The Act adds a new section to the Insurance Act (s 13A), implying a term in every contract, on or after this date, that any sums due in respect of a claim will be paid 'within a reasonable time.' If this duty is breached, policyholders will be able to seek additional damages for any resulting foreseeable loss (a separate cause of action from the original claim and with an independent limitation period).

The facts

The Enterprise Act received Royal Assent this month and will apply to insurance contracts from 4th May 2017.

The Act adds a new section to the Insurance Act (s 13A), implying a term in every contract, on or after this date, that any sums due in respect of a claim will be paid 'within a reasonable time.' If this duty is breached, policyholders will be able to seek additional damages for any resulting foreseeable loss (a separate cause of action from the original claim and with an independent limitation period).

Remedies for breach of the implied term include damages (in addition to payment of the original claim and interest). Although non-punitive in nature, damages will be assessed by reference to the amount of loss the insurer could reasonably have foreseen the insured would incur if payment of a claim was unreasonably late.

Any claim must be brought within one year of the payment of all sums due under the policy, thus providing some comfort to insurers that potential damages claims will not hang over them for some years and therefore prevent an increase in premiums.

Implications

This 'u-turn' in the law is likely to have significant implications for insurers.

What is 'reasonable time' will depend on all the relevant circumstances, including the size and complexity of the claim, the type of insurance and factors outside the insurer's control, but specifying a reasonable timeframe will be difficult and case law will be required for clarity. For example, 2 months and 4-5 months have equally been cited as 'reasonable time' in recent cases in differing circumstances. It is anticipated that claimants will make full use of this provision and insurers will have to be seen to be proactive in handling claims in order to not fall foul of the obligations.

However, 'reasonable time' will include time to 'investigate and assess' the claim. Insurers may therefore have a defence if there were 'reasonable grounds' for disputing the claim (in full or as to quantum), or simply if they can show that they acted 'reasonably,' and will not be liable whilst the dispute is continuing. The conduct of the insurer may therefore be a relevant and important factor in deciding whether there has been a breach. The effect of the reasonableness caveat remains to be seen. Even if there were 'reasonable grounds' for contention, there may still be a breach, for example if the investigation was conducted unnecessarily slowly.

There is a strong concern that, if insurers want to pursue this defence, it will be subject to them disclosing privileged documents (as seeking legal advice might assist in demonstrating that they acted reasonably) – an unattractive proposition for insurers and opening a potential for abuse if the insurer is unable to demonstrate that it relied on legal advice without risking waiving privilege. An amendment to the Bill which may have gone some way to rectify the situation was withdrawn, with the Government deciding that the assessment of 'reasonable grounds' should be objective and if insurers do not wish to publicise their legal advice, they will have to proceed on other grounds to justify the delay.

Interestingly, insurers may contract out of these changes (save in a few limited circumstances), but the 'disadvantageous term' must be 'clear and unambiguous' and must be drawn to the insured's attention before the contract is entered into. This possibility may go some way to alleviate concerns and the potential for a late payment claim could be included by the parties in the receipt or settlement agreement.

There has been concern voiced in the insurance industry that the availability of such damages will introduce considerable uncertainty for working practices and might require additional expenditure, such as the recruitment of additional staff to handle claims. There is also a perceived risk that policyholders might include a claim for damages for late payment to pressurise insurers into dropping defences.