Statutory Regime: An Overview
In England and Wales, insurance contracts are regarded as private contracts. Insurance disputes are accordingly subject to the general rules on contract law. These rules are derived from a mixture of common law and statute. There is also sector-specific legislation that applies to insurance contracts, with different legislative regimes for consumer and business contracts.
Statutory Regime: Consumer Contracts
The statutory framework governing consumer insurance contracts is largely set out in the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), which came into force on 6 April 2013.
CIDRA defines a consumer as "an individual who enters into a contract of insurance wholly or mainly for purposes unrelated to the individual’s trade, business or profession". CIDRA contains detailed provisions about the information that consumers must provide to insurers when applying for insurance and insurers’ remedies for pre-contractual misrepresentations as well as contractual breaches. General consumer protection laws, such as the Consumer Protection Act 2015, also apply to consumer contracts.
Statutory Regime: Business Contracts
The regime relating to business insurance contracts (and reinsurance contracts) is contained within the Insurance Act 2015 (IA 2015), which came into force on 12 August 2016. The IA 2015 applies to contracts entered into on or before 12 August 2016, as well as to variations to contracts of insurance agreed after that date. The IA 2015 reformed the law in relation to pre-contractual misrepresentation and non-disclosure in business contracts. It also updated the law in relation to warranties and fraudulent claims in both business and consumer contracts.
Statutory Regime: Sector-Specific Legislation
Other sector-specific legislation includes the Third Parties (Rights against Insurers) Act 2010 (which allows third parties to enforce a term of an insurance contract in the event that it purports to confer a benefit on the third party); the Enterprise Act 2016 (which creates a legal right to enforce prompt payment of insurance claims); and risk-specific legislation, such as the Life Assurance Act 1774 and the Fire Insurance Duty Act 1782.
As insurance contracts are private contracts, they may provide specific mechanisms for resolution of disputes. For example, arbitration is particularly prevalent in many business insurance and re-insurance contracts. Where no specific dispute resolution mechanism is included in the contract, insurance disputes are typically heard in the civil courts. However, consumers or small business owners may also make complaints to the Financial Ombudsman Service.
Financial Ombudsman Service
The Financial Ombudsman Service (FOS) may review complaints for consumers or small businesses against insurers in the UK after the internal complaints process within the insurance company has failed to resolve an issue. The FOS is an independent body which seeks to resolve disputes, without involving the courts, based on what is fair and reasonable in all the circumstances (the FOS is not strictly bound to follow legal precedent). If a matter is referred to the FOS, it will first be reviewed by a case handler who will assess the parties’ respective positions before recommending how a dispute should be resolved. If the parties are unsatisfied with the recommendations, the dispute can be referred to an ombudsman. Decisions of the ombudsman are binding on insurers, and can therefore only be challenged by judicial review.
The Civil Procedural Rules (CPR) are the procedural code governing litigation and specify the rules to be followed at each stage of court proceedings. Specific guides may also apply in certain courts, such as the Commercial Court.
For low-value personal injury claims in road traffic accidents, or employers’ liability (EL) and public liability (PL) claims, proceedings can be issued through the Electronic Claims Portal. Claims pursued via the Electronic Claims Portal are subject to strict procedural rules and fixed fees to keep costs low and speed up the process to resolve disputes.
Other disputes involving insurance are addressed through the court system. Disputes are allocated to a court based on the value of the claim. For disputes valued at less than GBP100,000, the claim will be allocated to the county court, while disputes worth more than GBP100,000 will be addressed in the High Court. Particularly complex cases of high value may be heard in the Commercial Court, a subdivision of the High Court. Further details about the court procedure can be found in the sections that follow.
Rules on Limitation
In England and Wales, the limitation period varies depending on the type of claim. Insurance disputes are typically regarded as claims for breach of contract. The Limitation Act 1980 (as amended) provides that an action founded on a simple contract, such as an insurance contract, must be brought within six years of the date on which the cause of action accrues.
For ordinary claims in contract, the cause of action typically accrues six years from the date of the breach of contract. However, the position is more complicated in relation to insurance contracts. For liability policies (ie, policies covering third-party losses), the cause of action normally accrues when the liability of the insured is ascertained. This may be in the form of an agreement, an arbitral award or a judgment. In other forms of insurance (such as marine, property and life insurance), the cause of action will usually be deemed to accrue when the relevant insured event occurs.
The limitation period for other types of claims against insurers will differ. For claims brought by policyholders against insurers for late payment of insurance claims, the limitation period is one year from the date on which the insurer has paid all sums due in respect of the insurance claim. In relation to claims for contribution commenced by one insurer against another, the limitation period is two years from the date on which the right of recovery accrued.
