The Enterprise Act 2016, which was enacted by Parliament on May 4 2016, contains a provision that will require insurers to pay claims within a reasonable time. This opens the way for a policyholder to claim compensation for losses resulting from the insurer's delay, in addition to any interest owed on the claim amount. Policyholders do not currently have this right due to a controversial rule of English insurance law that classifies insurance payments as damages (which are not subject to further damages for late payment) rather than contractual obligations. The new provision will bring insurance law into line with general contract law on this issue, but will also introduce new uncertainties for the insurance market. It will apply to policies incepting from May 4 2017.
Insured's right to claim damages
The Enterprise Act 2016 inserts a new Section 13A into the Insurance Act 2015. Section 13A(1) provides that it is an implied term of every contract of insurance that the insurer must pay a claim within a reasonable time. If the insurer breaches the implied term, this will be a breach of contract and may entitle the policyholder to claim remedies, including monetary damages. Section 13A(5) makes it clear that such remedies are in addition to and distinct from any right to enforce payment of the sums due and any right to interest on those sums.
For example, a landlord might have a claim for damages for lost rent if it is unable to repair premises due to a lack of funds caused by the insurer's failure to pay. This claim would be additional to the landlord's right to the insurance payment and any interest owed on it.
Policyholders will have to bring an action for late payment by the date falling one year after the insurer has paid the insurance claim. This is an exception to the usual statutory limitation period of six years, and was added to relieve insurers from the need to hold reserves in respect of possible late payment claims for a lengthy period following payment.
The possibility of actions for late payment introduces a number of uncertainties.
Reasonably foreseeable loss
In order to claim damages, general contract law principles will require that the policyholder show that the insurer's late payment caused the policyholder to suffer a loss and that the loss was reasonably foreseeable. This will be decided on a case-by-case basis. It may be difficult for a policyholder to demonstrate that the loss was reasonably foreseeable, unless at the time the contract was entered into it was clear to the insurer that the policyholder was financially vulnerable and that a delay in payment could cause the loss that is being claimed. The policyholder will also be under a duty to mitigate its loss.
Pay within a 'reasonable time'
Another significant area of uncertainty is what constitutes a 'reasonable' amount of time to pay out a claim. The new Section 13A provides some guidance on this point. Section 13A(2) provides that a 'reasonable time' includes a reasonable time to investigate and assess the claim, and Section 13A(3) gives a non-exhaustive list of possible factors that may influence a court, including:
- the type of insurance;
- the size and complexity of the claim;
- the insurer's compliance with regulation; and
- factors outside the insurer's control.
However, again the question will be determined on a case-by-case basis, given the significant variation in the time it takes to investigate and assess different types of claim. Where practicable, insurers may wish to consider negotiating the inclusion of a definition of 'reasonable time' in the contract in order to reduce the risk of dispute.
'Reasonable grounds' for disputing claims
Concerns were previously raised by insurers that they might be penalised for legitimately disputing liability or the amount of the claim. Section 13A(4) provides that if the insurer shows that there were reasonable grounds for disputing the claim, the insurer does not breach the term merely by failing to pay the claim while the dispute is continuing.
What constitutes 'reasonable grounds' will again be a matter for the court and this uncertainty may put pressure on insurers to settle disputed claims. Industry bodies such as Lloyd's, the Lloyd's Market Association and the International Underwriting Association of London have voiced concerns that this could lead to an increase in speculative claims, particularly in relation to large and complex claims. Earlier proposals that the reform should not extend to insurance of 'large risks' and reinsurance were ultimately rejected by the government.
Parties to a non-consumer policy may contractually agree to remove the obligation on the insurer to pay within a reasonable time, except with respect to deliberate or reckless breaches. This is permitted under a new Section 16A.
As with the other insurance contract law reforms brought in under the Insurance Act 2015, the extent to which insureds and reinsureds are prepared to contract out will be determined by the market. Where a full contracting out provision is not possible, insurers may be able to negotiate what constitutes a 'reasonable time' for the payment of claims or otherwise seek to limit the insurer's maximum liability.
Contracting out is permitted only under non-consumer policies and any term in a consumer policy which purports to contract out will be void. Insurers that do include a contracting out provision in their policy will need to ensure that it meets the transparency requirements contained in the Insurance Act.
Insurers will be considering the following issues:
- Internal documentation – the possibility of late payment actions increases the importance of implementing effective procedures for documenting the handling of claims and in particular recording the reasons for any delays.
- Contracting out – underwriters will need to consider their approach to contracting out or otherwise limiting exposure contractually where possible.
- Reinsurance – reinsurance wordings should be reviewed; outwards reinsurers may or may not be prepared to provide cover for liability for late payment.
- Claims control – insurers should address the risk of liability where they do not have control of claims and may therefore be exposed to mishandling by a third party. This may be relevant, for example, in the case of a following insurer on the subscription market, an insurer taking an excess layer or an insurer which has relinquished control to its reinsurer. Parties to these arrangements may wish to agree how such risk will be allocated.
- Reserving – insurers (and reinsurers) may need to work through any effects on reserving, particularly in relation to disputed claims where there may be a risk of an additional claim for late payment.
For further information on this topic please contact Martin Membery or Max Dannheisser at Sidley Austin LLP by telephone (+44 20 7360 3600?) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin LLP website can be accessed at www.sidley.com.
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