FOUR NEW SQUARE LINCOLN’S INN What if insurers cause additional business interruption losses and additional damage? Graham Eklund QC FOUR NEW SQUARE LINCOLN’S INN

FOUR NEW SQUARE LINCOLN’S INN Insured’s right to an indemnity. What does this mean in law and what should it mean in practice? 4 New Square 2

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 3 Mutual duty of good faith – the insurer’s responsibility to restore the insured to the pre- incident position The Star Sea [2003] 1 AC 469 Goshawk v Tyser [2006] All ER Comm) 501.

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 4 Insurer’s obligations (if any) to investigate or deal with claim expeditiously without causing additional damage. Insurers can not act to put insured in breach of policy conditions. Ronne Holdings v RSA (December 1999)

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 5 Compare position if insurers or their agents caused additional physical damage. Right of action against one or both. Breach of duty of good faith or straightforward cause of action in negligence or breach of duty for causing damage

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 6 Damage may be worsened by delay/refusal to recognise liability to indemnify by worsening initial losses and prolonging losses. Just as the insurer requires immediate notice of a loss or circumstance (the rationale being investigation can start immediately), so the insured requires immediate investigation and consideration of the claim.

FOUR NEW SQUARE LINCOLN’S INN Increased cost of working cover – contractual duty to make money available under such cover ASAP. Voluntary (in the sense that the insured does not have to take out the cover), but indicates the importance of dealing with the claim and losses as soon as possible to get the insured going. 7

FOUR NEW SQUARE LINCOLN’S INN Duty of the insured to mitigate, with or without the benefit of increased cost of working cover? Reasonable measures condition to minimise or avert loss. Absent an express provision in the insurance contract to that effect, doubtful if such a term would be implied. 4 New Square 8

FOUR NEW SQUARE LINCOLN’S INN Insured’s duty to mitigate Old law on impecuniosity - The Liesbosch [1933] 1 AC 449. New law - Langden v O’Connor [2004] Lloyd’s Rep IR 315 Unlikely that the insured would be prevented from recovering his full loss because has been unable to mitigate loss due to impecuniosity 4 New Square 9

FOUR NEW SQUARE LINCOLN’S INN Can insurers be liable for additional losses due to their delay/wrongful conduct in investigating a claim and providing an appropriate indemnity? 4 New Square 10

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 11 Sprung v Royal Insurance An insurer can not be liable for the consequential loss suffered by an insured if the insurer has delayed admitting liability or making a payment. Legal basis – No right of action for the late payment of damages A “win/win” for insurers

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 12 Facts – malicious damage to machinery on 5/6 April By 31 October 1986, no admission of liability and a very modest payment only. Little interest in investigation Proceedings settled by insurer paying £30,000 plus interest and costs

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 13 Insured lost the opportunity of selling his business. Claimed £200,000, but valued by the Court at £75,000 Insured blameless except that he had not repaired his machinery – CA – that was his decision, even if he could not afford to do so Impecuniosity caused his loss!

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 14 Sprung’s business did not survive – unlikely the decision will survive Clear moral and commercial distaste of CA that insurers could behave as they did without risk – but not fully argued in CA Implied obligation to deal with matter within reasonable time Impecuniosity effectively a bar – insurer’s conduct not the cause

FOUR NEW SQUARE LINCOLN’S INN 4 New Square 15 Impecuniosity argument is false, because there could never be a claim If repairs are undertaken – no loss If repairs not undertaken – insured’s fault HOL has recognised impecuniosity may not be a bar to a claim. Lagden v O’Connor [2004] 1 AC 1067

FOUR NEW SQUARE LINCOLN’S INN Evans LJ – “If as a matter of law the [insured] is able to show that the [insurer] has committed some other and separate breach of contract, and if specifically he can show the insurers were in breach by failing to accept liability or to approve reinstatement at an early stage, then the recovery of damages would not then be restricted to the discretionary award of interest.” 4 New Square 16

FOUR NEW SQUARE LINCOLN’S INN Breach of duty of utmost good faith Applies to insurers in post contract circumstances – including after a loss. See The Star Sea Causes of action probably available which not relied on in Sprung and not argued fully Law Commission considering No longer assume “Sprung” will survive – it will probably go 4 New Square 17

FOUR NEW SQUARE LINCOLN’S INN Conclusion: Likely that insurers (and their agents) will be subject to claims for additional losses and damages if there has been a breach of an implied term to act fairly or reasonably and/or a breach of the duty of utmost good faith. 4 New Square 18