The Litigation Process
As noted in 1.1 Statutory and Procedural Regime, the procedural rules to be followed at each stage of court proceedings are set out in the CPR.
Typically, insurance contract disputes with a value greater than GBP100,000 will be heard in the High Court, and particularly complex cases will be heard in the Commercial Court, a subdivision of the Queen’s Bench Division of the High Court. Claims of lesser value will usually be heard in the county court.
The litigation process in England and Wales is adversarial (as opposed to inquisitorial) in nature, with each party trying to prove their case on the “balance of probabilities”. Litigation in England and Wales can be expensive, but the legal system in the jurisdiction is thorough, fair and well regarded internationally.
The English legal system operates on the principle of open justice, which in practice means that, save in exceptional circumstances, the public can access key court documents and attend hearings and trials.
A final overarching point of note is that, in litigation in England and Wales, the presumption is that the losing party will pay the winning party’s costs (subject to the court’s discretion and certain specific costs protection legislation, such as qualified one-way costs shifting (QOCS) – see 2.3 Unique Features of Litigation Procedure).
There are specific procedural rules relating to pre-action conduct. These rules are contained in the CPR Practice Direction (PD) on Pre-action Conduct and the associated pre-action protocols that apply to particular types of civil claims, such as the Pre-action Protocol for Personal Injury Claims and the Pre-action Protocol for Construction and Engineering Disputes.
The PD and pre-action protocols set out the steps the court expects parties to take prior to commencing proceedings. The purpose of these rules is to encourage parties to exchange sufficient information so as to be able to:
Parties that have failed to comply with the relevant pre-action provisions may face costs sanctions in any subsequent litigation.
In the event that the parties are unable to resolve a dispute pre-action, a claim may be commenced by a claimant issuing a claim form and serving a copy on the defendant. The claim form may be accompanied by particulars of the claim, setting out the case and the facts relied on, or these may be served on the defendant up to 14 days after service of the claim form.
Following service of the particulars of the claim, the defendant must file an acknowledgement of service confirming whether or not the matter is disputed. If the claim is disputed, the defendant has the opportunity to file and serve a defence, setting out its position.
Subsequent stages of proceedings
Once the parties’ statements of case have been served, the court will allocate the claim to a “track” depending on its value and complexity and the parties will be encouraged to agree a timetable to trial (known as directions). These directions will be approved or amended by the court at a case management hearing. The directions will typically include deadlines for the following:
The court plays an active role throughout the litigation process and, depending on the size and complexity of the case, several case management hearings may take place to ensure the proceedings run smoothly. Parties are typically encouraged to consider settlement options throughout the course of the proceedings. In the event that settlement is reached, the parties must notify the court and the litigation process will end.
The majority of insurance contract disputes are settled by agreement between the parties. However, if settlement is not achieved, the matter will progress to trial.
Each party will present their case at trial, with witnesses and experts being cross examined on their evidence. The duration of the trial will vary depending on the complexity of the matter.
The remedies available will depend on the subject matter of the case but may include:
A judge’s final decision takes the form of a reasoned written judgment, which will usually also address costs.
If a party wishes to appeal, it must first seek permission from the court. This can be sought from the lower court where the decision was made, or from the appeal court.
For insurance disputes heard in the Commercial Court, appeals can be made to the Court of Appeal.
Parties can appeal on the grounds that the decision of the lower court was wrong, or unjust due to a serious procedural or other irregularity. Permission will be granted if there is a real prospect of success or some other compelling reason.
Appeals from the Court of Appeal can be made to the Supreme Court. Applications for permission can only be made to the Court of Appeal, or to the Supreme Court, if permission is refused by the Court of Appeal.
Alternative dispute resolution (ADR) is encouraged and widely used in different forms to resolve disputes in England and Wales.
The CPR specifically requires the court and the parties to consider whether ADR is appropriate.
Many insurance contracts specify that a particular form of ADR must be used as an alternative to litigation. The most common forms of ADR used in England and Wales include:
Some of the main advantages of ADR include: costs benefits (it is often much cheaper for all the parties to resolve disputes through ADR); the ability to retain confidentiality; and maintaining commercial relationships (in commercial disputes).
Arbitration is one of the most common forms of ADR used in insurance disputes and arbitration clauses are often incorporated into business insurance and reinsurance contracts.
The arbitration procedure will depend upon the precise terms of the relevant clause but this may specify that the arbitration is to be conducted under the rules of a particular institution, such as the London Court of International Arbitration (LCIA) or the International Chamber of Commerce (ICC).
Arbitration proceedings are governed by the Arbitration Act 1996 (AA 1996), which provides that an arbitral award can only be challenged in certain, limited circumstances. The AA 1996 also provides that the court can execute powers in support of arbitration proceedings, such as securing the attendance of witnesses.
