DLA Piper's Practical Guide for Claims Managers in 2022 Part 11: Limitation

Introduction

In this latest edition of our Practical Guide for Claims Managers in 2022, we consider the important issue of limitation of actions in insurance (sometimes referred to as time bar), including some perhaps less well-known applicable rules. In particular, this article focuses on:

1. The well-established general rules on limitation of actions.

2. Certain rules which Claims Managers should be aware of when presented with inward facing claims relating to:

• Property insurance.
• Liability insurance.
• Claims made directly against insurers under the Third Parties (Rights Against Insurers) Act 2010.
• Damages claims for late payment of insurance claims.

3. Rules which Claims Managers should be aware of when considering any outward recoveries, including in respect of:

• Contribution claims against other insurers.
• Claims against reinsurers.

4. Standstill/Tolling agreements entered into to preserve a cause of action and reduce the risk of a limitation defence being taken.

5. Time limits for FOS claims.

This article considers the position under English law. If you need to understand the position under a different system of governing law, please contact us and we will connect you with a member of our extensive international Insurance and Reinsurance practice.

The well-established general rules on limitations of actions

A limitation or time bar period is the period of time within which legal proceedings for a relief or remedy need to be commenced to avoid the risk that the claimant will lose the right to a remedy through effluxion of time (in other words, become time-barred). The law on limitation periods in respect of certain causes of action is set out under the Limitation Act 1980. By way of example, we reference here the principal limitation periods in simple contract and tort claims:

In both cases above, the relevant limitation period begins to run from the date the cause of action accrues (ie the date on which the facts give a person a right to claim legal relief) which will be when the breach of contract occurs or when the claimant has suffered loss or damage. However, there are also certain instances in which the limitation period will commence from a different (often later) date, such as the date of discovery of loss or damage, for example:

• Claims based on fraud - six years from the date of discovery of the fraud, or the date when it could have been discovered with reasonable diligence; and
• Latent damage negligence claims - the later of six years from the date the damage occurred or three years from the date of knowledge to bring a claim, subject to a maximum 15-year period from the negligent act or omission. This extension was introduced by the Latent Damage Act 1986 for negligence claims for latent defects (ie a fault in design, materials or workmanship) that existed when construction was completed but was not apparent at the time of completion. However, the Latent Damage Act 1986 only applies to liability types set out in the original contract – if the contract does not include liability for negligence, then the additional three year discoverability period introduced by the Latent Damage Act 1986 will not apply.

In respect of most claims under an insurance or reinsurance contract, and unless the contract itself provides otherwise, the relevant limitation period will be six years from the accrual of the cause of action. In each case, it is critical to understand when the cause of action under an insurance or reinsurance contract accrues. This will depend upon the type of insurance or reinsurance under which the claim is brought. We address these points in more detail below. 

When calculating the expiry of the relevant limitation period, Claims Managers should be aware that usually the day on which the cause of action accrues, is excluded from the calculation unless the cause of action accrues at midnight. The recent case of Matthew v Sedman 2021 UKSC 19 helpfully clarified that where a cause of action accrues at midnight, it is the following day which will count towards the calculation of the limitation period.

If, on investigation, it becomes clear that the claim has been brought after the relevant limitation period has expired, this will be a complete defence to the claim. However, a court or arbitration panel will not initiate time-barring a claim. The defendant must plead limitation as a defence and the burden of proof is then on the claimant to prove that its claim has not been presented out of time.

Contracting out of the statutory limitation rules

Under English law, it is open to the parties to an insurance or reinsurance contract to agree a different limitation period compared with that provided for under the general law. Such clauses will be subject to a reasonableness test preventing unfair contract terms. If the parties agreeing to a shorter limitation period are professional commercial entities of equal bargaining power, then the English courts are more likely to enforce such clauses and less likely to decide that the shorter limitation period is unreasonable.

Limitation rules which Claims Managers should be aware of when presented with inward facing claims

Whilst the above general principles may seem relatively straightforward, the devil, as always, is in the detail. In this section, we focus on how certain limitation rules apply to inward facing insurance claims which Claims Managers should be aware of.

