Insurance Contracts CP - Law Reform Commission

10.38 The decision of Hirst J in The Italia Express (No.2) 37 applied the reasoning in Lips (a case on
demurrage) to a case involving payments of insurance withheld whilst investigating suspected fraud. In
Sprung v Royal Insurance 38 the Court of Appeal rejected the argument that an insured had a claim in
damages arising out of the insurer‘s failure to pay out promptly on a policy, the insurer, if in breach of
contract, being answerable only to the insured by way of interest. Professor Merkin summarises English
law as having adopted the position that ―an assured who is paid late, and who in the meantime loses his
business for want of funds to reinstate his premises, has no additional remedy against his insurers.‖ 39
While this is generally the accepted position, there are some decisions that provide some prospect of
change. Even Sprung itself reflects a degree of unease with a rule of law that displaces the general
application of Hadley v Baxendale. Evans LJ in Sprung said that while the Italian Express states that late
or non payment per se is not actionable if, on the other hand:
―the plaintiff is able to show that the defendants have committed some other and separate
breach of contract, and if specifically he can show that the defendants were in breach by failing
to accept liability or to approve of the reinstatement at an early stage, then the recovery of
damages would not be restricted to the discretionary award of interest in the other case.‖ 40
10.39 In Tonkin v UK Insurance Ltd 41 Judge Coulson QC approved both the general principle and the
exception sketched out by Evans LJ in Sprung. In Tonkin the plaintiff sought to have damages assessed
by reference to the increased cost of reinstatement work that resulted from the insurer‘s failure to pay out
promptly on the claim, the insurers defending the action by arguing that the insured had failed to provide
proper information to support the claim. While on the facts the insured‘s claim was extremely weak,
Tonkin does open up the possibility of some movement on this point in English law. Rix LJ, in Mandrake
Holdings Ltd v Countywide Assured Group 42 opined that this matter was a matter for review by the House
of Lords but, as the Law Commission‘s Issues Paper No.6 indicates, the House of Lords did not grant
leave to appeal to the House. Issues Paper No.6 points up the extent to which the English approach is
somewhat isolated and in need of reform.
10.40 In Ireland, the only real guidance on this point is somewhat oblique. Kerry Tree (Technology)
Ltd v Sun Alliance and London Insurance 43 concerned a claim brought against an insurer involving
allegations that the insurer had caused a business to fail when imposing unreasonable duties to mitigate
loss before setting an insurance claim. The insurers put forward the argument that Sprung is authority for
the proposition that a claim for damages for late payment of damages is not a claim know to the law and
Ms Justice Carroll affirmed that such a proposition is part of Irish law.
10.41 The Commission would support the view that Italia Express and Sprung should not be followed
and that the law needs to be changed so as to reflect mainstream reasoning on remoteness of damage in
contract law as well as emerging principles of restitution. In this context however, the Commission
suggests that Article 6:103 and 6:105 of the Principles of European Contract Law should form a part of
Irish law. 44
10.42 The Commission provisionally recommends that any damages awarded to an insured arising
from the insurer‟s failure to comply with the proposed post-contractual duties of the insurer should reflect:
(a) general principles of damages in contract law, namely whether the loss is a reasonably foreseeable
37
38
39
40
41
42
43
44
[1992] 2 Lloyd‘s Rep. 281
[1999] 1 Lloyd‘s Rep. 111.
Merkin, ―Reforming Insurance Law: is there a case for Reverse Transportation?”, paragraph 8.12
[1999] 1 Lloyd‘s Rep. 111 at 116
[2007] Lloyd‘s Rep IR 283.
[2005] EWCA Civ 840
[2001] IEHC 144.
The Law Commissions support the view that damages should be recoverable for late payment of a claim and
provide a seven stage test which an insured must satisfiy to successfully claim such damages. See, Joint
Consultation Paper 2011: Insurance Contract Law: Post Contactual Duties and Other Issues.
205