Anger at QBE on changes to Trade Credit

I have had a massive number of people contact me about the legality of QBE changing terms, effective last weekend.

At the end of this post, I reproduce the announcement that one the underwriting agencies issued. You can skip to this if you wish.

The key question, after the writers typically unleash their anger, is: is this legal?.

The short answer is that QBE do have the right to change the credit limits. It can be done immediately, with the exception of sales/credit terms already put in place by an Insured.

If you are interested in the long answer, I start with the Insurance Contacts Act, 1984. (ICA).

Section 53 of the ICA is governed by the regulations shown below.

The Insurer can vary terms under Trade Credit policies and others, such as Contract Works, ISR, Machinery Breakdown, Product Liability and more as, on my reading of the ICA if they have a clause in the policy, that grants them that right. As you will see later in this post, the QBE Trade Credit policy, at least the one I reviewed, does.

I quote the relevant sections from the Insurance Contracts Act below. I have bolded and highlighted the relevant bits for your ease of understanding.

INSURANCE CONTRACTS ACT 1984 – SECT 53

Variation of contracts of insurance

                   Where a provision included in a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) authorizes or permits the insurer to vary, to the prejudice of a person other than the insurer, the contract, the provision is void.

Division 3—General provisions relating to insurance contracts

36  Classes of contracts of insurance in relation to which section 46 of the Act does not apply

                   For the purposes of section 46 of the Act, each of the following classes of contracts is declared to be a class of contracts in relation to which that section does not apply:

                     (a)  contracts of insurance commonly known as construction risks insurance contracts;

                     (b)  contracts of insurance commonly known as industrial special risks insurance contracts or commercial risks insurance contracts;

                     (c)  contracts of insurance under which the insurer agrees to indemnify the insured, in relation to a business undertaking, against loss resulting from a breakdown of, or malfunction in, machinery (including electronic equipment) or plant of the insured, being:

                              (i)  loss in respect of the repair or replacement of that machinery or plant; or

                             (ii)  any further loss resulting from that breakdown or malfunction; or both, but not against any other loss;

                     (d)  contracts of insurance commonly known as products liability insurance contracts;

                     (e)  contracts of insurance commonly known as “broad form” accidental loss and damage insurance contracts.

37  Classes of contracts of insurance in relation to which section 53 of the Act does not apply

             (1)  For the purposes of section 53 of the Act, each of the following classes of contracts is declared to be a class of contracts in relation to which that section does not apply:

                     (a)  each of the classes of contracts referred to in section 36 of this instrument;

                     (b)  contracts of insurance under which the insurer agrees to indemnify the insured against loss in respect of failure by a debtor to pay a debt due to the insured, but not against any other loss;

                     (c)  contracts of life insurance;

                     (d)  superannuation contracts, including individual superannuation contracts and blanket superannuation contracts;

                     (e)  sickness and accident insurance contracts to which paragraph 24(2)(c) applies;

                      (f)  export payments insurance contracts within the meaning of subsection 14(2) of the Export Finance and Insurance Corporation Act 1991;

                     (g)  aviation liability indemnity contracts.

             (2)  In this section:

aviation liability indemnity contracts means contracts under which the Commonwealth provides indemnities to airlines, airports or other aviation service providers for claims against them by third parties, for property damage or bodily injury or both (other than injury to aircraft passengers and employees of the insured travelling as passengers in the course of their duties) arising as a consequence of:

                     (a)  war, invasion, acts of foreign enemies, hostilities (whether war has been declared or not), civil war, rebellion, revolution, insurrection, martial law, military law, military or usurped power or attempts at usurpation of power; or

                     (b)  strikes, riots, civil commotions or labour disturbances; or

                     (c)  an act of one or more persons (whether or not as agent of a sovereign power) for political or terrorist purposes (whether the resulting loss or damage is accidental or intentional); or

                     (d)  a malicious act or act of sabotage; or

                     (e)  hijacking or an unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including an attempt at such seizure or control) made by any person acting without the consent of the insured; or

                      (f)  confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition or use by, or under the order of, a government (civil, military or de facto) or a public or local authority.

So, what all this means is that as Trade Credit is one of the classes of insurance that is allowed to be varied, the insurer is entitled to do this if they have a provision in their policy that grants them that right, ie the Insured is warned in advance that this can happen. 