Adjudication is a process whereby an independent adjudicator, who is an expert in the relevant subject matter, will make a decision on the matter using information presented by the parties, as well as their experience and expertise. Adjudication is often used in construction disputes.
The process usually takes place within a 28-day timeframe and begins when either party submits a Notice of Adjudication. The timetable set is strict, and the decision will be unenforceable if given outside the timeframe. Adjudication allows parties to resolve the dispute in a timely manner without incurring the costs associated with litigation or arbitration.
Mediation is also commonly used in England and Wales. It involves a neutral third-party mediator attempting to reach agreement based on the issues and options for resolution. Mediation can be significantly cheaper than either litigation or arbitration and can be used to resolve a range of insurance disputes.
The most common type of mediation used is facilitative mediation, whereby the mediator does not make a decision, but assists the parties in reaching a commercial settlement.
Mediation is common in construction professional indemnity disputes as it is confidential and enables the resolution of disputes with a result both parties have accepted, so the professional relationship can be maintained.
Negotiations and the "Without Prejudice" Framework
"Without prejudice" negotiations are often used to reach a settlement and this is encouraged by the courts. Where negotiations are conducted without prejudice (with or without legal representatives acting as intermediaries), details of these negotiations cannot be put before the court. This encourages the parties to make genuine attempts to reach an out-of-court settlement and ensures that confidentiality is maintained.
Jurisdiction clauses are common in insurance contracts. The English courts will typically respect jurisdiction clauses subject to certain exceptions, usually aimed at protecting the weaker party to a contract.
The applicable rules to determine jurisdiction, which were historically determined by the domicile of the parties, depend on whether proceedings were commenced on or before 31 December 2020 (the end of the Brexit transition agreement).
Proceedings Commenced on or before 31 December 2020
For proceedings commenced on or before 31 December 2020:
The Recast Brussels Regulation and the Lugano Convention both contain specific rules relating to insurance contracts which were designed to protect the insured as the weaker party to such agreements.
Under the common law rules, jurisdiction will be determined in accordance with Part 6 of the CPR. The commonlaw rules are less prescriptive and the English courts will typically respect the choice of jurisdiction specified in a contract. This is particularly the case where a contract contains an exclusive jurisdiction clause.
Proceedings Commenced on or after 1 January 2021
As of 1 January 2021 (the end of the Brexit transition agreement), the Recast Brussels Regulation ceased to apply and the UK also ceased to be treated as a member of the Lugano Convention. The UK’s application to join the Lugano Convention was rejected in April 2021.
The current position is that, for proceedings commenced after 31 December 2020, the relevant rules will be contained within either:
The Hague Convention (which became law in its own right in the UK on 1 January 2021) applies only to international cases where there is an exclusive jurisdiction agreement in favour of one of the states in which the Hague Convention applies. The application of the Hague Convention is subject to several limitations. The most important for present purposes is the exclusion of insurance contracts (in the case of EU member states and the UK). However, there is a “carve-out” for reinsurance contracts, large risks and certain other choice-of-court agreements in insurance cases.
Where the Hague Convention does not apply, parties to a contract will be reliant on the common law regime referenced above.
Choice of Law
As with jurisdiction clauses, the English courts typically uphold choice-of-governing-law clauses, subject to certain exceptions.
The Pre-Brexit Position
For contracts made after 17 December 2009, Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I) applies.
Article 7 of Rome I provides specific rules for insurance contracts. It differentiates between contracts covering “large risks” and other insurance contracts.
For large risks, the insurer can choose which law governs the risk. If the insurance contract does not specify the applicable law, the location of the insurer’s head office will determine the choice of law unless the contract is more closely related to another country, in which case the law of that other country will apply.
For all other insurance contracts, the parties may choose the applicable law from a number of specified options. Where the applicable law has not been chosen by the parties, the contract will be governed by the law of the member state in which the risk was situated at the time the contract was concluded.
Where the risk is situated outside the EU, the contract will be governed by the choice of law rules in Rome I (Articles 3 and 4). Article 3 provides that the parties may choose the applicable law. Where the applicable law has not been chosen, the rules specified in Article 4 will apply.
It should be noted that Article 7 expressly does not apply to reinsurance and the general rules will apply in relation to these contracts.
The Post-Brexit Position
Little has changed in relation to choice of law as a consequence of Brexit.
Rome I continued to apply to the UK during the transition period and was incorporated into law after 31 December 2020 via the Law Applicable to Contractual Obligations and Non-contractual Obligations (Amendment etc) (UK Exit) Regulations 2019 (SI 2019/834), which is now known as the "UK Rome I". As such, the principles detailed above continue to apply.
