Vol 3 (2006) - Issue 4

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Compromised Insurance Claims and Continuing Duties Thereafter – Policyholder Beware!

Introduction
It is not uncommon in indemnity insurances for the insurer and the policyholder to become engaged in negotiation regarding liability and quantum at the claim assessment and payment stage. Often as a result of the claim assessment and loss adjustment process, there will be amounts accepted as well as amounts excluded by insurers from the claim and these mutual compromises are usually incorporated into a voluntary settlement agreement between the parties. Generally, it is not open to a party to attempt to re-open a compromise agreement
and the overriding legal principle under English insurance law is that by compromising their rights, each of the parties has provided good consideration to the other, resulting in a binding agreement. It follows that assuming that a binding agreement has been reached, the rights of the parties are subsumed into the agreement and it replaces the earlier insurance policy under which the claim was made.
However, what happens when the insurer has made a claim payment but has offered settlement subject to certain conditions including the obligation on the part of the insured to take certain action? Further, what happens if the compromised claim and the documents purporting to incorporate the settlement are unclear, or the language and contents of such documents are ambiguous? Still further, what happens if the insurer can prove that the insured has breached the terms of the settlement agreement, what will be the measure of damages then, will it be damages to be assessed or simply an obligation on the part of the insured to repay the original claim with interest? The Court of Appeal had the rare opportunity earlier this year of considering these and other pertinent issues in the context of trade credit insurance when Lord Justice Moore-Bick2 delivered his judgment3 in the case of Euler Hermes UK plc and Apple Computers BV [2006] EWCA Civ 375.
Trade credit insurance
Trade credit insurance provides cover against the non-payment of outstanding receivables due to a supplier of goods and/or services. The majority of trading transactions are concluded upon trade credit terms and, on average, 40% of a company’s assets are represented by trade receivables. It is not surprising, therefore, that more and more companies, both large multinationals as well as SMEs and sole traders, are choosing to credit insure to protect themselves against the non-payment of trade receivables due from their buyers, either caused by simple protracted default over a period of time, the insolvency of the buyer, or political events in the buyer’s country which prevents the payment of the debt due to the supplier.