Page 226 - M97TB9_2018-19_[low-res]_F2F_Neat2

8/18 M97/February 2018 Reinsurance

D3 Arbitration
Arbitration agreements are self-contained and ancillary to the commercial contracts to which they relate.
An express provision is required. Similarly, it is not possible to use general words of incorporation to
incorporate the arbitration agreement in an underlying contract into the overlying contract (see
section A1B, specifically Pine Top v. Unione Italiana Anglo-Saxon Re (1987)).

D4 Irrelevant terms

Section 11 of the Insurance Act 2015 provides an example of a term implied by statute law. The Act
Reinsurers cannot
rely on a breach of a prohibits reinsurers from relying on a breach of a term that is entirely unconnected to the loss which
term that is entirely actually occurred in order to exclude, limit or otherwise avoid liability for that loss. For example, a
unconnected to
the loss facultative reinsurer of an ‘all risks’ property policy may not use a breach of a burglar alarm warranty to
disclaim liability for a loss caused by a fire. This is because the breach was not, on the facts, relevant to
the loss.

This ruling applies to any express or implied term which, if complied with, would tend to reduce the
risk of:
• a particular kind of loss;
• a loss at a particular location; or
• a loss at a particular time.
It does not, however, apply to any term which defines the ‘risk as a whole’; the Law Commissions have
It does not apply to
any term which suggested that this may include terms which define the geographical area in which a loss must occur or
defines the ‘risk as the age, identity, qualifications or experience of the operator of a vehicle, vessel or aircraft. It remains to
a whole’
be seen quite how this phrase will be interpreted by the courts.
Importantly, the reinsured who uses this defence must be able to demonstrate ‘that the non-compliance
with the term could not have increased the risk of the loss which actually occurred in the circumstances
in which it occurred.’
Therefore, in the case of a theft where a burglar alarm has not sounded because it was in need of repair, Reference copy for CII Face to Face Training
but the warranty states that it must sound and be in full working order, the reinsured would not be able
to satisfy this requirement. This is because the breach obviously caused the loss which actually occurred
in the circumstances in which it occurred.

D5 Late payments

Section 13(A) of the Insurance Act 2015, as introduced by the Enterprise Act 2016 on 4 May 2016,
provides another example of a term implied by statute law. Under this section, if the (re)insured makes a
claim under the contract, the (re)insurer must pay any sums due in respect of the claim within a
reasonable time. This applies to all reinsurance contracts entered into on or after 4 May 2017 which are
governed by the laws of England and Wales, Scotland or Northern Ireland.
8 It is stated that a ‘reasonable time’ comprises a reasonable time to investigate and assess the claim. The
Chapter matters that may be taken into account are non-exhaustive, but examples are listed such as the type of

(re)insurance, the size and complexity of the claim, and compliance with any relevant statutory or
regulatory rules or guidance. There is also a defence where a (re)insurer has reasonable grounds for
disputing the validity or value of the claim.
If breached, the (re)insured is entitled to recover contractual damages which, in most cases, are
restricted to compound interest.
The term was introduced in part to address the unfairness highlighted in Sprung v. Royal Insurance
(1997). After Mr Sprung’s business was vandalised, his insurance claim was rejected and, as he was
unable to pay for repairs, his business collapsed. Mr Sprung proceeded to successfully sue the insurers,
but his indemnity did not include a sum to recompense him for the loss of his business because, at that
time, there was no right to damages for late payment.
It is permissible to contract out of these provisions, but not in respect of deliberate or reckless breaches
of the implied term. Note that there is a one-year-limitation period within which to bring an action,
commencing from the date at which full payment of the sums due under the contract is made.

Reinforce
Before you move on, make sure that you understand the difference between express and implied terms and how they
apply in reinsurance contracts.