Foreign judgments may be enforced against insurers under one of several distinct regimes depending on the date the proceedings were instituted, the country in which the judgment was reached, the date of the judgment and the type of judgment.
The European Regime
The main European regime remains applicable to the enforcement of judgments given in proceedings instituted in EU/EFTA courts before the end of the Brexit transition period (31 December 2020). The relevant rules are contained within: the Brussels Recast Regulation (1215/2012), the Brussels Regulation 2001 (44/2001), the Brussels Convention, the Lugano Convention and the European Enforcement Order Regulation (805/2004).
The Commonwealth Regime
To enforce a judgment in England and Wales that has been handed down in a Commonwealth country (and some other countries) the "statutory regime" may apply.
Part II of the Administration of Justice Act 1920 (AJA 1920) sets out the procedure for the reciprocal recognition and enforcements of the UK courts and certain Commonwealth courts. Under AJA 1920, a judgment obtained in Commonwealth countries that have entered into reciprocal arrangements with the UK may be registered with the English High Court (and the equivalent courts in Scotland and Northern Ireland) and enforced as if it had been a judgment of the High Court.
The Foreign Judgments (Reciprocal Enforcement) Act 1933 contains similar provisions to the AJA 1920 but extends the possibility of recognition and enforcement to all nations with which the UK has reciprocal arrangements. As with the AJA 1920, foreign judgments may be registered with the English High Court (or its equivalent in other parts of the UK).
The UK Regime
The rules concerning the recognition and enforcement of judgments between the courts of the constituent parts of the UK are contained within the Civil Jurisdiction and Judgments Act 1982 (CJJA). Broadly, the CJJA confers upon an interested party the right to apply for a certificate from the court issuing the judgment. The certificate may then be registered with a court in another part of the UK within six months of its issue. Following registration, the registering court will be granted the same powers of enforcement as the original issuing court.
The Common Law Regime
The common law regime is the default regime and applies to judgments issued in all countries not already covered by a specific regime.
This regime requires the party seeking to enforce the judgment to bring new proceedings in the courts of England and Wales, where the foreign judgment is sued as a debt. In accordance with CPR part 24, the party seeking to enforce the judgment may apply to the court for summary judgment once proceedings have been issued, on the grounds that the defendant has no real prospect of successfully defending the action and there is no reason why the case should go to trial.
Enforcement under this regime will only be possible where the foreign judgment is for a debt or other specific sum of money (but not fines, taxes or other penalties) and where the foreign judgment is final and conclusive.
As previously detailed, the default method for resolving large disputes in England and Wales is by way of litigation in court. The system is adversarial in nature but the courts typically play a fairly active role in case and costs management. Two key features of the jurisdiction that international insurers should be aware of are the following.
Costs Rules and Regimes
The general rule in civil litigation in England and Wales is that the unsuccessful party pays the successful party’s costs. In the absence of unreasonable conduct, the successful party can usually expect to recover 65% (or more) of its legal costs from the losing party.
However, the general rule on costs is subject to the court’s discretion. In exercising its discretion, the court will typically consider: the conduct of the parties; whether a party was only partly successful; and any admissible offers-to-settle that are drawn to the court’s attention.
There are also certain notable exceptions to the general costs rules. For example:
Alternative Dispute Resolution (ADR)
International insurers should also be aware that the CPR requires parties to a dispute to consider ADR (before and after the commencement of proceedings). Failure to engage in ADR can lead to costs sanctions being imposed by the court.
Arbitration clauses in insurance and reinsurance contacts are enforceable in England and Wales. The jurisdiction is widely regarded as pro-arbitration and the courts will generally seek to uphold arbitral awards.
The key provisions governing arbitration in England and Wales are contained in the AA 1996. A written arbitration agreement or clause must be clear enough to show that the parties intended to incorporate the clause as an agreement to arbitrate but it need not be signed or contained within a single document.
In accordance with the AA 1996, where a party starts court proceedings in breach of an arbitration agreement or clause, the other party can apply for a stay of the court proceedings, which must be granted unless the arbitration agreement is null and void, inoperative or incapable of being performed.
If required, arbitral awards may be enforced by the courts in England and Wales. There are two principal routes through which an award may be enforced:
To enforce the award under either route, the enforcing party must make an application to the court for permission. This is usually done on a without-notice basis and involves submitting an arbitration claim form and witness statement attaching the arbitration agreement and award.
If permission is granted, the award can be enforced in the same manner as a court judgment, including, for example, awards of damages, specific performance and/or injunction.
The UK has been a party to the New York Convention since 1975. Accordingly, the UK will recognise and enforce arbitral awards from other contracting states.
