Following the respondent Credit Insurer's refusal to pay on a claim made by the claimant Bank on a credit insurance policy covering the risk of non-payment of trade receivables assigned to the Bank under a receivables purchase facility, the Bank commenced arbitration proceedings under the auspices of the Singapore International Arbitration Centre. In end-January 2022, the three-member Arbitral Tribunal unanimously granted the bank's claim in excess of US$22 million in full, plus interest to be paid from the date the Credit Insurer ought to have paid on the claim and costs.
In arriving at its decision, the Arbitral Tribunal scrutinised each of the respondent Credit Insurer's defences to the claimant Bank's claim in detail and found that the defences were either unsubstantiated or contradictory to the objective evidence. These defences were accordingly rejected. The Arbitral Tribunal's decision sends a clear signal that insurance companies may not rely on unsubstantiated reasons to reject valid claims submitted by insured parties.
Facts
The Bank's claim arose out of a credit insurance policy ("Policy"), whereby the insurance company agreed to insure the Bank against the risk of non-payment of trade receivables transferred to the Bank by the Bank's customer ("Customer").
The Customer was a trader in the business of buying and selling commodities. Pursuant to an accounts receivables purchase facility ("ARP Facility") extended to the Customer by the Bank, the Customer transferred to the Bank its trade receivables payable by the Customer's buyers located in India, Malaysia and Singapore. The buyers' payment obligations were secured by bills of exchange duly accepted by the buyers. The Bank entered into the Policy with the Credit Insurer to cover the risk of non-payment of these trade receivables.
On the due dates of the invoices, however, several of the buyers failed to make payment and the insured risk under the Policy materialised. Despite efforts by the Credit Insurer, the Bank and the Customer to work out repayment plans with the defaulting buyers, the repayment plans eventually failed and the Bank duly submitted its claims to the Credit Insurer in 2018.
To the Bank's surprise, the Credit Insurer raised the following key issues with regard to the Bank's claim (amongst other things):
- The Credit Insurer claimed that the Bank had not satisfactorily proved that the trades between the Customer and its buyers were genuine trades. Accordingly, the Credit Insurer alleged that the Bank had failed to show that the trade receivables fell within the scope of the Policy coverage. ("Coverage Issue")
- The Credit Insurer referred to letters written by a few of the buyers, whereby those buyers had raised bare denials of their liability to pay on the trade receivables, to allege that those trade receivables were "disputed debts" within the meaning of the Policy. As "disputed debts" fell outside the scope of the Policy cover, the Credit Insurer alleged that the Bank was not entitled to make a claim for those "disputed debts". ("Disputed Debts Issue")
- The Credit Insurer referred to a clause in the Policy which required the Bank to exercise due care in assessing its customers and in assessing the debts transferred to it, where the Bank was obliged to act with the same diligence as if it was not insured. The Credit Insurer alleged that the Bank had failed to exercise the requisite standard of due diligence in that the Bank had failed to identify that the trades between the Customer and its buyers were not genuine. Accordingly, the Credit Insurer denied liability. ("Due Diligence Issue")
Apart from the above, the Credit Insurer also raised a myriad of arguments based on the interpretation of specific clauses in the Policy (such as an argument that the trade receivables were not transferred "without recourse" to the Bank) to argue that the Bank was not entitled to its claim on the Policy.
The Bank therefore had no option but to commence arbitration proceedings.
Decision
The Arbitral Tribunal scrutinised each and every one of the Credit Insurer's defences and held that the defences were either unsubstantiated or contradictory to the objective evidence. The Tribunal's decision on the key issues in dispute (as highlighted above) are summarised below.
Coverage Issue: The Arbitral Tribunal held that it was not correct for the Credit Insurer to take the position that the Bank bore the burden of proving that the underlying trades were genuine before the claim would fall within the scope of the Policy. Rather, the correct analysis was as follows:
- The Bank, as the Insured, had the burden of showing a prima facie case that the claim fell within the scope of the Policy. The Bank had done so by providing written evidence of the trade receivables, which included the original Bills of Lading and the duly accepted Bills of Exchange. On the evidence, the Arbitral Tribunal was satisfied that the Bank had discharged this burden.
- The burden of proof then shifted to the Credit Insurer to show that the underlying trades were not genuine in that the trades were fraudulent (as alleged by the Credit Insurer). In this regard, the Credit Insurer had adduced expert opinions of 2 commodity traders, who had come up with 'case theories' on how the fraud may have been perpetrated. On the evidence, however, these 'case theories' were unsupported by any cogent evidence of the fraud, and were therefore insufficient to prove that the trades were not genuine.
