In our previous Briefing Notes on the Enterprise Bill 2015 we discussed the detailed provisions of the Bill that relate to the late payment of insurance claims. Since our last Briefing Note in January, the Enterprise Bill has completed its passage through the House of Commons and received Royal Assent on 4 May 2016.
Whilst other provisions of the Enterprise Bill, in particular those relating to Sunday trading and public sector exit payments, have attracted significant press coverage and controversy during the Enterprise Bill's Commons' stage, the provisions of the Bill that relate to late payment of insurance claims have passed through the House of Commons unamended.
The Enterprise Act, as it now is, inserts new provisions into the Insurance Act 2015 (sections 13A, 16A and 22(3A)). Those provisions will imply a term into all contracts of insurance that are made under the law of any part of the United Kingdom requiring an insurer to pay sums due within a reasonable time.
The late payment provisions will come into effect on 4 May 2017 (a year after the grant of Royal Assent).
Overview of the late payment provisions
The new section 13A of the Insurance Act 2015 will impose a duty on insurers to make prompt payment of claims, and will mean that policyholders will be able to claim damages in the event of breach of that duty. This represents a significant departure from the law as it currently stands.
The provisions address what amounts to a “reasonable time” to pay a claim, which is to be assessed by reference to all of the circumstances including:
- the type of insurance;
- the size and complexity of the claim;
- compliance with any relevant statutory or regulatory rules or guidance; and
- the extent to which relevant factors are outside the insurer’s control.
The time allowed to pay any claim expressly includes a reasonable time “to investigate and assess” the claim.
Insurers will have a defence (including where insurers fail to pay part of a claim), if there are “reasonable grounds” for disputing the claim (or that part of it). Insurers will not be liable “while the dispute is continuing”; it follows that once policy liability is agreed or established, the claim will need to be paid within a reasonable time.
The new section 13A(4)(b) makes it clear that the conduct of the insurer in handling the claim is potentially a relevant factor. Insurers may therefore have a defence to an allegation of failure to pay a claim within a reasonable time if they can show that they have acted reasonably in circumstances where the claim is disputed, even if they may have incorrectly refused to pay a claim.
An insured’s claim against an insurer for failure to pay a claim within a reasonable time will be a separate cause of action from the policy claim against the insurer itself, and it will have its own separate limitation period.
The Enterprise Act also contains a new provision to be inserted into the Limitation Act 1980 (section 5A of the Limitation Act), which will provide that a late payment action will be barred by the expiry of whichever of the following periods ends the soonest:
- the period of one year after payment of all sums that are due in respect of the insurance claim; or
- the usual limitation period of six years from the date of breach by the insurer of the implied term as to payment being made within a reasonable time.
An insurer will have paid all sums that are due in respect of the insurance claim when it either pays the entire sum that is due to the insured, or when it makes a payment that “extinguishes” the insurer’s liability.
The Limitation Act 1980, and the amendments made to it by the Enterprise Act, extend to England and Wales only.
Even with the addition of the one year period, there may be instances in practice where it will be exceedingly difficult to identify the precise date by which proceedings for breach of the implied term will have to be brought against insurers (in particular if there is a dispute between insurer and insured as to the claim). This in turn could be a point to be considered in any satellite litigation against professionals for failing to advance a claim against insurers.
Pursuant to section 16A of the Insurance Act 2015, "contracting out" of the implied term as to payment is only to be possible in limited circumstances. In non-consumer insurance, contracting out of the implied term as to payment of claims within a reasonable time is to be allowed. However, this is subject to the provisions as to contracting out which already appear in the Insurance Act 2015 (in particular, the transparency requirements of section 17). It is also important to note that it will not be possible to contract out when breach of the implied term as to payment is either “deliberate or reckless”. A breach is defined as “deliberate or reckless” if the insurer “knew that it was in breach, or did not care whether or not it was in breach”.
Consistent with the recent reforms to insurance law, it will not be possible to contract out of the implied term as to payment in a consumer insurance contract.
Settlement agreements resolving insurance claims are expressly not affected by the provisions as to contracting out.
Response of the insurance industry
The Insurance industry has taken an active part in the Law Commission consultation process and responses were published to Issues Paper 6 and Consultation Paper 2. A majority of the responses were supportive of a change in the law. The industry, and particularly the LMA, has continued to play an active role in the process even after the introduction of the Enterprise Bill into the House of Lords in September 2015. Some of the LMA's concerns were taken into account with the limitation amendments mentioned above.
It is interesting to note that no further amendments to the late payment provisions were discussed during the Enterprise Bill's Commons' stage.
It is only to be expected that policyholders and their advisers will seek to make full use of the late payment provisions, and that insurers will need to be proactive in handling claims (and be seen to be being proactive).
The Treasury has previously advised that it expects vexatious litigation claims seeking late payment damages to cost some £375,000 per year over the next 10 years. There remains some concern within the industry about the possibility of speculative claims being made under the new law for purely tactical reasons, and indeed potentially for disproportionate levels of damages compared with the insurance cover that was initially purchased. If these concerns are realised, the Law Commission's assessment may turn out to be an under-estimate.
There are also possible issues as to how the late payment provisions will be addressed in subscription markets. One wonders whether there could be instances of followers and excess layers trying to seek damages against a primary lead in respect of sloppy claims handling resulting in a late payment damages award. The Lloyd's Claims Scheme 2010 requires the lead managing agent (and managing agent of the second syndicate, if involved in determining a complex claim), to exercise the reasonable care of a reasonably competent managing agent. Paying a claim late is unlikely to qualify as being "reasonably competent". With excess layers, as the law currently stands, it is highly unlikely that any court would impose a direct tortious duty of care on the primary layer towards the excess layer in the absence of special circumstances such as an all-market steering committee. Of course, it will remain open to insurers to contract out of these new provisions of the Insurance Act 2015; however, whether such contracting out is commercially feasible is another matter.