Property Insurance

Under a property insurance policy, the standard six-year limitation period will begin to run from the date the insured loss occurs, even if the insured has not yet made a claim. Lord Goff in Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) 1991 2 AC 1, in this regard, very succinctly summarised the position, as follows:

“I accept that, at common law, a contract of indemnity gives rise to an action for unliquidated damages, arising from the failure of the indemnifier to prevent the indemnified person from suffering damage, for example, by having to pay a third party. I also accept that, at common law, the cause of action does not (unless the contract provides otherwise) arise until the indemnified person can show actual loss: see Collinge v Heywood [1839] Ad & E 634. This is, as I understand it, because the promise of indemnity is simply a promise to hold the indemnified person harmless against a specified loss or expense. On this basis, no debt can arise before the loss is suffered or the expense incurred; however, once the loss is suffered or the expense incurred, the indemnifier is in breach of contract for having failed to hold the indemnified person harmless against the relevant loss or expense.”

The loss occurs when there is physical damage to the insured property, and in most instances that will be the date of the insured event (eg the date on which the hurricane, flood, storm etc. causes physical damage to the insured property). If economic loss is recoverable without physical damage, then the damage occurs when that loss is suffered. Those are the points at which the cause of action accrues under the insurance policy. This is because English law deems the insurer to have agreed in the insurance policy to hold the insured harmless. Once loss has occurred, the insurer is, as a matter of legal theory, in breach of the insurance policy and a cause of action in damages for breach of contract against the insurer arises. It is therefore important in the property insurance context to consider the date that any insured loss occurred, because that is the date from when the limitation period will begin to run. 

Liability Insurance

The position under a liability policy (third-party loss) is different. The cause of action accrues only when the liability of the insured to the third party has been established and quantified, whether that is by judgment, arbitration or agreement/settlement - London Steamship Owners Mutual Insurance Association Ltd v Bombay Trading Co Ltd (The Felicie) 1990 2 Lloyd’s Rep. 21

However, where the insured’s right to an indemnity relates to mitigation costs, the limitation period will run from the date the insured incurred such expenditure (Euro Pools Plc v Royal And Sun Alliance Insurance Plc [2018] EWHC 46 (Comm)). This is because, in respect of mitigation loss clauses, the insurer is held to have agreed to indemnify an insured against such loss or expense. Accordingly, once that loss or expense has been incurred, the insurer will be considered to be in breach of contract – time for limitation purposes will therefore start to run as from that date.

Claims made directly against insurers under the Third Parties (Rights against Insurers) Act 2010

A limitation rule which will be of benefit to insurers, is the shorter time limit in which third parties can make claims directly against insurers under the Third Parties (Rights Against Insurers) Act 2010. This is compared with the position for claims made under the former Third Parties (Rights Against Insurers) Act 1930, which entitled third parties to pursue claims against insurers after expiry of the usual limitation periods (since such claims were considered claims within the insolvency and accordingly the limitation period would be suspended from the date of liquidation).

This development has arisen from the recent judgment of Rashid v Direct Savings Ltd 2022 8 WLUK 108. The Rashid case held that the suspension of the limitation period does not apply to claims made under the 2010 Act. This is because, unlike claims brought under the 1930 Act, third parties can make claims directly against insurers without first having to bring a liability claim against the insolvent insured (ie within the insolvency). Therefore, since the limitation period will not be suspended, Claims Managers should continue to apply the rules set out above, ie in terms of property claims, time will start to run as soon as the damage has occurred; and in respect of liability claims, the limitation period will commence once the insured’s liability to the third party has been established and quantified.

Although the Rashid judgment is a County Court decision and is therefore not binding authority on the High Court, the judgment referred to a number of other unreported decisions which also reached the same conclusion. This can provide insurers with some confidence that this is how the courts are now addressing this issue. 

Damages claims for late payment of insurance claims

We addressed in more detail in our fourth Practical Guide (which can be viewed here) the application of Section 13A of the Insurance Act 2015 which imposes a duty upon insurers to pay claims due within a reasonable time.

Section 13A does not define “reasonable time” but says it will depend on the relevant circumstances. Section 13A sets out several factors that the courts may take into account when considering whether insurers acted in a “reasonable time” or not. They include the type of insurance, the size and complexity of the claim, relevant statutory or regulatory rules or guidance, and factors outside the insurer’s control. It will also include a reasonable time to investigate and assess the claim.

If an insured considers it has suffered loss as a result of insurers’ failure to pay its claim within a reasonable period of time in line with Section 13A Insurance Act 2015, it has one year to bring its claim for damages from the date when the insurance claim was settled. Given that the clock only starts to run in respect of this one-year period once a claim has been settled, in circumstances where a claim has not been paid, the usual limitation rules will apply to determine by when the insured must commence legal proceedings in respect of its claim for an indemnity under the policy, as summarised in this Practical Guide.

Limitation rules which Claims Managers should be aware of when considering outwards recoveries

In this section, we address below certain limitation rules which will assist Claims Managers when considering outward (re)insurance related claims.

