Policyholders will soon be able to sue their insurer for damages caused by late payment of a valid claim.
Under the current law, insurers have no legal obligation to pay valid claims within a reasonable time. Whilst the Financial Conduct Authority rules require claims to be handled and settled promptly, any failure to comply does not entitle a commercial policyholder to recover its losses which it may have suffered as a result of late payment. This will now be addressed by new legislation. The Law Commission previously presented a number of recommendations for reform of insurance law in July 2014, the majority of which were implemented in the Insurance Act 2015, which comes into force on 12 August 2016. However, the Law Commission’s recommendations in relation to late payment of insurance claims were deemed too contentious and were not implemented in the Insurance Act 2015. The provisions have now been incorporated into the Enterprise Bill, which had its first reading in the House of Lords on 16 September 2015.
The Department for Business, Innovation and Skills has said that the Enterprise Bill will:
- introduce into every contract of insurance a requirement on the insurer to pay sums due within a reasonable time;
- provide a non-exhaustive list of matters which may be taken into account when determining what is a “reasonable time” for payment in the particular circumstances of a case, and state that a reasonable time will always include time to investigate and assess the claim. The insurer will have a defence to a claim for breach of the implied term where it had reasonable grounds for disputing the validity or value of a claim; and
- allow for contracting out of the default rules for non-consumer insurance contracts, provided that the insurer satisfies the transparency requirements set out in the Insurance Act 2015 (unless the breach of the term is deliberate or reckless, in which case any ‘contracting out’ term will have no effect).
In terms of defining “reasonable time”, the Bill provides that it will depend on the specific circumstances and provides a non-exhaustive list of factors that will be taken into account:
- the type of insurance,
- the size and complexity of the claim,
- compliance with any relevant statutory or regulatory rules or guidance,
- factors outside the insurer’s control.
Under the current law, an insured can only recover what it is owed under the policy plus interest. However, the Bill provides that damages will be payable by an insurer where a policyholder suffers additional loss because of the insurer’s unreasonable delay in payment. For example, if a warehouse owner makes a valid claim following a fire to its premises and the insurer unreasonably delays paying the claim, the insured will be entitled to any consequential losses that flow from the insurer’s unreasonable delay (e.g. loss of sales during the period of delay). It could therefore be said that the reforms amount to a form of qualified business interruption cover in certain circumstances.
The Bill aims to ensure that insureds are fully compensated where insurers who do not pay claims within a “reasonable time”. However, the Bill does try and allay insurer’s concerns by clarifying that “reasonable time” includes a reasonable time to investigate and assess a claim. This will inevitably lead to litigation concerning what amounts to a reasonable time, which will be very fact-specific.
The Bill should have a significant effect on the systems and processes of insurers when assessing and settling claims. Insurers will need to be wary of not delaying payment of claims unnecessarily or risk having to pay out more. Insurers will therefore need to address any complaints early. In addition, insurers should ensure that their external advisors, such as coverage counsel, coverholders and loss adjusters, work together efficiently to ensure that valid claims are paid promptly.
The Bill also comes hot on the heels of the FCA’s thematic review into the handling of insurance claims for small and medium-sized enterprises (SMEs), published in May 2015, which found that there was a gap between the claims service received and SMEs’ expectations. The FCA is acutely aware that a delay in payment can have a significant impact on a business’ ability to continue or re-start trading after an insured loss. It now appears that legislation, in addition to the regulatory requirements placed on insurers, will attempt to tackle this issue.
Finally, the proposed Bill will be implemented by way of an amendment to the Insurance Act 2015, meaning it will apply to both contracts of insurance and reinsurance.