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Excess Layers - Late Payment Damages: which layer pays the damages?


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Summary: How do damages for the late payment of claims under the Enterprise Act affect the relationship between primary and excess layer (re)insurers?

The Enterprise Act (the “Act”) contains a provision that will require insurers to pay valid claims within a “reasonable time”. This new obligation will apply to both insurance and reinsurance and allow policyholders/reinsurers to claim compensation for losses resulting from a (re)insurer’s delay, in addition to any interest owed on the claim amount.  The new law will apply to all policies incepting on or after 4 May 2017.  

We have previously considered the effect of the new law on reinsurers (as seen in our blog dated 3 May 2016: Are reinsurers affected by the new law on damages for the late payment of claims?). But what is the effect of the new law on the relationship between primary and excess layer (re)insurers?

By way of brief re-cap, in our view, an insurer’s liability for damages for late payment could be recovered from its reinsurer (depending on the wording of the reinsuring clause) on the basis that the insurer has incurred a contractual liability to its underlying insured.  This is because, pursuant to the Act, it is an implied term of every insurance contract that (re)insurers must pay valid claims within a reasonable time.  Reinsurers may therefore be liable for their share/proportion of those damages awarded against the insurer as the obligation arises out of its reinsured’s ‘contractual’ duty, as imposed by statute, to the underlying insured to pay claims within a reasonable time.
However, applying the same scenario to the relationship between primary and excess layer (re)insurers, the outcome is different.  This is because there is usually no contractual relationship between primary and excess layer (re)insurers.  Accordingly, in our view, an excess layer will not be triggered by a damages award for late payment against the primary layer insurer.

Taking a simple example, say an insured has purchased multiple layers of insurance cover where the primary layer provides £1,000,000 of cover and there are additional excess layers of cover up to £10,000,000. A valid claim is presented to the primary insurer totalling £750,000 but the primary layer insurer delays payment, resulting in a subsequent damages award of £1,500,000.  In these circumstances, the insured will receive £2,250,000 from the primary layer insurer only.  The insured will still retain £250,000 worth of cover available under its primary layer.  The excess layer(s) should be unaffected by the primary insurer’s delay in paying the valid claim.  

If, on the other hand, the excess layer caused the delay in paying their share of the valid claim (perhaps by questioning quantum in an attempt to reduce the impact on their layer), then it may be that the excess layer (and not the primary) that has damages awarded against it.  

Alternatively, a Court may find that both the primary and excess layers are at fault and apportion liability between them as appropriate.  The key question is who is at fault for the late payment of a valid claim.  Primary and excess layers therefore need to work collaboratively to avoid being held liable for a late payment.

Excess layer (re)insurers are also advised to review and amend their wordings (if appropriate) to make it explicitly clear that their excess cover is not triggered as a result of a primary/lower layer insurer’s tardy claims handling.

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