In a surprise move, the Law Commissions announced on 17th September that a section on late payment damages has been in included in the Enterprise Bill, laid before Parliament the day before.
The Bill provides that a further clause will be inserted into the Insurance Act 2015. This new clause (to be called section 13A of the Insurance Act) will provide that it is an implied term of every insurance contract that an insurer must pay any sums due in respect of a claim made by the insured "within a reasonable time" (which will include a "reasonable time" to investigate and assess the claim).
Reasonableness will depend on all the relevant circumstances, including the size and complexity of the claim, the type of insurance and factors outside of the insurer's control.
The new section will also provide that where an insurer can show that there were reasonable grounds for disputing the claim (either in full or as to quantum), the insurer will not breach the new implied term "merely by failing to pay the claim…while the dispute is continuing, but ..the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and, if so, when". Thus, in principle, an insurer might breach the implied term even though it had reasonable grounds for contesting a claim (which is subsequently proved to be valid) – where, for example, the insurer has conducted the investigation unreasonably slowly, or has been slow to change its position when new facts come to light.
The remedies for breach of the new implied term are said to include damages (in addition to having the claim paid and interest).
The new section does envisage that insurers will be able to contract out of these changes (although not for consumer insurance). However, contracting out will not be valid where there has been a deliberate or reckless breach by the insurer. Recklessness in this context means where the insurer did not care whether or not it was in breach. The general contracting out rules set out in the Insurance Act will apply to terms in non-consumer policies relating to non-deliberate/reckless breaches.
The new section will not apply to settlement contracts.
The new section mirrors the clause previously inserted by the Law Commissions into the Insurance Act (and which was removed in order to allow that Act to follow the Law Commissions' uncontroversial bills route).
As we have previously reported, it has long been argued that the rule in Sprung v Royal Insurance (UK) Ltd 1999 is an anomaly which places England and Wales out of step with many other jurisdictions (including Scotland). However, insurers have expressed concern that the late payment damages clause will introduce considerable uncertainty for their working practices and might require additional expenditure, such as the recruitment of additional staff to handle claims. There is also a perceived risk that, when suing insurers, policyholders might include a claim for damages for late payment in order to pressure insurers into dropping defences.
Exactly how much time will be reasonable for investigation and payment will become fully clear only with further future case law on the point. However, it might be worth noting that the FOS (which hears complaints from consumers and micro-businesses) already applies a remedy of damages for late payment, with broad acceptance from the industry. Consumers and micro-businesses are, in any event, far more likely to sustain losses as a result of late or non-payment of a claim than larger businesses, which in general will have better cash flows to cope with delayed insurance claims. Furthermore, insurers' ability to (largely) contract out of the change when covering business risks might go some way to alleviate concerns.