The ambiguity of the Spanish Shipping Act, which entered into force on 25th September 2014, with regards to the direct action against P&I’s will surely open the door to many third party claims before the Spanish courts. It is unclear whether such actions will prevail or not. If the Spanish courts accept the existence of a direct action, P&I’s in such proceedings may allege the application of English law to their marine insurance contracts as maritime transport is considered a large risk where the choice of law prevails. This will require proof of the contents of such law. Lack or insufficient proof of English law could result inevitably in the application of Spanish law.
Depending on what law regime is applied to the third party claim by Spanish courts the consequences as to late payment by the insurer may vary.
AIYON ABOGADOS as a Shipping and Insurance Law firm has briefly compared in this Article the consequences of the application of both regimes.
Under English Law
According to our sources, as English law currently stands, damages for late payment of an insurance claim are not recoverable from insurers (Sprung v Royal Insurance (UK) Ltd). This means that, if the insurer rejects a valid claim or pays it late, and the insured suffers additional loss as a result, he cannot claim additional compensation from the insurer because English law says you can’t claim “damages on damages”. The insured is only entitled to interest and his legal costs. Proposals to introduce remedies for late payment of claims were not included in the final text of the Insurance Act 2015.
Recently, a new attempt is being made to change the current law.
The Enterprise Bill which had its first reading in the House of Lords on 16 September proposes an amendment to the Insurance Act 2015 which will come into force in August 2016. The second reading took place on 12 October 2015.
Part 5 of the Enterprise Bill introduces a new section 13A to the Insurance Act 2015 requiring that insurers pay claims within a reasonable time. This will be a term implied into both consumer and non-consumer contracts of insurance, breach of which will give rise to the usual remedies for breach of contract, including damages. Reasonable time should always enable the insurer sufficient time to investigate and assess the claim.
For the moment, however, late payment of claims will only give rise to interests and payment of costs.
Under Spanish Law
Insured’s rights under Spanish law are regulated in Law 50/1980 dated 5 October. The two relevant provisions that deal with late payment of an insurance claim are Article 18 and Article 20 of Law 50/1980.
According to Article 18, an insurer is obliged to pay a claim under a policy at the conclusion of the investigation and assessment of the validity of the claim. In any event, an insurer must pay the minimum amount of the claim, according to the information available to the insurer, within 40 days from the date the claim is made. The insurer may substitute the payment of the claim for the repair or replacement of the object of the claim, if the nature of the policy permits it and the assured accepts. Depending on the nature of the insurance policy and only if the insured accepts it.
On the other hand, Article 20 establishes that an insurer will be considered in default if it does not meet its obligations within three months from the date of the claim event or if it does not pay the minimum amount of the claim within 40 days from the date the claim is made. Interests for late payment will be awarded by the courts calculated at a sum equivalent to the legal interest rate prevailing at the time increased by 50% for each elapsed day. However, two years after the production of the claim event, the annual interest shall not be lower than 20%.
Such provision applies not only in favour of the assured but also to third party claimants in civil liability insurance contracts and to the beneficiary of a life insurance contract.
As a matter of interpretation, if an insurance claim is not paid within two years, most Spanish courts have established that this 20% annual interest rate only starts accruing once the two year period after the production of the event has expired. Until such moment, the applicable rate would be the legal interest rate prevailing at the time increased by 50%, for each elapsed day (as per Supreme Court Judgment dated 20 April 2009).
If the above Spanish Law provisions are applied, P&I Clubs could be facing large amounts of interests in case of late payment of insurance claims, particularly when such late payment goes beyond the second year after the date of the claim event.