Limitation of action considerations in respect of U.K. insurers.

• Author: King, Ronald C.

The London insurance market, both corporate and Lloyd's of London, has an extensive participation as reinsurer of primary business underwritten throughout the world. The question of the choice of security to stand behind the primary underwriters has proved to be the source of considerable litigation in the London Commercial Court as business placed in or through London by London brokers has been defaulted on.

The highly publicized failure of the H.S. Weavers pool has brought home, particularly to the North American market, the reality of the failure of United Kingdom insurers. It has become apparent that authorization by the United Kingdom Department of Trade and Industry is no guarantee that an insurer will prove able to meet claims when they fall due. In addition to undergoing liquidations, a number of U.K. insurers have entered into schemes of arrangement with their creditors.

The purpose of this article is to highlight a topic that has yet to yield much, if any, considered judicial analysis in insurance cases but is, quite literally, a time bomb threatening the recoverability of balances due under reinsurances placed in London.

Limitation Defences

1. Tradition Eroding

   Insurers and their advisors are accustomed to debating vigorously the validity of policyholders' claims and to protecting the interests of insurers by contesting extravagant assertions as to the extent of cover or the quantification of claims. The bread and butter of many defence counsel derives from advising clients in just such disputes. The insurance industry is not, however, always as astute and timely in advancing its own claims for recovery from reinsurers. Defences based on available periods of limitation usually have not been taken by insurers in the London market, and some participants in the market feel that it is a custom not to assert them.

   Time-bar defences, however, are being encountered from reinsurers in London with increasing frequency, and no one who seeks to enforce rights under insurance or reinsurance agreements can afford to ignore these defences. It may be helpful to outline the principal provisions of the U.K.'s limitation statutes that apply in the context of claims under insurance and reinsurance contracts.

2. The Statute

   Under a policy of reinsurance governed by English law, where the parties have agreed to the jurisdiction of the English courts for the resolution of disputes arising between them, a reinsured must take action within six years following the accrual of the cause of action in order to recover amounts due under the contract (Section 5 of the Limitation Act 1980).

   It is vital to the interests of the reinsured to identify and guard against the expiry of the time for taking action. Various events may lull the reinsured into a false sense of security, leading it to sleep on its rights, only awakening when the claims have become time-barred.

   1. When Time Runs

      The basic rule concerning the commencement of the six-year period is that the right of action accrues at the time breach occurs, whether or not any damage (beyond the purely nominal) has been suffered by the plaintiff at that time. There is no provision for delaying the commencement of the time, even if the breach is not reasonably discoverable until a later date.

      The question of what event gives rise to the accrual of a cause of action in English law under a policy of reinsurance is not free from argument. The most exhaustive analysis of accruals of causes of action under contracts of indemnity, of which insurance agreements are an example, is found in the decision of the High Court in Telfair Shipping Corp. v. Interessa Carriers S.A.,(1) which was approved by the Court of Appeal in The Fanti and Padre Island.(2)

      Telfair was a charter-party case and enunciated the uncontentious proposition that in a contract for an indemnity, the date of accrual of the cause of action depends on the terms of the indemnity itself. The High Court went on to say that if the indemnity is expressed to be against liability, then the cause of action will accrue when the liability is incurred. In other cases the cause of action normally will accrue when the underlying liability is established and ascertained.

      It will be appreciated that in the context of an event giving rise to a claim under an insurance policy, in respect of which the insurer seeks indemnity from the reinsurer, there may be a considerable passage of time between the happening of the event giving rise to the loss and the settlement or agreement of compensation by the primary insurer, or adjudication by a court, of the amount due the insured. The latter events are the ascertainment of liability, as opposed to the incurring of liability to the assured under the primary insurance policy, which event will have occurred much earlier.

      An earlier decision of the High Court in an insurance context, however, leaves a residual area of concern as to how the court will approach the issue. Chandris v. Argo Insurance Co.(3) concerned general average losses and particular average losses under the Marine Insurance Act 1906. In accordance with market practice, average adjusters were appointed to determine the proportions in...