Time Please!

Originally published in March 2002

The Law Commission's initial proposals to reform the present law of limitation, that is to say how long a claimant has to bring legal proceedings against a defendant, were widely considered by the reinsurance industry to be likely to cost millions of pounds in unmet reinsurance recoveries. However, following representations by the industry, these concerns have been significantly reduced in modified proposals published by the Law Commission last year.

The current limitation provisions, mainly contained in the Limitation Act 1980, prescribe different limitation periods, ranging from three years to twelve years, for different causes of action (personal injury, contract, land related actions and so on). A number of exceptions and special rules also apply, for example, where "fraud, concealment or mistake" has occurred and when a defendant acknowledges a debt or makes a part payment in respect of it. The time at which the applicable limitation period begins to run also varies according to the nature of the cause of action and the precise facts involved. The result of these matters is that the existing law is unclear and uncertain in its application to existing and, particularly, emerging causes of action.

The objective of the Law Commission's proposals was to resolve these problems by creating a single, uniform limitation regime applicable to most causes of action.

The Law Commission's basic proposition is a "core regime", the main elements of which are:

• A primary limitation period of three years running from when a claimant knew or ought to have known that he has a cause of action, that is to say that he knew, or ought reasonably to know:

• A "long-stop" limitation period of ten years running from the date of the accrual of the cause of action or, in some cases, from the date of the act or omission which gave rise to the cause of action.

Special rules will continue to apply in certain circumstances.

The limitation period currently applicable to claims relating to reinsurance contracts is six years from the accrual of the claimant's cause of action. Whilst accrual will depend on the terms of the reinsurance contract, generally a reinsured's cause of action against his reinsurer for breach will accrue on the date on which his liability under the underlying contract was settled, by judgment, arbitration award or agreement.

The Law Commission initially proposed that the core regime should apply to reinsurance claims but with the modification that the ten year long-stop limitation period should run from the date of settlement of the original insurance claim. Originally, the Law Commission also proposed that any new act based on their proposals should apply to all causes of action accruing before it commenced, except those statute-barred or in respect of which proceedings had been issued. These proposals caused the reinsurance industry concern and, accordingly, representations were made to the Law Commission that:

• the reduction of the primary limitation period from six years to three years would impose additional costs;
• the retrospective effect of the reduction in the primary limitation period might mean that reinsureds would be prevented from bringing claims under reinsurance contracts existing at the time the new act came into force;
• the imposition of the ten year "long-stop" from the date of settlement of the original claim would be unworkable as reinsurance chains could be lengthy and the ten year period could easily expire before the original claim reached the ultimate retrocessionaire, rendering reinsurance purchased by reinsureds down the chain valueless; and
• the ultimate result would be to diminish the assets of reinsureds and reinsurers, increase the likelihood of insolvencies and reduce the amount of international business transacted in the London market.

Whilst the Law Commission’s amended proposals retain the recommendation for a three year primary limitation period, it has taken on board the other representations by devising transitional provisions and modifying the application of the core regime to "chains of indemnity" such that:

• The limitation period for causes of action accruing before the commencement of the new act would expire on the later of the date on which it would have expired under the previous law and the date on which it would expire under the new act.
• The ten year long-stop limitation period would run from the date of the settlement of the liability of the reinsured in respect of the risk reinsured, rather than the settlement of the original claim. Accordingly, a new long stop limitation period would arise for each claim in the chain of reinsurance.

The revised proposals have eradicated most of the difficulties posed by the Law Commission's original plans. However, reinsureds will be considered "sophisticated claimants" and, accordingly, the three year limitation period from their "date of knowledge" will usually be held to run from the date on which their cause of action accrued. To avoid any difficulties this may cause, reinsureds will need be aware of the shorter primary limitationperiod and more efficient in pursuing their reinsurance recoveries. Nonetheless, the earlier settlement of reinsurance recoveries may well lead to more certainty in the market overall.