The Enterprise Act 2016, which was enacted by the UK Parliament on May 4, 2016, contains a provision that will require insurers to pay claims within a reasonable time. This opens the way for a policyholder to claim compensation for losses resulting from an insurer’s delay, in addition to any interest owed on the claim amount. Policyholders do not currently have this right due to a controversial rule of English insurance law that classifies insurance payments themselves as damages (which are not subject to further damages for late payment) rather than contractual obligations. The new provision will bring insurance law into line with general contract law on this issue but will also introduce new uncertainties for the insurance market. Insurers and reinsurers will need to consider the impact on policy wordings, claims handling, claims control and reserving. It will apply to policies entered into on or after May 4, 2017.
Insured’s right to claim damages
The Enterprise Act 2016 inserts a new Section 13A into the Insurance Act 2015. Subsection (1) provides that it is an implied term of every contract of insurance that the insurer must pay a claim within a reasonable time. If the insurer breaches the implied term, this will be a breach of contract and may entitle the policyholder to claim remedies, including monetary damages. Subsection (5) makes it clear that such remedies are in addition to and distinct from (a) any right to enforce payment of the sums due and (b) any right to interest on those sums. To take an example, a landlord might have a claim for damages for lost rent if it is unable to repair premises due to a lack of funds caused by the insurer’s failure to pay. This claim would be additional to the landlord’s right to the insurance payment and any interest owed on it.
Policyholders will have to bring an action for late payment by the date falling one year after the insurer has paid the insurance claim. This is an exception to the usual statutory limitation period of six years and was added to relieve insurers from the need to hold reserves in respect of possible late payment claims for a lengthy period following payment.
The possibility of actions for late payment introduces a number of uncertainties, including the following:
- Reasonably foreseeable loss
In order to claim damages, general contract law principles require that the policyholder will need to show that the insurer’s late payment caused the policyholder to suffer a loss and that the loss was reasonably foreseeable. This is a question that will be decided by the courts on a case-by-case basis. It may be difficult for a policyholder to demonstrate that the loss was reasonably foreseeable, unless at the time the contract was entered into it was clear to the insurer that the policyholder was financially vulnerable and that a delay in payment could cause the loss that is being claimed. The policyholder will also be under a duty to mitigate its loss.
- Pay within a “reasonable time”
Another significant area of uncertainty is what constitutes a “reasonable” amount of time to pay out a claim. The new Section 13A provides some guidance on this point. Subsection (2) provides that a reasonable time includes a reasonable time to investigate and assess the claim, and subsection (3) gives a non-exhaustive list of possible factors that may influence a court, including (a) the type of insurance, (b) the size and complexity of the claim, (c) the insurer’s compliance with regulation and (d) factors outside the insurer’s control. However, again the question will only be determined on a case-by-case basis given the huge variation in the time it takes to investigate and assess different types of claim. Where practicable, insurers may wish to negotiate the inclusion of a definition of “reasonable time” in the contract in order to reduce the risk of dispute.
- “Reasonable grounds” for disputing claims
Concerns were previously raised by insurers that they might be penalized for legitimately disputing liability or the amount of the claim. Subsection (4) provides that if the insurer shows that there were reasonable grounds for disputing the claim, the insurer does not breach the term merely by failing to pay the claim while the dispute is continuing.
What constitutes “reasonable grounds” will again be a matter for the court, and this uncertainty may put pressure on insurers to settle disputed claims. Industry bodies such as Lloyd’s, the LMA and the IUA have voiced concerns that this could lead to an increase in speculative claims, particularly in relation to large and complex claims. Earlier proposals that the reform should not extend to insurance of “large risks” and reinsurance were ultimately rejected by the Government.
Parties to a non-consumer policy may contractually agree to remove the obligation on the insurer to pay within a reasonable time, except with respect to deliberate or reckless breaches. This is permitted under a new Section 16A.
As with the other insurance contract law reforms introduced under the Insurance Act 2015, the extent to which insureds and reinsureds are prepared to contract out will be determined by the market. Where a full contracting out provision is not possible, insurers may be able to negotiate parameters around what constitutes a “reasonable time” for the payment of claims or limits on the insurer’s maximum liability.
Contracting out is only permitted under non-consumer policies, and any term in a consumer policy which purports to contract out will be void. Insurers that do include a contracting out provision in their policy will need to ensure it meets the transparency requirements contained in the Insurance Act 2015.
Insurers will be considering the following practical issues:
- Internal documentation: The possibility of late payment actions increases the importance of implementing effective procedures for documenting the handling of claims and, in particular, recording the reasons for any delays.
- Contracting out: Underwriters will need to consider their commercial approach to contracting out or otherwise limiting exposure contractually where possible.
- Reinsurance: Reinsurance wordings should be reviewed; outwards reinsurers may or may not be prepared to provide cover for liability for late payment.
- Claims control: Insurers should consider the risk of liability where they do not have control of claims and may therefore be exposed to mishandling by a third party. This may be relevant, for example, in the case of a following insurer on the subscription market, an insurer taking an excess layer or an insurer which has relinquished control to its reinsurer. Parties to these arrangements may wish to agree how such risk will be allocated.
- Reserving: Insurers (and reinsurers) may need to work through any effects on reserving, particularly in relation to disputed claims where there may be a risk of an additional claim for late payment.
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