Looking at the QBE wording LMI has in its Policy Library, I note that General Condition 7 reads:

You will see that there is no allowance in either the ICA or the QBE Policy Condition around timing. It happens immediately with the exception listed in the policy.

I assume this is done so that an insured cannot select against an insurer and start issuing a heap of invoices after the change is announced.

The bottom line is that it does appear that QBE are well within their rights.

As Michael [surname and email provided] pointed out in a comment to my earlier post on this subject:

My hard copy of the Act (as at 2016), sets out the original 1984 version of the Act. Which followed the ALRC report’s draft, which placed an absolute provision on an insurer unilaterally, changing a term of the insurance contract.

The amendment to s53 flies in the face of the Commission’s findings, and indeed the common law rules governing contract law.
Why should insurers be permitted to change the wording unilaterally because some unforeseen risk becomes evident after inception of cover?
It undermines one of the very reasons why the ICA was enacted

To which I replied,

I must say that I agree that the ability to change a contract of insurance is certainly very much in the favour of the insurer, and I cannot see how it got through parliament. It must have been a very good argument, but I am not privy to that. Hopefully, a reader in our insurance community knows and will share it with us.

The contract of insurance has to have a condition in it that allows the insurer to do this so the client, if you can find one that reads a policy, knows in advance that the insurer has the right. Other than Trade Credit, I cannot recall ever seeing such a clause, but then I have not been looking for it either. No policy I have drafted has had it in it, nor has any insurer asked me to include such a clause.
I can see why a Trade Credit insurer would need this for catastrophic events such as this.

This, of course, is not the only bit that has been watered down, but that is a subject for another day.

I end with the announcement that was made so we have a copy for posterity.

Given the extraordinary events we are seeing with the global health crisis and the knock-on economic consequences, QBE Trade Credit is focused on working with customers and helping them navigate through the current environment. We need to work together in these challenging times whilst the COVID-19 virus impacts us all.

Following our earlier communication, we have listened to the feedback from you and looked to incorporate some of these points in this communique, whilst at the same time being more explicit about our intention and action plan on our risk portfolio. From a Risk perspective, we recognise that a material shift in credit dynamics now exists and this has led to a review of all credit limits. QBE Trade Credit’s absolute aim is to support our clients whilst recognising that the level of exposure moving forward may not reflect current trading levels. The first of our actions was focused on the upper end of our portfolio and targeted towards non-essential sectors with reductions to impacted Credit Limits.

We are now turning our attention to the area of the risk portfolio with weaker risk ratings. In response to the deteriorating economic outlook, as an Insurer, we are taking steps to withdraw Credit Limits below US$250k (or equivalent in local currency) at the lower end of our risk rating scale. The withdrawal of cover will occur over the weekend (Saturday 28/03 & Sunday 29/03).

We have attempted to protect supply chains in industries classified as essential. Whilst the overall list of affected Credit Limits is extensive, we have focused on protecting risks in the food, pharmaceuticals, agricultural, telecommunications, fuel and transport sectors recognising the essential nature of the services provided towards our collective wellbeing.

The decision to withdraw cover has been taken, with the knowledge of the effects and implications of our actions. We apologise for not providing time for you to communicate with Policyholders. These urgent actions are necessary to protect Policyholders and ensure our product can support them during and beyond the current crisis.

Should a Policyholder wish to appeal a decision please ensure the request is submitted via the Portal and not via email. We will be happy to consider each appeal on a case-by-case basis and require the following information as a minimum:

1.            Full details of aged outstanding debts owed to the Insured,

2.            Full details of confirmed (not anticipated) orders on hand, and

3.            An explanation as to why the requested limit is essential to the Insured’s business and the immediate need for the supply of goods or services in the economy.

Appeals will be prioritised within the ‘protected’ Industry sectors above.

As a consequence of the processing of the Credit Limit withdrawals over the weekend the Portal will not be available until 03:00am Sydney time on Monday 30^th March.

Although our actions are swift, it is critical we all recognise the overall impact on trade the COVID-19 outbreak is having on the global economy.

Many thanks for your consideration and understanding as we work together at this difficult time,

Yours,