The Enterprise Act received Royal Assent on 4 May 2016. The sections on damages for late payment of claims will therefore apply to all contracts of insurance and reinsurance, made from 4 May 2017. Parties can contract out but if not, partners Jonathan Sacher and Anthony Lennox, have been reviewing some scenarios as to the consequences for the reinsurance market:
- If the court believes that an insurer has delayed payment of a claim, the insurer will be held liable for damages. These are deemed to be contractual damages as opposed to extra contractual as it will be a term implied into all insurance and reinsurance contracts, that the claim will be paid promptly. Therefore, the insurer becomes liable for these damages as if it’s liability was a term of the policy. There is no limit on these damages and they could exceed the policy limits. For reinsurers, therefore, they will be liable for their share/proportion of those damages awarded against the insurer as the obligation arises out of the reinsured’s deemed contractual duty to pay on time. Therefore, the reinsurer may become liable for considerably more than the original reserved claim due to the award of damages against the insurer for late payment. Or the increased loss suffered by the reinsured will cause the deductible to be further eroded, thereby advancing the likelihood of claims into the reinsurance layer.
In this scenario, the reinsurer will only be liable up to its policy or treaty limits.
- What happens if the reinsurer has claims control and fails to act promptly, thereby causing the reinsured to have an order made against them for damages for late payment of the claim. In those circumstances, the reinsured would be claiming normal contractual damages against reinsurer for the loss suffered due to reinsurers' delay in agreeing the claim, not technically "late payment" damages as the reinsurer has not delayed paying the reinsurance claim.
- In what circumstances could a reinsurer actually be held liable for damages for the late payment of a reinsured claim? Say, for example the reinsured is simply fronting the business and it cannot afford to pay the claim until the reinsurer pays the reinsured. That could lead to the reinsured being wound up, or have its solvency rating materially reduced, therefore causing it other consequences in its insured business. In those circumstances, the reinsurer could be held liable for the actual damages suffered by the reinsured as a result of the reinsurer's delay in paying. Again, those damages are unlimited at the reinsurance layer and no excess limit will apply.
- In the subscription market, the question of late payment is particularly complex. What happens if the lead reinsurer/s delays payment which causes the court to award damages caused by the leaders' delay? To avoid that risk, the leaders must act cautiously to avoid the risking of paying 100% of the late payment damages as they have breached their duty of care to the followers.
If you have any queries regarding this article, please contact a member of the Insurance/Reinsurance team.