Insurance claims in trade and project finance projects – how to maximise your chances of recovery

Presentation by Marian Boyle

Sullivan & Worcester UK LLP

26 April 2018

Marian Boyle Partner T +44 (0)20 7448 1004 mboyle@sandw.com

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Introduction Key role of insurance in bank’s credit support package

Contrast › claims by policyholder/insured with › claims made by borrowers on their policies, in which bank has interest

What strategies can be employed to maximise chances of successful claim payment?

How can “interested banks” influence the handling of their borrowers’ claims process?

Health warnings › English law polices and practice only › Perspective

Issues that might arise in a claims scenario – should inform any policy review

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Trigger for Claims Process

Trigger will be determined by the policy wording

Vital to read the policy!

Physical loss or damage policy (PLD)

Comprehensive Non-Payment Insurance Policy (NPI)

Different considerations depending on whether the bank is named as insured -v- bank taking an interest sharing in/sharing policies taken out by borrower

Policy may require notification of potential loss circumstances, regardless of whether a claim is imminent

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Notification/Reporting Requirements NPI policies or those that insure country/political risk likely to

contain reporting requirements independent of claims process › e.g. “the Insured shall notify Underwriters promptly upon becoming aware of any

circumstances which are likely to give rise to a Loss”

What must be notified? › Depends on construction of the clause › Any relevant policy definitions

For PLD risks, likely to be less difficult to determine whether loss or damage has occurred

For NPI policies, rumours of borrower’s cash flow difficulties may not necessarily trigger a notification requirement – depends on the drafting

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Notification/Reporting Requirements (continued)

If the policy is silent as to notification of circumstances that might give rise to loss, there is no obligation to notify insurers that risk of loss may have increased

Not all wordings are the same – is notification required: › “immediately”; › “as soon as possible” or › within specific time period

Why do insurers want to have early notification?

What information is required?

Who must give notice? › Question of construction of the policy › Does it provide that the insured is to give notice? › If not, is it a reasonable interpretation of the wording that notice can be given by

a bank with an interest in the policy?

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Is there a Duty to Mitigate Potential Claims Any contractual requirements?

NPI policies often require the insured to take all reasonable measures/act with reasonable due diligence to prevent or minimise a loss or a potential loss

Does policy confer a right on insurers to be consulted in relation to mitigation steps?

Do insurers have right of veto over policyholders’ discussions?

Are insurers able to insist on particular course of action?

All of the above depend on the proper construction of the Policy

Absent very clear language, this type of contractual discretion must be exercised by the insurers in good faith for the purpose conferred

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Is there a Duty to Mitigate Potential Claims (continued)

Statutory duty to mitigate in marine insurance – Section 78(4) of MIA 1906 provides: › “It is the duty of the assured and its agents in all cases to take such measures as

may be reasonable for the purposes of averting or minimising a loss”

For non-marine insurance, absent any contractual requirements, probably no general duty to mitigate a potential loss

Danger area is the effect of proximate cause of loss

Could it be argued that the proximate cause of loss is not the insured peril, but the policyholder’s failure to take obvious steps to minimise the loss in circumstances where any prudent uninsured would have done so?

For interested banks relying on a customer’s policy, are there contractual rights to control/direct the insured?

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How to Make the Claim Make use of the invaluable expertise of the broker

Generally communications with underwriters take place via the insured’s agent, the placing broker › What does the policy provide › Check notice clauses

NPI policies often incorporate a template notice of claim/proof of loss: › Name of insured, obligor and broker › Policy number, policy period and date premium paid › Summary of transactions insured e.g. bilateral facility between bank and obligor › Amounts claimed - less any recoveries received during waiting period › Description of documentation attached › Certification/declaration

Interested banks – do you have contractual right to be involved in/influence the claims process?

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What does an Insured Need to Prove The policy may specify the degree of proof required

› e.g: “Burden of proving a Loss has occurred shall lie with the insured. The Insured shall……………………”

Policy may provide cover against losses caused “directly” or “indirectly by” [specified perils]

Regardless of class of insurance, insurer is only agreeing to indemnify against specified perils

Absent express wording as to the degree of connection required between the insured peril and the loss, courts will assume parties intended the doctrine of proximate cause should apply

Proximate cause: the effective or dominant cause of the loss (not necessarily the last event to occur in the chain of causation)

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What does an Insured Need to Prove (continued)

Loss has to be proved on the balance of probabilities

Is the fact in issue more likely to have occurred than not?

Inherent probability (or improbability) of an event can be taken into account

Absent, contrary provision, burden on insurer to prove: › A loss falls within the ambit of policy exclusion › There has been a breach of warranty › Failure to comply with condition precedent to liability › Breach of a [simple] condition

Interested banks: right to review in advance the proofs of loss/information provided to insurers?

