Amendments to the Insurance Act 2015 have been included in the Enterprise Bill, which had its first reading in Parliament on 16 September 2015. If passed by Parliament in its current form, the Enterprise Bill will insert wording into the Insurance Act 2015 implying a term into every contract of insurance that the insurer must pay any sums due in respect of a claim within a reasonable time.
The Insurance Act received Royal Assent earlier this year but some of the proposals put forward by the Law Commissions, including allowing damages to be claimed for late payment of claims, were considered unsuitable for the special parliamentary procedure for Law Commission bills and were removed from the final wording of the Insurance Act. While supported by some sections of the Insurance Market, others, particularly those that are more specialised in bespoke or complex risks, had misgivings about the provisions. However, the Government had expressed support for reform of the law and it is no surprise that it has looked to include it in the Enterprise Bill.
Why is there a need for legislation concerning late payment of claims?
Under current English law, where a valid insurance claim is made the insured is entitled to indemnity up to the sum insured but cannot claim in respect of additional losses caused by the insurer’s failure to pay the claim within a reasonable time. This runs contrary to the position in other jurisdictions (including Scotland) where insurers are under a legal obligation to pay within a reasonable time. It is also at odds with the position adopted by the Financial Ombudsman Service in respect of consumers and micro-enterprises and the FCA rules that require insurers to handle claims promptly and fairly.
As part of their review of insurance contract law, the Law Commissions expressed concerns that businesses, particularly small and medium sized enterprises, are especially vulnerable to late payment of claims, which in the most serious of cases may even put the SME at risk of insolvency.
What is the proposal?
The late payment of claims wording that has been included in the Enterprise Bill (which is identical to the wording proposed by the Law Commissions) would insert an implied term into every contract of insurance that the insurer must pay all sums due in respect of a claim within a reasonable time. “Reasonable time” will depend on the relevant circumstances but would include a reasonable time to investigate and assess the claim. The wording proposes the following, non-exhaustive, examples of things that might need to be taken into account in assessing what is a reasonable time:
- The type of insurance;
- The size and complexity of the claim;
- Compliance with any relevant statutory or regulatory rules or guidance; and
- Factors outside the insurer’s control.
If the insurer could show that it had reasonable grounds for disputing the claim, it would not be in breach of the implied term but the insurer’s conduct might be a relevant factor in deciding whether the implied term had been breached.
Insurers would be able to contract out of the late payment provisions provided they satisfied the transparency requirements set out in the Insurance Act 2015 and they had not acted deliberately or recklessly.
When would the provisions come into force?
The Enterprise Bill received its first reading in the House of Lords on 16 September and its second will take place on 12 October. It is likely that the Bill will complete its passage through Parliament and receive Royal Assent next year. The provisions relating to late payment of claims would come into force one year after the Bill is passed.
Both the Insurance Act and the proposal on late payment of claims are underpinned by a perceived need to bring insurance contract law into line with the approach taken by the FOS and the FCA and to enhance confidence in the UK insurance industry by bringing it into step with other jurisdictions. It is thought that the late payment of claims proposal would incentivise insurers to pay insurance claims within a reasonable time and would provide insureds with protection where that was not the case.
However, in its Impact Assessment (which can be read here), the Government acknowledged that late payment by insurers of valid claims is relatively rare meaning that, for the most part, insurers are already compliant with the proposed measure. Critics of the proposal have argued that it is unnecessary and could put insurers at a disadvantage when assessing claims, particularly when these are complex or involve issues that require further investigation.
The reforms would have ramifications for insurers and reinsurers alike. Among the areas to consider are:
- While the proposed measure contains a number of safeguards, what is a “reasonable time” to investigate a claim is likely to be a contentious area; although the proposal is not for a bad faith remedy, questions as to insurers’ claims practices may be opened up.
- Recovery of awards of damages under reinsurance arrangements.
- Claims reserves may need revising to reflect any potential increased exposure.
- For non-consumer insurance contracts insurers may wish to consider policy terms limiting or excluding their exposure.
The provisions are likely to come into force during the course of 2017 and would apply to insurance contracts that are entered into after that date (or variations to such contracts). Insurers should watch developments with interest.