We are regularly asked by clients to explain what makes a ‘good insured’ in the eyes of insurers and how could they improve insurers’ views of their standing in the insurance market.
It is an important question which is quite difficult to answer; however, we recently had a potential claim which we think demonstrates the good behaviour that any insured would be advised to consider:
Our Client, XYZ entered into a contract with its counterparty, CCC, to sell grain with payment due under the contract on 180 day payment terms. A down payment of 5% of the total contract value was payable and paid on signature of the agreement and a guaranteed by CCC’s parent.
Several cargoes of grain were shipped to CCC over a period of six months and, initially, CCC made prompt payments to XYZ to the value in excess of USD 10 million. After a delay of two months, CCC, who had been citing a lack of liquidity as the reason for non-payment, proposed that the payment dates be formally delayed by six months as additional funds would be generated through ongoing activities. To ensure this would not prejudice any party, insurers were consulted. They agreed and the policy was similarly extended.
When the revised payment date was reached, the balance of in excess of USD 30 million remained outstanding but only USD 1 million was received. No further payments were made for a considerable time despite a further agreement by CCC to pay the money over an additional extension period of three months.
As required by the policy, the insured kept insurers through JLT Specialty, fully appraised of all developments and their discussions and correspondence with the buyer. When the latest repayment schedule was defaulted upon, the insured asked for insurers’ comments on their wish to call the parental guarantee for the full amount outstanding. Insurers agreed that, as a prudent uninsured, the insured should consider this option and this process, despite pleadings from CCC, having already started. This involved considerable time and costs to the insured utilising their internal insurance and legal teams as well as external legal experts, however they were adamant that they only wanted to claim on their insurance once all angles had been exhausted.
As the policy covered the failure or refusal of the guarantor to honour its debt obligation in accordance with the guarantee, JLT Specialty advised that, subject to the policy terms and conditions, the claim payment date would be deemed to be 180 days (the waiting period) from the failure or refusal by the guarantor – this being 1st January 2014.
Over the next four months, as a result of constant pressure by the insured, intermittent payments were received from CCC totalling USD 3.5 million, so the insured submitted a proof of loss to insurers, through JLT Specialty for an amount of USD 28 million. Insurers agreed to appoint a loss adjuster to investigate the situation and a meeting was held with the insured the following week. There were, as always, a small number of outstanding queries and issues arising from that meeting which were dealt with by the insured within the following two weeks.
The adjuster reported to insurers and, following a meeting between the claims agreement parties and JLT Specialty’s Credit Political and Security Risks Claims Director, the adjuster wrote to JLT Specialty confirming that, subject to a final computation of the quantum of the claim amount, coverage had been triggered and that insurers were willing to pay the claim if XYZ decided to submit a formal claim.
The insured’s main board discussed the submission of the claim in great detail and decided that they would not submit a request for payment at that stage. The insured did, however, initiate proceeding under LCIA rules against the guarantor for the full payment owing and, after the arbitrator had found in their favour, they began to identify assets owned by CCC worldwide – again, with the prior agreement of insurers.
At the end of February 2015, the insured’s trader reported that he had been called by CCC to discuss another repayment plan and was presented with a contract amendment which he had been asked to sign. This had a contractual change to the original payment dates which would require board approval. Having discussed this with the insured’s legal director, it was decided that they should seek external advice as to the ramifications of this including whether the extension of the payment dates would affect their rights under the arbitration, how it would affect the parental guarantee and whether CCC’s local obligations would be affected on currency issues. The insured did decide, again with insurers’ prior agreement, not to sign the amendment but to see if payments were made.
Beginning on 1st March 2015, the insured received daily payments from CCC– even taking into account bank holidays – up to 15th July when the full debt had been paid. The insured wrote to the LCIA advising that they had received full payment and requested that the arbitrator cancel his award which he duly did. A final payment was also subsequently received from CCC relating to contractually owed interest. The insured benefited financially through these activities, not least they ended up gaining full recompense of their financial loss as they did not have to pay the 10% deductible and they received full reimbursement of the interest charged which collectively amounted to a number of millions of dollars. They also achieved their aim of not claiming from insurers and retaining a very good relationship with insurers, with whom they have developed long term relationships.
As readers will imagine, insurers were extremely pleased with the actions and pragmatism of the insured’s decisions, which has already resulted in favourable treatment being accorded to the insured on new opportunities/initiatives in relation to the terms offered by Insurers. A firm partnership has now been cemented to the benefit of all concerned.
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For further information, please contact Jay Payne, Senior Partner on +44 20 7466 6236 or email firstname.lastname@example.org