Statutory Limitation Periods For Premium Claims

English law has almost since its origins recognised the need to protect the defendant against a stale claim. There are two basic reasons for imposing a statutory limitation period. First, with the passing of time, evidence and witnesses become increasingly unreliable. Secondly, although this is admittedly less of a problem in the modern computer age, the defendant cannot be expected to retain his files on all matters indefinitely.

The Limitation Act 1980, section 5, lays down a six year limitation period for bringing an action for breach of contract, time running from the date of the breach. Actions by and against reinsurers must thus be brought within six years from the date of the act complained of. In the case of a dispute concerning placement, it is to be borne in mind that the renewal of a reinsurance contract amounts to the making of a fresh contract even though the renewed terms are much as before. If, therefore, a reinsurance agreement is entered into for the years 1996 to 1998, and is renewed for the years 1999 to 2001 during which period claims arise, the reinsurers are free to deny liability or allege breach of contract under the renewal and it is not open to the reinsured to rely on a time-bar by asserting that the wrongful act originally occurred in 1996 and was merely repeated on renewal in 1999. It is of course open to the parties to a reinsurance agreement to vary the limitation period, either by agreeing a shorter period at the outset or, following a dispute arising, by entering into a standstill agreement which postpones the running of time while settlement negotiations take place.

As is well known, as far as marine insurance and reinsurance is concerned, it is the duty of the placing brokers to pay the premium to the underwriters, and it is irrelevant to this rule whether or not the brokers have been put in funds by their clients. The rule dates back to the early nineteenth century, and has been codified in section 53 of the Marine Insurance Act 1906. The rule has its basis in the curious fiction that the premium has been paid by the broker and then loaned back by the insurers, thereby rendering the broker personally liable to repay the loan. Brokers who are subject to this funding duty can protect themselves to some extent by inserting into the policy a clause to the effect that if the brokers are not reimbursed they have the right to terminate the policy and to reclaim their payment from the underwriters on a pro rata basis.

The Heath Lambert case required the Court of Appeal, on appeal from the decision of Deputy High Court Judge Jonathan Hirst QC, to ascertain the limitation period for a claim against the client by the brokers for reimbursement of the funded premium. The direct assured in this case was a Venezuelan shipping company, INC, which appointed local brokers Scort to place marine insurance. Scort placed the cover with a Venezuelan insurer, Banesco, although it was understood from the outset that Banesco would act as a front for the London market and would reinsure the entirety of the risk. Scort were retained by Banesco as producing brokers to effect the reinsurance, and Scort duly appointed Heath Lambert as its London placing brokers. Heath Lambert placed initial reinsurance cover in January 1996, and extended the cover by a series of endorsements between January and July 1996. Heath Lambert funded the premium for the initial reinsurance placement and for each of the endorsements. The total sum paid by Heath Lambert was in excess of half a million US dollars. The reinsurance contained a premium warranty under which the premium was to be paid within 90 days of attachment.

It was the intention of the parties that the premiums would be paid by INC, and passed on down the chain to Heath Lambert. INC did not, however, make payment, and in October 2002 Heath Lambert commenced proceedings against both Scort and Banesco for indemnification and obtained permission to serve the proceedings on the two defendants in Venezuela. The defendants sought to have the action set aside. The initial question for the Judge was, which of the defendants was liable to indemnify Heath Lambert? The Judge, applying established principles, held that there is in the normal course of events no contractual relationship between a placing broker and the reinsured and accordingly it was unlikely that Banesco was under any obligation to pay the premium to Heath Lambert. The contractual relationship was between Scort as producing brokers and Heath Lambert as placing brokers, so the most likely claim was against Scort. There was no appeal against this finding, nor against the judge’s ruling that section 53 was applicable even though the case had an international dimension.

All of this set the scene for recovery by Heath Lambert against Scort. At this point the limitation issue became significant. The payments to the reinsurers had been made in the first half of 1996, but proceedings were not brought until the second half of 2002. The court was required to identify the date on which the contractual obligation on Scort to indemnify Heath Lambert arose, as that date triggered the six-year limitation period for the claim for indemnification. The Judge’s view was that Heath Lambert’s claim against Scort accrued when the premium fell due under the reinsurance. The general rule accepted by English law is that a reinsurance premium falls due as soon as the risk attaches, and that in the case of an endorsement the premium is due as soon as the endorsement takes effect. The general rule is of course capable of being ousted by agreement, and the Judge held that the premium warranty in the reinsurance which allowed 90 days for the payment of the premium had the effect of extending the date on which the premium fell due by an additional 90 days. The outcome of all of this was that Heath Lambert was entitled to seek indemnification from Scort for any premiums which had fallen due within the period of six years and 90 days immediately before the proceedings against Scort had been issued. Unfortunately for Heath Lambert, the only premium which fell into this category was that in respect of the final endorsement in July 1996. Thus, irrespective of the other complex issues in this case, the claim was for the most part time-barred.

Scort appealed against this finding, and on appeal argued that the premium fell due on the date on which the risk incepted and not on the expiry of the 90-day credit period. The Court of Appeal disagreed, and held that the limitation period had to be judged by reference to the contractual arrangements for the payment of the premium: as the premium was not due for 90 days after inception, it was only after that period had expired that the limitation period began to run. The claim for sums paid within six years of the expiry of the 90 day period was not, therefore, time-barred.

Although the case turned on a narrow point, it is destined to have far wider implications. The Court of Appeal expressed doubts as to the traditional view of the broker as the agent of the assured, noting that it would be preferable to regard the broker as a "common agent", acting in some circumstances as wholly independent of both parties and in others for one or other of the parties. The Court of Appeal also to a considerable extent undermined the fiction on which section 53 is based by saying that the contractual provisions as to payment prevail. Thus, in the case of a policy which requires payment of the premium on a given day, there is no room for the notion that the premium is deemed to have been paid and that the broker simply owes a personal duty to make payment. This reasoning breathes life into premium warranty and other payment obligations which, before the Heath Lambert case, were in essence undermined by reason of the deemed payment of the premium. Section 53 continues to operate after Heath Lambert, but only for the purpose of determining who has to pay the premium: the section no longer operates to regard payment as having taken place by the inception date.