The AA 1996 gives effect to and implements the New York Convention. An application to enforce a New York Convention award is usually made without notice to the respondent by issuing an Arbitration Claim Form in the English courts, supported by witness evidence alongside an authenticated original award or certified copy, the original arbitration agreement or a certified copy, and an official translation if the award or agreement is in a foreign language.
The court may then give permission to recognise the award and the respondent will usually be served with a copy of the order and original application. Thereafter, a respondent may apply for the order to be set aside. In the event that the order is not set aside, the arbitral award can be enforced in the English courts and will be treated as if it was a judgment made within the jurisdiction of England and Wales.
Arbitration is a common method of resolving insurance and reinsurance disputes in England and Wales. Contracts governed by English law often contain London-seated arbitration clauses and the same is often true of Bermuda excess liability insurance policies.
The ICC and the LCIA are two of the most frequently chosen institutions.
Provisions of the AA 1996
The AA 1996, alongside common law, governs arbitration in England and Wales. The AA 1996 contains both mandatory and non-mandatory provisions. The mandatory provisions are listed in Schedule 1 to the AA 1996 and include, for example, the right of the parties to stay legal proceedings for a matter referred to arbitration, and the powers of the court to extend time limits or remove an arbitrator. The "non-mandatory provisions" are all of the provisions that are not listed in Schedule 1. The non-mandatory provisions will apply in circumstances where the parties have not made their own arrangements by agreement.
The Arbitration Process
The arbitration process involves an arbitrator or panel of arbitrators who will gather evidence from the parties and make a decision on the dispute. The arbitration process is private, so third parties cannot attend hearings. This makes arbitration a preferred method of dispute resolution for many involved in international transactions and commercial dealings, which are typically kept private and confidential.
Decisions on the merits of a dispute by an arbitral tribunal are typically binding and may only be appealed in limited circumstances within 28 days of the date of an award.
The grounds for challenging an arbitral award are contained within the AA 1996 and include:
Importantly, the parties may agree to exclude a right to appeal on a point of law under the AA 1996 (but not on the other grounds). Readers should also be aware that certain types of institutional rules governing arbitration proceedings (such as the LCIA rules) do not permit appeals, subject to certain limited exceptions.
Insurance and reinsurance contracts are subject to the same general principles as other commercial contracts in England and Wales. Terms may therefore be implied into such contracts by legislation, by the courts, from previous dealings between the parties and by industry customs. The following legislation implies terms into insurance and reinsurance contracts.
Insurance Act 2015
IA 2015 implies certain terms into a contract of insurance. Under Section 13A of the IA 2015 (introduced by the Enterprise Act 2016), there is a term implied in every contract of insurance that, if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a "reasonable time". Parties to consumer insurance contracts cannot contract out of the relevant provisions of the IA 2015 and substitute terms that would put the insured in a worse position than it would have been under the IA 2015. However, the term can be contracted out, or an insurer’s liability can be limited, in non-consumer insurance contracts, provided the contracting out is clear and unambiguous and the insurer takes sufficient steps to draw the term to the insured’s attention. Deliberate or reckless breaches of the implied term are not permitted.
A range of legislation lays down implied terms in consumer contracts, including insurance contracts, for the protection of the consumer. A notable example is the Consumer Rights Act 2015 (CRA). The material requirements of the CRA, when applied to insurance contracts, are as follows:
The parties are not permitted to contract out of or breach any of these provisions, and doing so will grant the consumer the right to damages.
Business Insurance Contracts
The IA 2015 applies to business insurance contracts that were entered into after 12 August 2016. The “old” regime, as set out in Sections 18 to 20 of the Marine Insurance Act 1906 (MIA 1906) and interpreted by common law, will accordingly apply to policies entered into or varied before 12 August 2016.
The Duty of Fair Presentation Implied into Insurance Policies by the IA 2015
The IA 2015 provides that, in the case of non-consumer insurance contracts, the insured has an implied duty of fair presentation of the risk. The IA 2015 provides some guidance as to what "fair presentation" of the risk entails, including:
Any representations as to expectation or belief should be made in good faith. A presentation will be "fair" if the information provided to the insurer is:
Remedies for Breaches of the Duty of Fair Presentation
In the event that the insured breaches the implied duty of fair presentation, an insurer can seek a remedy only if it proves that it was induced by the breach to enter the contract of insurance in the terms that it did, or at all. The remedy available to the insurer will depend on whether the breach was deliberate or reckless.
If the insured’s breach of the duty of fair presentation was deliberate or reckless, the insurer:
If the insured’s breach is not deliberate or reckless, various proportionate remedies may apply, depending on what the insurer would have done if the insured had complied with its duty.
