The forced closure of many businesses as a result of the Coronavirus pandemic has had a huge impact on the nation’s Gross Domestic Product (GDP). Recent reports from the Office for National Statistics state that the economy was 25% smaller in April than it was in February this year.
Please note: the information contained in this legal update is correct as of the original date of publication
The forced closure of many businesses as a result of the Coronavirus pandemic has had a huge impact on the nation’s Gross Domestic Product (GDP). Recent reports from the Office for National Statistics state that the economy was 25% smaller in April than it was in February this year1. In a situation where cash flow has all but dried up, many financial obligations continue. If difficult decisions are being taken regarding the allocation of funds, some businesses may be looking for “quick wins” and deciding not to pay insurance premiums. However, where the premium is unpaid will the insured still have cover? Having not performed its part of the bargain – are insurers obliged to provide an indemnity? The position is not necessarily as straight forward as one may think.
As is usually the case, the starting point is to consider the wording of the insurance contract. In most cases, payment of the insurance premium is not a requirement for the creation of a binding insurance contract.
Payment of the premium may be a condition precedent, with payment usually being made on inception of the risk.2 However, unless the policy unequivocally states that time for payment of the premium is of the essence, then the default position is that it is not. Such a stipulation will not be implied3; absent an express clause to that affect non-payment will not in itself prevent risk from attaching.
We address these two broad categories below:
Where payment is made by instalments it is a matter of construction whether the policy is single period or a series of separate contracts, a new one being formed on the payment of each instalment. The distinction is potentially as fine as the policy wording referring to ‘the premium’ as opposed to ‘the premiums’.6 Ordinarily payment by installments is no more than the insurer providing credit and the policy period will remain as one.
Where the date for payment is of the essence (either as a matter of construction or as a result of notice being served), the insurer may:
Given the unprecedented times affecting many businesses, it may be necessary to depend on insurers adopting a reasonable approach to such matters. Indeed, one of the measures mooted by the Financial Conduct Authority is the idea of deferred payments to help insureds suffering from financial difficulties during the coronavirus pandemic.7
Indeed, where insurers have the right to offset claims against unpaid premiums, the more palatable and regulator friendly approach would be to allow the insured a period of time to pay the premium. However, in cases where no claims arise, insured’s might be happy to waive the insurance it hasn’t needed to call upon but in those cases insurers could lose out on millions in premiums.
C-authored by Jude Cummings and Alex Lucas.
1Office for National Statistics, ‘GDP monthly estimate, UK: April 2020’ (ONS, 12 June 2020)
2Heath Lambert Ltd v Sociedad de Corretaje de Seguros [2004] Lloyd’s Rep. I.R. 905
3Ibid.
4Lake v Reinsurance Corp Ltd 1967 (3) S.A. 124 (W).
5Pacific and General Insurance Co Ltd v Hazell [1997] L.R.L.R. 65.
6JA Chapman & Co Ltd v Kadirga Denizcilik Ve Ticaret [1998] Lloyd's Rep IR 377 CA
7Financial Conduct Authority, ‘FCA Confirms measures to help insurance customers who may be suffering financial difficulties as a result of coronavirus’ (FCA, 14 May 2020) accessed 20 June 2020.
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