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Who are the Claims Handlers? Straightforward/lower value claims, where one or two insurers,

likely to be handled by underwriters’ claims staff

For complex/higher value claims, or where risk subscribed by large number of insurers, loss adjusters often engaged

Loss adjuster’s role: › Review and investigate claim on insurer’s behalf › Advising insurers on legal matters, e.g. does the loss fall within the terms of the

policy; has there been any breach of duty/condition › Advising insurers on factual issues, e.g. is the quantum claim accurate; was there

any property damage limit referred to in the policy › Loss adjuster’s role to report to insurers

Loss adjuster’s involvement: legal professional privilege

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Sharing Information and Cooperating with Insurers Policies often impose an obligation on the insured to cooperate

with insurers in relation to claims, or circumstances which may give rise to claims

Absent contractual term › Insured must prove its loss › Common law has recognised that insurers cannot make unreasonable demands

for information

Claims cooperation/claims control clauses can take many forms

Generally “simple” conditions

In NPI policies, claims cooperation clause often includes obligation to disclose relevant documents/records

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Sharing Information and Cooperating with Insurers (continued)

N.B. although automatic avoidance remedy abolished by IA 2015, contracts of insurance are still contracts of utmost good faith

The good faith obligation should inform all dealings with Insurers in a claims context

NPI policies often also give insurers the right to inspect an insured’s records that are relevant to the claim

Difficulties created where documents have been obtained by the insured from third parties under the terms of a confidentiality agreement

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Insurers’ Claim Obligations Regulatory obligations – Financial Services and Markets Act 2000

Insurance: Conduct of Business Sourcebook ICOBS 8.1.1 requires an insurer to: › Handle claims promptly and fairly › Provide reasonable guidance to help a policyholder make a claim and

appropriate information on its progress › Not unreasonably reject a claim (including by terminating or avoiding a policy) › Settle claims promptly once settlement terms are agreed

Breach of regulatory duties only actionable by “private person” but should inform any insurer’s conduct in relation to any claim

Duty of good faith applies equally to insurers as to the insured

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Claims Assessment Process Reservation of rights by insurer: employed to prevent assertions

that insurers have waived the right to avoid or are estopped from relying upon a policy condition

ROR operates as “obstacle to finding an unequivocal communication of a decision to affirm the policy”

What is under investigation? › Does the loss fall within the scope of the policy? › Has there been any non-disclosure/misrepresentation pre-policy inception › Has there been a breach of condition precedent to liability? › Is the insured in breach of a policy warranty? › Has the loss been notified within the time limits specified (or statutory limitation

period)?

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Claims Assessment Process (continued)

What is under investigation: › Breach of policy conditions that would entitle insurers to reduce the loss (e.g.

duty to mitigate loss) › Is the quantum claimed supported by persuasive evidence? › Double insurance? › Under insurance for PLD claims, where value has been declared › What recoveries might be available to insurers post claim payment, in exercise of

their rights of subrogation? › Are any third parties liable to the insured in respect of the loss?

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Insurers’ Claim Payment Obligations NPI policies generally specify a strict timetable for payment of

claims

Absent any clear payment timetable in the policy, position depends on when the policy was entered into

For policies taken out before 4 May 2017, no general right to receive damages for late payment of an insurance claim and no implied term that claims would be met promptly

For insurance contracts entered into after 4 May 2017, Insurance Act Part 4A will apply

Implied term that if the insured makes a claim, insurer must pay claims within a “reasonable time”

Reasonable time includes affording insurers time to investigate and assess the claim

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Insurers’ Claim Payment Obligations (continued)

“Reasonableness” of the time taken by insurers depends on relevant circumstances but includes: › Type of insurance policy › Size and complexity of the claim › Compliance with any relevant statutory/regulatory rules and guidance › Factors outside the insurer’s control

If implied term is breached, right to claim damages for late payment of claim (in addition to right to enforce payment of the claim)

Implied term will not apply if there are reasonable grounds for disputing a claim (liability or quantum)

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Insurers’ Claim Payment Obligations (continued)

Obligation on insurer to prove there were reasonable grounds to dispute claim

“Conduct of the insurer” in handling the claim may be a relevant factor in deciding whether the implied term was breached

Damages claim subject to the usual rules on remoteness, foreseeability and mitigation of loss

Damages only available to the policyholder (not to a bank that might be relying on the insurance claim payment)

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Key Messages Read the policy wording!

Understand the legal landscape within which insurance policies operate

Monitor compliance with legal and contractual obligations, throughout life of the insurance contract

Ensure all relevant stakeholders are aware of the role of insurers and any contractual obligation to keep them informed

During the claims process be scrupulous, co-operative but prepared!

What if insurers still refuse to pay/unreasonably delay claims payment? › Get a good claims lawyer!

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Marian Boyle Partner

Marian Boyle is a partner in our London office and heads the UK insurance and disputes practices working closely with the firm’s established trade and export finance team offering advice on insurance, risk management and commercial dispute resolution.

With over 20 years' experience, Ms. Boyle advises banks, insurance brokers, investment funds, government agencies and corporates on commercial insurance arrangements which support structured trade, commodity and pre-export financing as well as corporate finance, energy, property, M&A and outsourcing transactions. She also drafts and interprets insurance policies and advises on the use of insurance by credit institutions and investments firms as credit risk mitigation for capital adequacy purposes under the Capital Requirements Regulation.

Marian’s contentious experience includes advising clients in relation to disputes arising from trade credit, professional negligence and transactional disputes. These disputes are often international in nature and result in large-scale, highly complex multi-party litigation and arbitrations.

Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ

T +44 (0)20 7448 1004 F +44 (0)20 7900 3472 mboyle@sandw.com

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Awards & Recognition TFR “Best Law Firm in Trade Finance”

Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards GTR “Best Law Firm”

Sullivan & Worcester UK LLP was top ranked firm in the Global Trade Review (GTR) Best Law Firm 2015 and 2016 polls The Legal 500 UK 2016

Geoffrey Wynne and Simon Cook are listed as Leading Lawyers and Sullivan & Worcester UK LLP was ranked in the following category in The Legal 500 UK:

› Trade Finance (Tier 1) Chambers UK 2017

Chambers UK ranked Sullivan & Worcester UK LLP, along with Geoffrey Wynne and Simon Cook, in the following area:

› Commodities: Trade Finance (UK-wide)

TFR Fellowship Award 2017

Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards

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