- Accordingly, the Arbitral Tribunal found that the Bank's claim fell within the scope of cover of the Policy, and the Credit Insurer's defence in this regard was rejected.
Disputed Debts Issue: In its analysis of this issue, the Arbitral Tribunal agreed with the Bank's submission that the term "disputed debts" must refer to a genuine dispute raised by the debtor. In other words, the Credit Insurer could not rely on any "dispute", however fanciful, frivolous or unmeritorious to allege that the debt was a "disputed debt" and therefore outside the scope of cover of the Policy. This was consistent with the approach of the Canadian courts in the cases of Strategic Associates Incorporated v. Export Development Corporation [2007] I.L.R. I-4583 and Bassett & Walker International Inc. v. Export Development Canada [2017] O.J. No. 804, and the Arbitral Tribunal opined that if the issue were to come before Singapore Court, the Singapore Court would reach the same conclusion.
On the evidence, the Arbitral Tribunal found that none of the Customer's buyers had raised genuine disputes. Conversely, the evidence showed that the Customer's buyers had made partial payments on the debts and had even sought extensions of time to pay the debts. It was only after the Credit Insurer's lawyers issued letters of demand to these buyers that they had raised bare denials to the claim.
Due Diligence Issue: After scrutinising the evidence before it, the Arbitral Tribunal held that the Credit Insurer had failed to prove that the Bank had not exercised the same diligence as it would be expected to exercise were the debts not insured. The Arbitral Tribunal found that the expert evidence adduced by the Credit Insurer in this regard was unsatisfactory in that it did not take into account local and international standards on managing receivables finance accounts as encapsulated in the MAS Information Paper entitled Guidance on Anti-Money Laundering and Countering the Financing of Terrorism Controls in Trade Finance and Correspondent Banking from October 2015 ("MAS Guidelines 2015") and The Wolfsberg Group, ICC and BAFT Trade Finance Principles 2019 ("Trade Finance Principles 2019").
On the other hand, the Tribunal found that on the evidence, the Bank had done everything the relevant guidelines had required it to do, including checking the movements of the relevant vessels with the International Maritime Bureau and other relevant checks. The Credit Insurer's allegation that the Bank had not acted with the same diligence and prudence had it not been insured was therefore rejected.
As for the remaining issues raised by the Credit Insurer relating to the interpretation of specific clauses in the Policy, the Arbitral Tribunal rejected the Credit Insurer's interpretation of those clauses. The Arbitral Tribunal held that the Credit Insurer could not rely on those specific clauses to deny the Bank's claim on the Policy either.
Decision
This case serves as a welcome clarification that where the insured is able to show a prima facie case that the claim falls within the scope of the Policy, the burden of proof falls squarely on the insurer to prove any reason as to why the insured's claim should not be accepted. The insurer may not reverse the burden of proof and require the insured to go one step further to disprove any suspicions the insurer may have about the claim, such as in the present case where the insurer sought to disclaim liability under the Policy on the basis of, inter alia, its suspicion that the underlying trades were not genuine.
The Tribunal's analysis of the Disputed Debts Issue is also a useful illustration of how the same issue may be dealt with by the Singapore Court. It is a common term of credit insurance policies that debts which are disputed by the debtor fall outside the scope of the policy cover – this case affirms the approach of the Canadian Courts in holding that an insurer may not rely on any "dispute", however fanciful, frivolous or unmeritorious it may be, to claim that the debt was a "disputed debt" and therefore outside the scope of cover of the Policy.
Financial institutions should also take note that where due diligence is concerned, it is also a common term in credit insurance policies that the insured should act with the same level of diligence as it would be reasonably expected to exercise were the debts not insured. Financial institutions should therefore continue to conduct the necessary checks and KYC procedures on their customers even where the bank's exposure is covered by insurance. In this regard, it may be useful for financial institutions to refer to both local and international guidelines to ensure that the relevant checks and processes are carried out – in the case of receivables financing, the MAS Guidelines 2015 and the Trade Finance Principles 2019 are relevant.
Finally, the outcome of this arbitration serves as a timely reminder to financial institutions and their insurers that where an insurer chooses to reject a claim on the policy, the insurer must have a clear and substantiated basis for rejecting the claim. Arbitration Tribunals and//or the Courts are not likely to allow an insurer to reject a claim on the basis of unsubstantiated and speculative reasons.
Shook Lin & Bok LLP acted for the claimant Bank.
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