to a claim.958 In any event, the insured’s liability in respect of notice is objectively assessed959 with reference to what is practicable for a person in their position in the ordinary course of things. Little weight is given to personal factors such as their business convenience960 or, in particular, any wish that they may have to delay notice to the insurer in the hope that the problem will resolve itself and not affect future insurability.961

Breach of a notice of loss condition, it has been held, defeats the claim, whether or not the insurer was prejudiced by the breach.962 A notice requirement has been commonly described as a “condition precedent.”963 Condition precedent is not the only possibility. In descending order of importance, the possibilities are that the condition is (a), as stated, a condition precedent so that breach rules out payment by the insurer; (b) a suspensive condition such that breach rules out payment until the breach is corrected; and (c) a minor contract duty, breach of which does not prevent recovery by the insured, but may render the insured liable in damages to the insurer for loss (if any) caused to the latter by the breach.964 Moreover, there is possibility (d): there may be “a term a breach of which was so serious for underwriters that it would give them a right to reject the claim without having to accept the breach of contract as being a repudiation of the contract as a whole”.965 Such a term would be located at point (a) on the scale of importance and that would indicate that there are two kinds of condition precedent: (a)(i), a condition such that breach entitles insurers both to reject claims and to terminate the contract; and (a)(ii), a condition such that breach entitles insurers to reject claims but not to terminate the contract. However, possibility (a)(ii) has been rejected by a majority decision of the Court of Appeal applicable for all practical purposes to all liability insurance contracts.966 In any event the nature of such conditions is assessed in accordance with general rules of construction.967

Moreover, some policies provide that where the insured’s breach of this or perhaps any other condition “has resulted in prejudice to the handling or settlement” of the claim, the indemnity “shall be reduced to such sum as in the insurer’s opinion, would have been payable” in the absence of such prejudice. The inference is that, in the absence of prejudice, breach of condition does not adversely affect the amount payable, still less defeat the claim.968 In any event, although properly described as conditions precedent, notice conditions are conditions precedent to payment and not to cover itself; thus breach of notice conditions does not automatically discharge the contract, as it would if the conditions were insurance warranties.969

12.5   Establishment of Liability to Third Parties

A claim must concern liability that has been established, the meaning of which depends on the terms of the policy. A liability policy usually refers simply to the “liability” or “civil liability” of the insured.970 In this connection, the argument, that there is a general rule of law that a liability without actual payment of that liability does not constitute a recoverable loss, has been rejected.971

As regards the establishment of liability, according to the leading Post Office case liability is established “either by judgment of the court or by an award in arbitration or by agreement,”972 or, it seems, a default judgment to similar effect, even though the judgment can be set aside later.973 The Post Office ruling is not without critics974 and has not been applied entirely literally.

12.5.1   Proceedings

First, if liability to the third party is disputed by the insured in proceedings brought by the third party, the third party can nonetheless initiate third-party proceedings against the liability insurer, although the liability of the insured has yet to be established. The court will give its decision in the main action between the third party and the insured and then turn to the third-party proceedings.975 Note, however, that the insurer cannot take the initiative by obtaining a declaration that the insured is not liable to the third party: the insurer has no locus standi.976 Further, although in one case an insurer applied successfully to be joined as a defendant in proceedings,977 such applications are not likely to be made often.

Second, although liability has yet to be established and proceedings against the insured are pending, the insurer may nonetheless have an immediate “duty to defend” the insured, if the contract imposes such a duty.978

Third, a flexible view will be taken of what this means when liability has to be established in courts or comparable institutions of other countries or, indeed, in this country. Thus, it has been held that the determinations of the Pensions Ombudsman are “findings of legal liability” on the part of the insured to pay compensation in respect of maladministration of a pension scheme.979

In the Commercial Court in the Lumbermens case, Colman J took the view that to establish liability, the insurance claimant must show the actual amount of the third-party claim.980 This caused a problem in global settlements covering different claims and cross claims in so far as the judge thought that all these would have to be itemized before there could be a “settlement”. A sum would have to be notionally allocated to each, a problematic process because even though the global figure might be acceptable there might be no agreement on particular items.981 Moreover, in some instances, agreement may amount to an admission of liability contrary to the terms of the policy. The judge’s view was highly controversial.

Subsequently, however, in Centre Re v Curzon,982 Blackburne J took the view that, whereas the obligation of liability insurers to pay insurance money only arises when the liability of the insured is established, under section 1(b) of the Act the rights of the insured against the insurer are transferred to the third party on the making of a winding-up order, and so on, and that therefore a statutory transfer can take place before the obligation of the insurer to pay arises, that is, before the liability of the insured has been established.983 This view was subsequently preferred by the Court of Appeal in Re OT Computers.984

For liability arising before 25 March 2010, that remains the position. That was when the Third Parties (Rights against Insurers) Act 2010 came into force. For liability arising after that date, on the insolvency of the person liable, although the third party “may not enforce those rights without having established that liability,” the third party may then “bring proceedings to enforce the rights” of that person against the insurer “without having established” the liability.985

12.5.2   Agreement

Liability established by “agreement” includes any reasonable settlement by the insured with the third party, even if the cover is “liability imposed by law”.

