When Interest Can Be Obtained On Insurance Claims Paid Late

Quadra Commodities SA (“Quadra”) v XL Insurance Co [2023] EWCA Civ 432 (Court of Appeal)

This is believed to be the first reported case on the statutory right to claim interest on the late payment of an insurance claim.  The issue arose in the manner described below.

The issues in the case

The facts – The case involved a grain commodities fraud. The Ukrainian group Agroinvest obtained grain, corn and sunflower seeds from local farmers, which it on-sold to international markets.  When the group made a sale, the buyer would pay 80% of the purchase price and Agroinvest would issue the buyer with a receipt for delivery of the goods into its warehouses.  Pending physical delivery to the buyer at the seaport, payment of the final 20% and transfer of title, buyers could send surveyors periodically to check and sample the goods.  However, the goods as thus sold were not kept separate by Agroinvest, but stored in bulk with other quantities of the same commodity.

One such purchasing trader was Quadra, who declared its purchases from Agroinvest under its marine cargo open policy, which gave cover against misappropriation, amongst other perils. 

Agroinvest’s fraud consisted of selling the same goods to numerous different buyers.  Obviously, when it came to delivery against the warehouse receipts, there was not enough of the commodity to go round. Agroinvest collapsed, at which point the goods that Quadra had purchased were nowhere to be found.  Quadra submitted a claim under its insurance.

The terms of Quadra’s insurance – As to the subject matter of this insurance, Quadra’s “interest” was described as being on,

“goods … and/or … interest of every description incidental to the business of the Assured … consisting principally of but not limited to cereals, grain … and food products in  container, bulk and/or break-bulk”.

It is possible to insure against perils adversely affecting a marine “adventure” such as the storage and subsequent carriage of goods by sea, and also against the loss of profits.  However, the Commercial Court held that, in the present case, the subject matter of the insurance that Quadra had obtained was simply goods in which Quadra had an insurable interest.  

Insurers’ central defence was that, because of the facts of the case, Quadra had no insurable interest in the subject matter insured.  The court therefore had to consider the relationship between the subject matter of the insurance (damage to, or loss of, goods) and any insurable interest that Quadra had in that risk.

The court’s decision – The court accepted that the policy would not cover a situation where no goods had existed (because the goods could not then be lost or damaged).  Nor did Quadra have any proprietary interest in the goods. However, the court did accept that there would be coverage for misappropriation if (a) there had been goods (b) in which Quadra had an insurable interest.

Even though the evidence partly depended on documentation issued by, and warehouse access controlled by, the fraudulent Agroinvest,  the court accepted that Quadra had established, on a balance of probabilities, that goods corresponding to the cargoes they had purchased were sufficiently identified as physically present at the time the warehouse receipts were issued to Quadra. 

As to insurable interest, the court held that Quadra had an immediate right to possession of the goods, the insurers not having established that any other party had any rights that would oust Quadra’s rights. The court held further that, as Quadra had rights derivable from “a contract about the property”, on old English authority Quadra did have an insurable interest in the goods.  The court was fortified in this conclusion by a US court decision, itself based on English law principles, to the effect that part payment of the purchase price in respect of unascertained goods gave rise to an insurable interest even though the insured did not have a proprietary interest in the goods. Quadra therefore succeeded in its insurance claim (this decision being upheld on appeal).

The claim for interest

Pursuant to s.13A Insurance Act 2015, it is an implied term of every contract of insurance that the insurer must pay any sums due in respect of a claim within a reasonable time.  The section makes clear that a reasonable time includes a reasonable time to investigate and assess the claim. 

Section 13A states that what is reasonable depends on the circumstances, but (a) the type of insurance, (b) the size and complexity of the claim, (c) compliance with statutory or regulatory rules and guidance and (d) factors outside the insurer’s control, may need to be taken into account.  If the insurer shows that there were reasonable grounds for disputing the claim, the insurer does not breach the implied term by failing to pay the claim while the dispute is continuing, but the insurer’s conduct may be relevant.

In the present case, there were some 15 months between the insured giving notice of loss and the commencement of proceedings. Quadra contended that the insurer did not pay sums due to it within a reasonable time, asserting that the insurer’s conduct of the claim was wholly unreasonable and its investigations either unnecessary or unnecessarily slow.

The Commercial Court approached Quadra’ claim for interest by considering two separate questions; (1) What was a reasonable time within which the insurers should have paid the claim? (2) Were there reasonable grounds for disputing the claim, the insurer’s conduct being relevant to this question?

As to the first question, the court held that the burden of proof was on the insured to show that the insurers had taken longer than a reasonable time.  In the present case, Quadra offered no expert or comparative evidence. Therefore, the court considered the factors listed alphabetically above. As to (a) the type of insurance was marine cargo.  Claims under such covers could involve “very various factual patterns and differing difficulties of investigation”.  As to (b), the size and complexity of this claim was substantial, but not exceptional.  The fraud, the uncertainty as to what happened at the warehouse and issues concerning the governing law of the insurance were all significant complicating factors.  There were no relevant circumstances to consider under factor (c) but as to (d), a number of factors had been outside the insurer’s control, in particular certain local proceedings and the recovery effort in Ukraine.  The court concluded that a reasonable time to investigate, evaluate and pay the claim was ‘about a year from the notice of loss’, assuming no reasonable grounds for disputing the claim.

As to the second question, the court held that the insurers did have reasonable grounds for disputing the claim.  The fact that the court had found the grounds to be wrong did not indicate that the grounds were not reasonable.

Quadra argued that the issue of the insurers’ conduct should be considered in its own right, and that the insurers’ handling of the claim was unreasonable and too slow.  However, the court considered that the insurers’ conduct, for example in the investigations that they made, should not be regarded as a relevant factor because it could not sensibly be distinguished from their grounds, considered reasonable, for disputing the claim.  Therefore, the Commercial Court held that Quadra was not entitled to interest.  This decision was not the subject of any appeal.

For further information contact Wendy Miles, Chris Earl or William Sturge at Lovetts Solicitors.

23 June 2023