Insurance Contracts CP - Law Reform Commission

not only an economic purpose, but also a social purpose. It facilitates commercial enterprise
and provides protection to those who suffer harm. By increasing the possible exposure on the
part of the insurers may well render risk management and reserving policies problematic and
make the cost of insurance inordinately high.
Secondly, the insurer is not in fact guilty of a breach of duty or a wrongdoing in causing the
insured loss; it has merely agreed to bear the risk of that loss. It would be inappropriate to
treat the insurer‘s ―breach‖ in the same way as a party guilty of a breach of duty. Thirdly, the
consequential losses are not those which the insurer has agreed to bear under the policy. For
example, if a property insurer agrees to indemnify the assured for physical loss of a factory, the
financial losses associated with the assured being deprived of the use of that factory does not
fall within the insurer‘s remit. Indeed, such losses are specifically insurable. Fourthly, it is
unlikely that such consequential losses will satisfy the rules of remoteness, as the additional
losses likely to be borne by the assured are based on the latter‘s impecuniosity, which in many
cases might not be reasonably foreseeable or in the contemplation of the parties when the
contact of insurance is concluded.‖ 96
8.60 The first argument ignores the causal link between late payment of the claim and subsequent
damage to the ―commercial enterprise‖, or individual policyholder, as being a sine qua non to recovery of
damages, while insurance costs will only increase if insurers process claims inefficiently – these
increased costs can be avoided by effective claims handling. The second objection, in Ireland, is beside
the point because the law will change to impose a duty upon the insurer as a result of the Commission‘s
provisional recommendations. Eggers‘ third objection has some merit but it is the existence of the duty to
process claims with all reasonable speed, and the insurer‘s breach of it, that triggers this head of loss.
The fourth objection, that damages might not in fact be awarded, the Commission consider to be an
argument in favour of making this rather modest adjustment to the law.
8.61 Eggers puts forward a number of arguments that support the view that an insurer, absent
fraud, should not be liable for consequential losses. While these are persuasive in some respects it
should be noted that Eggers favours a limited duty on the insurer in respect of claims handling because
he believes that the duty of good faith is, or should be, the basis of an insured‘s duty not to make
fraudulent claims. Indeed, Eggers takes the view that an insurer will be liable if the insurer makes a
knowing misrepresentation of fact, and probably of law, in their handling of a claim; this will be a breach of
the duty of utmost good faith. Eggers is no doubt correct in making the argument that a fraudulent
misrepresentation of this kind is actionable, but it is difficult to see why this forms part of the law on
utmost good faith in insurance law, as distinct from actionable misrepresentation in tort.
8.62 In any event, the question of whether consequential losses should be recoverable and the
basis of liability are distinct issues. Certainly, if the action is established via fraudulent misrepresentation
then all consequential losses will be recoverable as the existing rules on remoteness of damage in deceit
now stand. In the case of an insured being able to establish that the claim was not processed by
reference to a duty to take all reasonable steps to settle a claim promptly, for example, 97 then such a duty,
if cast as contractual, will attract first limb Hadley v Baxendale damages which can of course involve an
element of lost profits in any case, and it would require communication of special circumstances for the
damages to engage ―second limb‖ Hadley v Baxendale damages. The Commission think that the
exposure of insurers to claims for consequential loss, or indeed any kind of loss, is of itself a reason not
to retain the existing law if it is unsatisfactory.
I
Has an insurer a right to damages against the insured?
8.63 Oblique authority for the view that an admission of liability given by an insured, to the prejudice
of the insurer, can give rise to liability in damages, can be found in Car and General Insurance
96
97
Ibid
Eg Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] EWCA Civ 290; GB Gas Holdings v
Accenture UK Ltd [2010] EWCA Civ 912
178