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Damages for late payment of insurance claims: Enterprise Bill

16 November 2015

Catching many by surprise, the UK government has announced proposals to introduce a legal requirement for insurers to pay out on insurance claims within a reasonable time, and to permit claims for damages based on the consequences of a failure by them to do so. The new provisions are included in the Enterprise Bill (the Bill) which was published in September.

Previous proposals to include such provisions within the Insurance Act 2015 were dropped due to resistance from the insurance industry. Given the government's stated commitment to address the issue of late payment, it was anticipated that the provisions may resurface in the future, but few predicted that it would be so soon.

The stated purpose of the proposed measures is to protect businesses, in particular to enable them to recover more quickly from insured losses such as fires and floods. Small and medium sized businesses are considered particularly vulnerable, and the late payment of insurance claims, which it has been estimated occurs in up to 10% of cases, can have serious consequences including insolvency.

The current position: no timing requirement

At present there is no requirement for insurers to pay out on policy claims in a reasonable time, and no ability in law to hold an insurer to account for the consequences of any delay in paying out on a valid claim in a reasonable time. This arises out of the "hold harmless" principle, which is the notion that insurers are contracting to protect the policyholder from loss. The occurrence of the insured event constitutes a breach of that obligation, and the damages to which the insured is entitled is the payment of the insurance claim, plus interest. There is no cause of action for claims for late payment of damages, and therefore no legal mechanism by which insurers can be obliged to make payment of additional damages arising out of the consequential losses resulting from their late payment.

The proposed measures

The Bill introduces a new s13A to the Insurance Act 2015 (the Act) which creates an implied term that insurance claims must be paid within a reasonable time. A breach of this term will leave insurers liable for damages on top of the original indemnity claim and any interest payable. "Reasonable time", although not defined, will allow for the investigation and assessment of the claim and take into account all relevant circumstances including the type of insurance and the size and complexity of the claim. Insurers will have a defence to any failure to pay out in respect of all or part of the claim where there are "reasonable grounds" to dispute the claim, but the insurers' conduct in handling the claim may be a factor in that assessment.

A further new s16A would allow parties to contract out of the implied term. However, this carve‑out does not apply to consumer contracts, and is further subject to the transparency rules contained in the Insurance Act 2015 requiring the insurer to bring such clauses to a policyholder's attention. As such, the marketability of a policy which expressly absolves the insurer from any obligation to pay out under the policy in a reasonable time remains to be seen. Further, even should a policyholder agree to such a term, it will not operate to protect the insurer if the delay can be shown to be reckless or deliberate.

Implications

These reforms, which will be welcomed by businesses and policyholders, would serve to bring the London insurance market into line with many other jurisdictions. For example, Scotland, Australia and the U.S. have no equivalent of the hold "harmless" principle, and therefore already allow recovery of damages to compensate policyholders for losses resulting from the late payment of a valid claim.

These proposals also align the law with the current position for consumers and micro-businesses, who already benefit from the ability of the Financial Ombudsman Service to award damages for late payment in respect of complaints made to it. 

Concerns have been raised by insurer bodies during the consultation on the original reforms to the Insurance Act 2015, which mirror these proposals, related to the uncapped nature of the potential damages; this makes it difficult for firms to value potential costs and the potential implications for insurers' capital adequacy and reinsurance requirements. A further concern raised was the potential for insurers to pay claims in haste and with insufficient scrutiny for fear of being sued, resulting in unnecessary costs and potential increase in fraudulent claims. In light of the available defence to insurers that there were reasonable grounds for disputing the validity or value of a claim, should the proposed measures become law, we can expect to see insurers taking steps to strengthen their systems relating to the assessment and payment of claims to enable them to demonstrate reasonableness if required.

What next?

The Bill will now pass through the usual Parliamentary process. As a government bill, formal consultation is not part of that process, but insurers will no doubt take steps to ensure their concerns are heard.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.