986 To establish liability by “agreement” is of great importance to those policyholders, who may well wish to avoid not only the cost of court proceedings but also the publicity associated with the proceedings.987 To deal with conflicts of interest of this kind, the policy may contain a QC clause. Typically such a clause provides that the insurer will pay:

any such claim or claims which may arise without requiring the assured to dispute any claim, unless a Queen’s Counsel (to be mutually agreed upon by the underwriters and assured) advises that the same could be successfully contested by the assured and the assured consents to such a claim being contested, but such consent not to be unreasonably withheld.988

In some policies, the QC clause extends to any dispute arising out of the policy, so that the clause functions as an arbitration clause. The QC clause has also benefited the insured claimant in that it offered cover before liability had been formally established. Indeed it often carries a degree of ambiguity and hence circularity. The clause can be invoked by either party. To trigger the clause, it is assumed that the third party’s claim against the insured is covered under the policy insuring clause. If the QC decides that the insurer must pay, the insurer is then still entitled to revisit the assumption that the third party’s claim is within the scope of the policy or, accepting that to be the case, raise any defense available under the policy. If the insurer does not invoke the clause, however, the insurer cannot complain if the insured does not invoke it either and agrees a settlement with the third party.989

If the insured settles with the third party without the consent of the insurer, the insured has deprived the insurer of the opportunity to dispute the liability to the third party or to question the amount of the claim. However, if the insured cannot settle with the third party, the only alternative appears to be the onerous one of being led to court for liability to be established. Be that as it may, it has been plausibly argued that an insured may enter into a reasonable settlement with the third party only where the insurer has wrongfully repudiated liability under the policy,990 especially if the latter contains a “no compromise” clause.991

12.6   Insolvency of the Insured

Section 1 of the Third Parties (Rights against Insurers) Act 1930 provides that, if a person is (a) insured under a contract of insurance against liability to third parties and (b) becomes bankrupt or makes a composition or arrangement with creditors, the rights of that person against the insurer in respect of liability incurred to a third party are “transferred and vested in the third party to whom the liability was incurred”. Given the potential cost of establishing liability, it is important to the third party to know what liability insurance is in place and that the insurance will respond. So, at the request of the third party, the insured is obliged under section 2 of the Act to give “such information as may reasonably required of him for the purpose of ascertaining whether any rights have been transferred.” However, in some cases, a literal interpretation was put upon section 2(1), whereby the third party is not entitled to any of this information unless it could be shown that rights under the Act had been transferred to the third party,992 a barrier of circular reasoning to the intended operation of section 2.993 To break this barrier one leading judge took the view “that a statutory transfer can take place before the obligation of the insurer to pay arises, that is, before the liability of the insured has been established,”994 and some decisions followed his lead.995 In any event, to improve the possibility of direct actions, the Third Parties (Rights against Insurers) Act 2010, received the Royal Assent on 25 March 2010.

The 2010 Act has yet to come into force. The time scheme of the 2010 Act is that where both the policyholder’s insolvency and liability to a third party occur before the 2010 Act comes into force, the 1930 Act remains applicable. Where they occur after that date a third party may “bring proceedings to enforce the rights” of the insured against an insurer “without having established” the liability of the insured, although the third party “may not enforce those rights without having established that liability”: section 1(3). In particular, henceforward third party C may commence a single action to establish both the liability of insured B, as well as the potential liability of A, B’s insurer, to pay the indemnity in question, without, as before, separate sequential actions against them.996 The resurrection of a defunct company will no longer necessary.

The main thrust of the Act is the transfer of rights and that C “may bring proceedings against [A] without have established [B]’s liability”: section 1(3). Nonetheless “to the extent (if any) that” B’s liability to C “exceeds the amount recoverable from [A] by virtue of the transfer” under section 1, C may still enforce B’s liability to C: section 14(1).

The position of claimants under the 2010 Act will be better than before in that they are “in control” of the insurance cover, if any, and can ensure for example that it is not undermined by the failure of B to perform B’s part in the insurance, such as giving notice of claims. Moreover, “pay first” clauses are inoperative, thus sidelining the difficulty they raise for claimants, and settling the controversy raised in the past by such clauses.997 Notable perhaps, is that claimants benefit from the disclosure of insurance information (although not documentation) before committing resources to proceedings. Disclosure of such information is dealt with comprehensively by section 11 and Schedule 1 of the 2010 Act.

12.6.1   Liability and Insolvency

The transfer of rights under the 2010 Act is triggered by the liability and insolvency of a person, B.998

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