The Enterprise Act 2016 (the Act), which allows damages to be claimed against insurers for late payment of insurance claims, has just been granted Royal Assent, which means that the insurance related provisions will come into effect on 4 May 2017.
The Act inserts sections into the Insurance Act 2015 (which itself comes into force on the earlier date of 12 August 2016) which provide that insureds can claim damages (not just interest) for late payment of insurance claims if not paid within a reasonable time.
A reasonable time is defined in the Act as including "a reasonable time to investigate and assess the claim. What is reasonable will depend on all the relevant circumstances, but the following are examples of things which may need to be taken into account:
- The type of insurance,
- The size and complexity of the claim,
- Compliance with any relevant statutory or regulatory rules or guidance,
- Factors outside the insurer's control."
If the insurer shows that there were reasonable grounds for disputing the claim the insurer is not in breach just 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 there was a breach and, if so, when.
Changes to the Limitation Act 1980 have also been made by the Act so that insureds can only claim late payment damages for up to 1 year after a claim has been paid or settled.
Contracting out is available for non-consumer contracts so long as the breach is not deliberate or reckless.
Whilst the insurance market is generally in favour of the Act, there remain some concerns over the following aspects:
- The Act creates potential privilege problems, since insurers will not want to say that they delayed payment because they were seeking legal advice on coverage as this could waive privilege on that legal advice during coverage proceedings themselves
- Claiming damages for late payment of the claim will likely be used routinely in coverage disputes as a tactic to put pressure on the insurer and seek disclosure of privileged legal advice. That advice, if disclosed, could potentially weaken the insurer's negotiating position on coverage
- Reserving will now inevitably become more complex and reserves may have to be kept open for longer
- The Act creates potential new liabilities for claims brokers. For example, brokers will have a duty to advise their clients (as insureds or as reinsureds) on their entitlement to make a claim under the Act. Also, where the broker is acting under a coverholder arrangement where it has a contractual relationship with the insurer as well as duties towards the insured, if a claim for damages is met by an insurer with an allegation that the broker caused the delay the insurer may have the right to pursue recovery from the coverholder for damages paid to the insured
- The Act creates a potential new liability for solicitors involved in claims handling. If solicitors unduly delayed their advice and caused insurers to have to pay damages to the insured, those damages might be recoverable from the solicitors. This creates an extra risk for solicitors' professional indemnity insurers to consider, where those solicitors act for insurers on insurance claims.
Whether these concerns are well-founded remains to be seen, but it is likely that some questions over the implications of the new insurance provisions brought about by the Act will have to be decided in the courts, most likely as part of, or following, a significant coverage dispute. The privilege aspects in particular are likely to prove contentious.