Currently, insurers cannot be liable to an insured for consequential losses flowing from insurers’ failure to pay a valid claim. The Enterprise Bill 2015 includes changes to the Insurance Act 2015 which, if enacted, will end that position.

Overview

The reintroduction of this proposed change may dismay sections of the insurance industry. For example, the International Underwriting Association and Lloyd’s Market Association have argued against damages for the late payment of claims for the complex, wholesale risks which their members are generally involved in.

The industry will now be considering what further representations to make about the proposed changes.

For insureds, the change is likely to be widely welcomed. It also seems clear that the political will is that the law should change in this area for all classes of insurance.

Current position

An obligation to pay under an insurance policy is an indemnity from the insurer to the insured, which is an obligation in damages. There is no cause of action in damages for the late payment of damages. There can therefore be no recovery of damages in respect of a failure to pay the original indemnity.

This currently means an insured cannot be awarded damages for breach of contract in respect of consequential losses that flow from an insurer's late payment or failure to pay a valid claim.

In Sprung v Royal Insurance (UK) Ltd [1996], plant and machinery at Mr Sprung's factory were vandalised. When his insurers disputed the claim, he could not afford to carry out the repairs and his business failed. At first instance, the Judge assessed the consequential loss (representing the loss of the chance to sell the business) at £75,000 but would not award that, on the basis it was irrecoverable in damages. Mr Sprung did, however, recover damages representing the indemnity under the policy for property damage, plus costs and interest. The Court of Appeal agreed, ruling that Mr Sprung could not recover damages for the consequential loss of the opportunity to sell the business.

Reform proposals

The Law Commission considers that English law is unfair and anomalous in this respect. It has long proposed that the rule should be changed. There were originally provisions to do so in the Insurance Bill. However, after consultation with the insurance industry, these were removed before that legislation was enacted as the Insurance Act 2015.

The changes are now included in the Enterprise Bill 2015, which received its first reading in the House of Lords on 16 September 2015.

The key change proposed is to make it an implied term of every insurance contract that the insurer will pay valid claims within a “reasonable” time. What amounts to a “reasonable time” will include time to investigate and assess a claim and will otherwise depend on all the relevant circumstances. Those will include, for example the following:

  • Type of insurance.
  • Size and complexity of the claim.
  • Any applicable statutory or regulatory considerations.
  • Factors outside insurers’ control.

The proposed change therefore recognises in principle that the widely varying circumstances of different insurance products and claims affect how long it might reasonably take insurers to pay valid claims.

The remedies available (including damages) for a breach of the implied term to pay valid claims within a reasonable time will be “in addition to and distinct” from any right to enforce payment of the sums due and any right to interest on such sums.

Contracting out?

There are provisions to restrict how far insurers can contract out of the new rule, which distinguish between consumer and non-consumer contracts:

  • Consumer contracts: insurers effectively cannot contract out.
  • Non-consumer contracts: an insurer will not be able to contract out in respect of a deliberate or reckless breach of the implied term to pay valid claims within a reasonable time. Otherwise, any provision to contract out must satisfy the transparency requirements under s.17 Insurance Act 2015.