Contribution claims

Claims Managers should be aware, in circumstances where they are seeking to pursue a contribution claim from another insurer under the Civil Liability (Contribution) Act 1978, that a two-year limitation period (from the date on which the right accrues) will apply. Generally speaking, the right will accrue on the date of judgment given in any civil proceedings, or the date of any arbitration award (s.10(3) Civil Liability Contribution Act 1978). 

If, however, there is no judgment or arbitration award, the cause of action will accrue on the date on which the amount to be paid in compensation is agreed between the parties, in accordance with s.10(4) Civil Liability Contribution Act 1978. 

Claims Managers should therefore act promptly in pursuing a contribution claim, and in any event within two years from the date of judgment/arbitration award, or the date the amount of compensation is agreed between the parties, to avoid being barred by limitation.

Claims against reinsurers

If insurers are seeking to recover from their reinsurance policies, the same rule which applies to liability insurance (as discussed above) will usually be adopted by the English courts – ie time will start to run on the date liability has been established against the reinsured under the underlying policy.

For example, in the case of North Atlantic Insurance Co. Ltd v Bishopsgate Insurance Ltd [1998] 1 Lloyd’s Rep. 459, the Court held that in the case of excess of loss policies (ie non-proportional reinsurance), the insurer’s cause of action against its reinsurer will accrue in respect of each liability to the insured that is ascertained and quantified once the attachment point of the excess of loss reinsurance policy has been reached. Accordingly, insurers will have to keep under review the quantified underlying losses to identify when such excess point has been breached.

Standstill/Tolling agreements which are entered into to preserve limitation

Taking into account all of the above, if Claims Managers find themselves faced with the scenario that limitation is imminently about to expire on claims they are handling, two immediate issues arise.

To stop time running before the expiration of the limitation period in relation to a particular cause of action, the party concerned must either issue a claim form at court or enter into a standstill agreement with its opponent.

Entering into a standstill agreement to suspend the limitation period will be a less costly exercise than issuing proceedings in court, as it will be limited to the direct and associated costs of drafting the standstill agreement. However, it is nevertheless dependent on your opponent agreeing to enter into the standstill agreement.

Time limits for FOS (Financial Ombudsman Service) claims

Another limitation consideration for Claims Managers, is the time limit within which insureds can refer a complaint to the FOS.

After an insured has received the final response from insurers to its complaint, it has six months from the date of the final response to refer the complaint to the FOS.

Practical Takeaways

With the above in mind, here are our practical takeaways for insurers on the issue of limitation:

• Claims Managers should be aware that the six-year limitation period for breach of contract is applicable to claims made under an insurance or reinsurance contract, unless the parties have otherwise contractually agreed.

• The limitation period will start to run at different points in time depending on the type of insurance involved, ie:

1. Property insurance - time will start running from the date on which the property damage occurs.
2. Liability insurance - time will start running from the date the insured’s liability against the third party is
3. established and quantified.

Reinsurance - time will start running from the date the reinsured’s liability has been established and quantified under the underlying policy. When calculating the expiry of the relevant cause of action, Claims Managers should be aware that usually the day on which the cause of action accrues, is excluded from the calculation unless the cause of action accrues at midnight. Where a cause of action accrues at midnight, it is the following day which will count towards the calculation of the limitation period.

• If an insured considers it has suffered loss as a result of insurers’ failure to pay its claim within a reasonable period of time in line with Section 13A Insurance Act 2015, it has one year to bring its claim for damages from the date when the insurance claim was settled.
• Where insurers are seeking to pursue a claim for contribution, a two-year limitation period (from the date on which the right accrues) will apply. Claims Managers should ensure that any contribution claims are commenced within that two-year timeframe.
• To stop time running, Claims Managers can consider entering into a standstill agreement to suspend the limitation period. However, when the standstill agreement expires, Claims Managers should be aware that time will start to commence at the point at which the limitation period was suspended.
• Insureds have six months in which to make a complaint to the FOS following receipt of insurers’ final response.

For more information

Rebecca Hopkirk is a Partner, Oliver Saunders is a Legal Director and Louisa Lieng is an Associate in the Insurance and Reinsurance Disputes team in the UK. The UK Insurance and Reinsurance Disputes team forms part of DLA Piper's leading, multi-disciplinary, global insurance sector, consisting of over 400 lawyers representing major insurance and reinsurance companies internationally on all aspects of their business, including claims, disputes and investigations, transactional, regulatory and all forms of commercial advisory work.

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