Consumer Insurance Contracts
CIDRA (referred to in 1.1 Statutory and Procedural Regime) contains the provisions regarding the consumer insured’s duty of utmost good faith.
CIDRA requires consumers to take reasonable care not to make a misrepresentation to an insurer when a contract is entered into or varied. It is therefore less onerous than the "old" duty of disclosure, which implied on an insured a duty of "utmost good faith" (as set out in the MIA 1906), which required consumer insureds to volunteer all material information to insurers, and it can be distinguished from the duty of fair presentation placed on business insureds under the IA 2015.
The remedies available to insurers for misrepresentation under CIDRA are also proportionate to the failings of the insured. CIDRA provides that:
There have been several significant trends in policy coverage disputes over the last 12 months.
COVID-19-Related Insurance Claims
As a result of the COVID-19 pandemic, there has been a surge in related insurance claims, most notably, claims under business interruption (BI) policies which do not have a material damage coverage trigger. These claims have largely been brought as a result of BI losses caused by the government-mandated closure of certain categories of business to prevent the spread of COVID-19.
In 2020, the Financial Conduct Authority (FCA), with the assistance of eight insurers, brought a Test Case on behalf of affected policyholders which considered various sample policy wording and was designed to resolve uncertainty as to whether these BI policies respond. The outcome of the FCA Test Case is addressed in 7.3 Coverage Issues and Test Cases.
Whilst the FCA Test Case provided some welcome clarity on the application of cover under BI policies, it has not conclusively resolved all coverage issues. There is currently a range of satellite litigation underway in the Commercial Court, and a number of other coverage issues of significant value to insurers are also likely to be tested in court within the next year.
There has been growing interest as to whether risks of failing to comply with the GDPR can be and are insurable.
On the basis that English law prohibits the insurance of punitive fines, and given that policies will likely specifically exclude cover for such fines, it is unlikely that the risks of failing to comply with the regulation will be insurable.
However, it is possible that insurance may cover the costs of participating in regulator investigations or any follow-on proceedings. It is therefore expected that the number of insurance coverage disputes arising out of failure to comply with data protection regulations will continue to rise.
Artificial Intelligence and Cyber-Related Claims
Disputes relating to a failure to appreciate the scope and impact of artificial intelligence have been increasing and continue to be a developing area for insurance claims. In addition, while there have only been limited disputes relating to warranty and indemnity or cyber-insurance, it is anticipated that, given the growing prevalence of cyber-attacks, the frequency of such disputes will likely increase.
As discussed in 1.3 Alternative Dispute Resolution (ADR), the English courts encourage ADR before and during litigation. Disputes may be resolved through a variety of different ADR mechanisms including, but not limited to, arbitration, adjudication and mediation. If disputes cannot be resolved via ADR, then they will be heard in the courts.
Mediation is one of the most commonly used means of resolving insurance disputes, as it provides considerable flexibility and confidentiality and is less expensive than court proceedings.
The most commonly used resolution mechanism for reinsurance contract coverage disputes is arbitration. This is because reinsurance contracts commonly contain arbitration clauses, which will typically be upheld by the English courts.
If the law views the insured party as a consumer, the position is different.
Consumers (and small businesses and certain charities and trusts) may take complaints to the Financial Ombudsman Service (FOS), which was established under the Financial Services and Markets Act 2000 (FSMA).
The FOS may make awards of up to GBP150,000. Complaints made to the FOS may be resolved far more quickly than disputes resolved by way of litigation, but the FOS is not bound by strict legal precedent, which means its decisions are difficult to predict. The FOS is also typically regarded by those in the insurance industry as a pro-consumer organisation.
The Third Parties (Rights against Insurers) Act 2010
The Third Parties (Rights against Insurers) Act 2010 (as amended) (the TP(RAI)A) permits a third party with a claim against an insured to bring proceedings directly against the insurer in the event of the insured’s insolvency. The act does not apply to reinsurance contracts.
The TP(RAI)A will specifically apply if:
Of particular note, the TP(RAI)A does not require the third party to have established liability prior to bringing proceedings against an insurer, although the third party may not enforce their rights against an insurer before liability is established. The TP(RAI)A also allows a third party that considers itself to have a right of action to obtain information about an insured’s contract of insurance from a party that it reasonably believes may possess such information, such as an employer or agent. A party that receives such a notice is required to provide as much information as they can within 28 days.
The Contracts (Rights of Third Parties) Act 1999
Under the Contracts (Rights of Third Parties) Act 1999 (the C(ROTP)A), third parties are permitted to benefit from contractual terms where they are identified by name or by class in the insurance contract. This may take the form of reference to a subcontractor by a contractor in a construction all-risks insurance policy or an employer taking out personal accident/injury policies for the benefit of employees, for example. It is possible to exclude the C(ROTP)A entirely from a contract of insurance.
