The correct time for action.

John Butler examines a case that questioned the role of policy provisions in determining when a cause of action accrues.

The question of when a cause of action accrues under an insurance
policy is a matter of some interest to reinsurers. Although Universities
Superannuation Scheme Ltd v Royal Insurance (UK) Ltd is not a case
directly concerned with reinsurance, it illustrates the issue.

The Universities Superannuation Scheme administered pension funds for
employees of institutions of higher education. In 1982 it took out a
fidelity guarantee policy (FGP) from the defendant which, in broad terms,
provided cover against fraud or dishonesty on the part of its

The FGP was renewed on an annual basis as a series of distinct individual
policies until 18 December 1990, when it was replaced by a new form of
policy known as a fidelity insurance policy (FIP) with an initial period
of cover to 17 December 1991.

On 23 October 1991 the claimant discovered that one of its employees had
been guilty of fraud or dishonesty between July 1987 and May 1991.

There were three allegedly dishonest transactions and losses of property:
22 July 1987, #1.6m ($2.6m); 20 February 1989, #1m, and 1 May 1991,

Disputing the statue bar

A writ was issued on 25 June 1997 - more than six years after the losses
were sustained and more than six years after the FIP incepted.

The defendant submitted that the claim was statute barred under Section 5
of the Limitation Act 1980, which provides that an action founded on a
simple contract cannot be brought more than six years after the cause of
the action.

It was submitted on behalf of the claimant that the claims were covered
under the FIP (see box); the 1987 and 1989 claims under the superseded
policies clause and the 1991 claim under the indemnity in Section 1 of the

The first two claims were assumed to result from dishonest acts committed
by the employee while the FGP was in force, and the fidelity insurance had
been kept continuously in force within the meaning of the second proviso
of the superseded policies clause.

The position in relation to the first proviso of the FIP was that under
the terms of the FGP the indemnity for loss resulting from "any act of
fraud or dishonesty" was subject to a proviso that "the acts insured
against are discovered not later than eighteen months after the
resignation dismissal retirement or death of the Employee nor later than
eighteen months after termination of this Policy whichever be the

Provisions come into play

The alleged 1987 and 1989 frauds were not discovered until October

However, it was accepted that, even if the proviso in the FGP meant that
the claims were not covered under the FGP, the effect of the first proviso
to the superseded policies clause was to provide cover precisely because
the alleged frauds were not discovered within the 18-month period
permitted under the FGP.

It was argued on behalf of the defendant that the cause of action under
all the policies was for an indemnity in respect of loss from a fraudulent

Established law

It was established law that the nature of the claim under an indemnity
policy was for unliquidated damages for breach and that the breach arose
as soon as the loss was suffered by the insured.

This was because the insurer had failed to hold the insured harmless
against the relevant loss and the discovery or knowledge of the fraud or
loss was irrelevant to the accrual of a cause of action where the claim
was for damages for breach of an indemnity.

Consequently, unless the policies provided to the contrary, the cause of
action in respect of the 1987 and 1989 claims under the 'superseded
policies' clause arose when the FIP was concluded because the defendant
then became immediately liable to indemnify the claimant against those
losses. The cause of action in respect of the 1991 loss under the FIP
arose when the loss was suffered in May 1991.

Mr Justice Langley concluded that the defendant was right. The fact that
the reference to discovery of the fraud appeared in the definition of
'fraudulent act' and so was incorporated in the insuring clauses did not
alter the fact that the words were, in his opinion, expressed as a proviso
or qualification to the acts to which the indemnity applied.

Natural meaning

The natural meaning of the insuring clauses and definition was therefore
that the indemnity applied to loss caused by an act committed during the
currency of the policy, provided that it was discovered not later than 24
months after the earlier of the termination of the policy or the dismissal
of the insured person.

If it was not discovered, the claim was excluded. However, if it was
discovered the fact of discovery did not form part of the cause of action
for an indemnity which, in accordance with the authorities and the
wording, arose when the loss occurred.

In other words, the trigger for the accrual of the insured's cause of
action remained the occurrence of the loss and not its discovery within
the period stated in part (b) of the definition of 'fraudulent act'.

Consequently, in Mr Justice Langley's judgment, the cause of action for
the 1991 loss accrued under Section 1 when it occurred on 1 May 1991 and
the cause of action in respect of the 1987 and 1989 losses accrued when
the indemnity provided by the superseded policies clause was agreed.

The defendants were therefore entitled to avoid the claims on the grounds
that they were statute-barred under Section 5 of the Limitation Act


- Fraudulent act

"Means any act or series of related acts of fraud or dishonesty:

a) committed by any Insured Person alone or in connection with others
during the currency of this policy and after any commencement date
applicable to such Insured Person, and;

b) discovered not later than twenty four months after the termination of
this policy or the resignation dismissal retirement or death of such
Insured Person whichever occurs first."

- Section 1 cover

"Indemnity to Insured. If during the Period of Insurance the Insured
sustains loss of Property as a direct result of a Fraudulent Act the
Insurers will indemnify the Insured up to the Limits of Indemnity." -
Superseded policies

"The insurance by this policy is extended to indemnify the insured in
respect of any Fraudulent Act committed during the currency of previous
fidelity insurance effected by the Insured in respect of any Insured
Person provided that:

a) such Fraudulent Act was not discovered within the period allowed by the
previous policy,

b) fidelity insurance in respect of the relevant Insured Person has been
maintained continuously in force by the Insured,

c) ...".
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