As of 4 May 2017 policyholders will have the right to sue their insurers if their insurers fail to pay a claim within a reasonable time. The right is implied into all insurance and reinsurance contracts entered into on or after 4 May 2017. However policyholders who think they may have such a claim will need to act quickly as the late payment claim must be brought within a year of the insurance claim being paid.
Damages for late payment
In effect, this means a policyholder is able to claim damages for foreseeable losses resulting from the late payment of a claim. This is of particular importance to business continuity insurance or insurance of business critical operations.
This is also important in the context of the Insurance Act placing an obligation on the policyholder to give a fair presentation of risk to the insurer before the policy is entered into. What is considered a ‘foreseeable loss’ is likely to depend, in part, on the content of the policyholder’s presentation of risk and any subsequent responses received by the insurer to their follow-up questions.
What is meant by “reasonable time”?
What is a reasonable time for the insurer to pay a claim will depend on all the relevant circumstances, but may include taking into account:
- the type of insurance, for example business interruption claims can take longer to resolve
- the size and complexity of the claim
- compliance with any relevant statutory or regulatory rules or guidance. For example, regulatory rules require insurers to treat customers fairly when handling claims
- factors outside the insurer’s control.
A reasonable time expressly includes a reasonable time for the insurer to investigate and assess the claim. Insurers will have a defence to a claim of late payment if there are reasonable grounds for disputing the claim. This places greater emphasis on insurers effectively managing investigations of claims, communicating any potential concerns with the insured and attempting to resolve them within a reasonable time and in a reasonable manner.
Is it possible to contract out?
It will only be possible for insurers to contract out of the implied term in business insurance contracts, not in consumer insurance contracts. This is subject to the requirements under the Insurance Act for an insurer to act with transparency when contracting out of the Insurance Act.
Also, it will not be possible to contract out when the breach to pay within a reasonable time is either “deliberate or reckless”, which is where the insurer “knew that it was in breach or did not care whether or not it was in breach”.
As the term is implied under an amendment to the Insurance Act, policyholders will need to check if the insurer has contracted out of the Insurance Act and has complied with the Act’s transparency requirements.
Claims for damages must be brought within the year
The Enterprise Act has also amended the Limitation Act 1980, inserting a limitation period on claims for damages for payment of one year from the date the insurer made the full payment of the claim. Where insurers simply refuse to pay at all the usual six year limitation period applies.
Policyholders will have to be mindful of this short limitation period when attempting to settle any dispute with an insurer arising from an alleged late payment.
What can policyholders do?
- Consider the risks to your business if payment of insurance claims is delayed.
- Check whether insurers are proposing to contract out of any provisions of the Insurance Act and whether that includes contracting out of the implied term?
- Make clear when taking out insurance what loss could occur should a significant claim not be paid within a reasonable time.
- Document the claims process and communications with brokers and insurers.
Make sure you respond promptly to insurer requests for information and documents concerning the claim.