The manner in which the interest of a third party is noted in the policy will affect whether a benefit is conferred on the third party, or whether the third party is given a right of enforcement. It should also be noted that any third-party claim has the potential to be defeated by any defence available to the insurer against an insured claim. A notable example would be a breach of the duty of fair presentation.
There is no concept of bad faith under English law.
As noted in 4.1 Implied Terms, under Section 13A of the IA 2015, damages can be awarded to insureds for late payment of claims. Section 13A was added to the IA 2015 by the Enterprise Act 2016 and implies a term into all consumer and non-consumer insurance contracts that the insurer must pay any sums due to the insured in respect of a claim within a "reasonable time".
The term "reasonable time" is not defined and is therefore decided on a case-by-case basis having regard to the relevant circumstances, including but not limited to the type of insurance, the complexity and/or value of the claim, compliance with relevant statutory or regulatory rules or guidance, and factors outside the insurer’s control.
Section 13A states that a reasonable time will include a reasonable time to investigate and assess the claim. If the insurer shows that there were reasonable grounds for disputing the claim, the insurer does not breach the term implied merely by failing to pay the claim (or the affected part of it) while the dispute is continuing. However, the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when.
Damages can be awarded for breaches of Section 13A, in addition to the insured’s right to enforce payment of the sums due and the right to interest on those sums. A claim under Section 13A must be brought within one year of payment by the insurer.
Insurance brokers are independent agents appointed by an insured. Their primary function is to obtain agreement and understanding between an insured and an insurer in order to place appropriate insurance cover. In accordance with the principles of agency, it is generally accepted that a broker acts as the agent of the insured. Therefore, in theory, an insured is bound by representations made by its broker. However, in practice, it can be more complicated.
In the case of consumers, Section 9 and Schedule 2 of CIDRA specifically outline the circumstances in which certain classes of person (including brokers) can be regarded as agents of an insured.
Insurers commonly use delegated authority arrangements to outsource certain functions to third parties, including underwriting and claims handling activities. While it is possible that this type of arrangement may give rise to litigated issues or disputes, this is a relatively rare occurrence.
There are many types of insurance policies in England and Wales which include cover for the costs of funding an insured’s defence. Notably, such cover is usually provided under liability insurance policies, such as employers’ liability and public liability policies. This compulsory insurance routinely funds the defence of insured businesses for claims of bodily injury or disease sustained by their employees in the course of their employment. Similarly, professional liability cover also provides defence costs cover for any claims brought against professionals.
Defence costs cover is often compulsory for certain types of insured business or professional. For that reason, there are unlikely to be significant changes in the prevalence of defence costs cover under liability policies. However, as claims handling processes continue to be streamlined and AI becomes more advanced, it is possible that new entrants to the insurance market will find ways to profit from underwriting defence costs cover.
Significant efforts have been made by the UK government to streamline the litigation process in recent years. Notable examples include the following.
Despite attempts to reduce the time and cost of litigation, the litigation process often remains time-consuming and expensive. It is expected that the process of streamlining civil litigation will continue in future, in an attempt to widen access to justice. The increasing move towards technology by the courts – hastened by the COVID-19 pandemic – is also likely to result in the continued reduction of litigation costs in the longer term.
Protection against costs risks is readily available and legal expense insurance is very common in England and Wales. There are two types of legal expense insurance, namely "before the event" and "after the event". Due to after the event insurance being purchased when legal action is already contemplated, it tends to be offered as a standalone policy.
In circumstances where an insurer has paid out money to an insured for a loss under a policy, it accrues subrogation rights to pursue an action, in the name of the insured, to recover some or all of the loss from the third party who caused or contributed to the original loss.
The right of subrogation is based on the principle of indemnity, which prevents the insured from being over-compensated by recovering sums from both its insurer and a culpable third party. Consequently, the right will not arise until the insurer has paid the insured the indemnity under the policy.
Subrogation claims must be pursued in the name of the insured. Subrogation rights arise under common law and any recoveries are subject to an established order of priority between the insured and the insurer in the event that there are both insured and uninsured losses. Subrogation rights (often re-stating the common law position) are commonly set out in insurance policies.
The impact of COVID-19 on litigation, including insurance-related litigation, has been surprisingly contained given the scale of the pandemic. However, following the mandated closure of different types of businesses to combat the spread of COVID-19, there have been a significant number of business interruption (BI) insurance claims which, in turn, have attracted regulatory intervention and test case proceedings that reached the Supreme Court – see 7.3 Coverage Issues and Test Cases.
