Improved Rights for Policyholders and Third Parties against insurers

Until very recently, changes to insurance law in the UK were few and far between: the Marine Insurance Act 1906 stood as the key statutory text for well over 100 years.  However, the Law Commission's project to reform insurance contract law has created momentum for change and led to significant reforms.  The latest are the Enterprise Act 2016, which received Royal Assent yesterday (Enterprise Act) and the long awaited coming into force of the Third Parties (Rights against Insurers) Act 2010 (2010 Act).  These changes will give improved rights to policyholders and third parties under insurance contracts.

Damages for late payment of an insurance claim

As we previously reported, the Enterprise Act includes a section giving rights to policyholders to claim damages against insurers who delay payment of a valid insurance claim.  This change, which is drafted as an amendment to the Insurance Act 2015, will come into force on 4 May 2017. 

From that date, new contracts of insurance will automatically contain an implied term requiring the insurer to pay sums due within a reasonable time.  A reasonable time includes time to investigate and assess the claim and an insurer will not automatically be in breach if he can show it had reasonable grounds for disputing the claim. 

Much will depend on what is a "reasonable" time and the Enterprise Act states that this will depend on the circumstances of each claim, including for instance its size and complexity, the type of insurance involved, whether some factors are outside the control of the insurer, etc. 

Policyholders will have one year to bring a claim under this new section, and time will run from the date the insurer has paid the claim.  The Enterprise Act also allows for contracting out of the implied terms if the policyholder is not a consumer.  This is subject to restrictions, which are in line with the provisions of the Insurance Act 2015. 

This should not detract from the fact that the Enterprise Act will, for the first time, allow policyholders to seek compensation for losses caused by an insurer's unreasonable delay in payment.  Until now, such actions were not possible under English law because of an old legal fiction that payment of the indemnity under an insurance contract constitutes payment of damages, and the general principle that English law does not allow payment of 'damages on damages'.

Third party rights under 2010 Act

The 2010 Act allows third parties to bring proceedings directly against insurers when the policyholder is insolvent but liable to the third party.  It was enacted back in 2010 but required a further statutory instrument to come into force.  This was delayed, partly because the list of insolvency events had to be updated to reflect changes in insolvency law.  The 2010 Act has now been updated by regulations and it will come into force on 1 August 2016. 

The 2010 Act was enacted to address some of the shortcomings of the Third Parties (Rights against Insurers) Act 1930 (1930 Act).  Once it is in force, third parties with a valid claim against an insolvent policyholder will be in a better position to obtain compensation from insurers.  This is for the following reasons.

Firstly, the 2010 Act allows third parties to pursue the insurer as soon as the insured is subject to an insolvency event.  Under the 1930 Act, the liability of the insured has to be established first, which can be costly and time-consuming.

Secondly, the 2010 Act allows a third parties to obtain specific information concerning the insurance from the insurer or another person (e.g. a broker) at an earlier stage, once he "reasonably believes" an insolvent insured has incurred a liability to him.

Finally, some of the more "technical" defences that could be raised by insurers under the 1930 Act will not longer be readily available.  The general rule remains that claims from third parties are subject to defences the insurer had against its policyholder, but the 2010 Act imposes some restrictions on specific defences (e.g. lack of notification, "pay first" clauses which cannot be fulfilled once the policyholder is insolvent, etc.).  

Comments

The amendments summarised above, together with the Insurance Act 2015 (which comes into force on 12 August 2016) and the Consumer Insurance (Disclosure and Representation) Act 2012, represent a significant change in English insurance law.  Much has been said about the new legal tests all these statutes will import and the potential uncertainty that may follow.  For example, the concept of a "reasonable time" for payment introduced by the Enterprise Act is a provision that should be of benefit to Policyholders, but which has the potential to give rise to some disputes as parties test the boundaries of the new law. 

Nevertheless, the reforms as a whole bring much needed modernisation to insurance law in the UK, with the commendable aim of re-adjusting the balance between insurers and those seeking protection under insurance policies. It will be interesting to see whether that aim comes to fruition. In any event, with such dramatic changes being made, an interesting period awaits as parties adjust.