Restrictions on business and personal travel also saw an increase in insurance claims under certain types of travel policies.
By contrast, the government lockdown measures implemented in 2020 and 2021 resulted in lower volumes of traffic on the roads, which led to a significant decline in the number of motor claims.
It is likely that insurance litigation will continue to experience the effects of COVID-19 over the next 12 months and beyond. The FCA Test Case (see 7.3 Coverage Issues and Test Cases) has clarified certain policy coverage and causation issues under BI policies, meaning that these types of claims are likely to be largely resolved by the end of 2021. However, over the next 12 months, expect to see:
The government-mandated closure of certain categories of business to prevent the spread of COVID-19 resulted in a significant number of business interruption (BI) claims. The FCA, as the regulator with responsibility for insurance in the UK, initiated proceedings under the Financial Markets Test Case scheme (set out at Practice Direction 51M of the CPR) to obtain clarity for insurers and their policyholders concerning coverage under various sample BI policy wordings. It is estimated that the outcome of the FCA Test Case affects approximately 700 types of policy issued to over 370,000 policyholders.
The High Court held that certain of the sample policy wordings ("prevention of access" clauses) do not respond to nationally imposed restrictions due to the local nature of the cover provided.
However, the operation of certain other sample policy wordings containing "disease" clauses and "hybrid" clauses was the subject of an appeal to the Supreme Court. In January 2021, the Supreme Court held that these policies are triggered by nationally imposed restrictions on businesses and, in reaching that decision, the Supreme Court overturned the previous law that the "but for" test is a necessary but insufficient means of proving causation in the insurance context when there are multiple causes of an insured loss.
It is clear that the COVID-19 pandemic has impacted insurers’ appetite for risk – in the short term, at least. Given the ongoing effects of the pandemic and the repeated implementation of "lockdowns" as a means of controlling the spread of COVID-19, many insurance policies have been amended to include blanket exclusion clauses for COVID-19, and these are now a common feature of most travel, health and BI policies.
In time, the appetite for underwriting pandemic-related risks is likely to grow, as insurers are able to price such risks more accurately and repair their balance sheets from the COVID-19 related losses incurred in 2020. However, for now, the uncertainty surrounding the government response to the pandemic means that the appetite for such risks is limited.
Climate change risk is an increasingly significant area of concern for insurers, who are expecting climate-related losses to grow.
The number of climate change liability claims in the UK (and other jurisdictions including the US) is likely to increase over the coming decade, as climate science improves and extreme weather events become more frequent, resulting in potentially large liabilities for the London insurance market and posing new challenges for the insurability of climate-related events.
To the extent that climate-related risks are covered, insurers are beginning to consider increased premiums to match the increased risk in underwriting property policies in particular. It is also becoming much more common for insurers to include climate change-related exclusion clauses within insurance policies. Insurers are also increasingly including clauses that mandate compliance by their insureds with obligations to improve environmental and sustainability standards. Many insurers are also re-considering their underwriting decisions and are no longer taking on new businesses that are not sustainable.
Physical risks from extreme weather conditions are already causing an increase in insurance claims. Insurers are facing claims for property damage caused by flooding, wildfires and drought, as well as business interruption claims, supply-chain cover claims, and health impairment claims, such as respiratory diseases from air pollution.
As climate science has developed in recent years to enable the relationship between emissions and climatic events to be quantified, there has been a recent wave of climate change litigation in the US and in other jurisdictions. In the US claims to date, counties, major cities and states have sought multibillion-dollar compensation from energy companies for the rising costs of taking action to mitigate the effects of climate change (including the cost of making improvements to flood defences, employing additional firefighters to tackle wildfires, and upgrading municipal drainage). In addition to allegations of public nuisance, some claims against energy companies have been presented as product liability claims on the basis that petroleum is a “defective product”. This has enabled the argument that the claims attract cover under the defendant energy companies’ excess of loss liability insurance, much of which is underwritten in the London insurance market. In the UK, following the Supreme Court decision in Okpabi v Royal Dutch Shell and another (2021), it is more likely that UK companies with subsidiaries abroad will face action in the UK courts for the activities of their foreign subsidiaries.
One of the most significant developments in England and Wales that has affected insurance coverage is Brexit, which has seen various UK insurers establishing subsidiaries in the EU. It has been reported that 35 UK insurers founded branches in EU member states in response to Brexit and an estimated 29 million insurance contracts had, by the end of the Brexit Transition Period on 31 December 2020, been transferred to new offices.
In future, this may result in a greater number of insurance coverage disputes in the courts of EU member states, although it is expected that the English courts will continue to retain their dominance as the preferred European destination for insurance coverage disputes.