In July 2014, the Law Commission presented a series of recommendations for reform in four areas of insurance law, the majority of which were implemented in the Insurance Act 2015, which received Royal Assent on 12 February 2015.
The Law Commission's recommendations in relation to late payment of insurance claims were deemed to be too contentious and failed to be implemented into the Insurance Act 2015 but the government promised to revisit the issue at a later date.
The late payment provisions have now been incorporated into the Enterprise Bill (the Bill) which was introduced to the House of Lords on 16 September 2015. The proposed draft is expected to be implemented by way of an amendment to the Insurance Act 2015.
The implied term
Currently, where an insurer has unreasonably refused to pay a claim or has caused unreasonable delay in settling the claim, the insured is entitled to recover only that which they are owed under the policy plus interest. There is no provision for the insured to recover any additional losses suffered due to the delay.
The proposed provisions in the Bill aim to encourage insurers to deal with claims as quickly as possible and grant a legal right for insureds to claim damages for the breach which are separate from, and in addition to, their right to enforce payment of sums due under the policy. Under the Financial Conduct Authority Handbook guidelines (ICOBS) insurers must handle claims promptly and fairly and must settle claims promptly once terms are agreed but there are no firm rules on how long this process should take. By comparison, the reforms place an implied term into every contract of insurance that where a claim is made, the insurer must pay any sums due within a reasonable period of time. This includes a reasonable time to investigate and assess the claim, but how is 'reasonable' defined?
The Bill defines that the amount of time which is considered reasonable will depend on;
- The type of insurance
- The size and complexity of the claim
- Compliance with any relevant statutory or regulatory rules or guidance
- Factors outside of the insurer's control
The definition of reasonable is left deliberately open but it is likely that the response period will be shorter in respect of consumer claims and in circumstances where the delay is preventing the insured from continuing or resuming trade.
Contracting out of the implied term
The Bill does contain provisions to allow the parties to contract out of the implied term. However there are clear distinctions between consumer and non-consumer contracts.
In a consumer contract, any term which would put a consumer in a worse position than under the proposed late payment provisions has no effect. This means that an insurer cannot contract out of the provision in a consumer contract.
In a non-consumer contract, insurers are permitted to contract out of the provisions provided that they satisfy several requirements under section 17 of the Insurance Act 2015 in relation to the term. This requires that an insurer draws the disadvantageous term to the insured's attention before the contract is entered into and to ensure that the term itself is clear and unambiguous as to its effect. If the insurer fails to meet these requirements, the term will be void.
In addition, the term may also be void if the insured is put in a worse position as a result of 'deliberate or reckless breaches' of the implied term. A breach is defined as being deliberate or reckless if the insurer either knew that it was in breach or did not care whether or not it was in breach.
Summary and implications
If passed in its proposed form, the Bill will inevitably have a significant effect on how insurers manage and settle claims. Insurers will have to be careful that they do not delay settlement unnecessarily.
Where insurers are found to have breached the implied term and have to pay damages for any losses incurred by the insured then reserves for such claims will be higher. It is therefore likely that both reserves and claims costs overall will be higher. This has implications for actuarial assessments of reserving going forward and under Solvency II may feed into higher capital requirements.
The extent to which reinsureds will be able to recover any such damages awards (and whether reinsurers will be obliged to pay such damages) will also have to be assessed.
Practical steps which can be taken to avoid breaching the implied obligation and to minimise the overall financial effects include:
- Addressing any complaints early;
- Making interim payments where appropriate;
- Utilising claims handling software to diarise regular review points within the life of a claim to ensure it is being progressed and keeping the insured informed of what steps are being taken;
- Ensuring any loss adjusters or outside claims handlers involved are aware of the new provisions and matters in their control are expedited to ensure prompt settlement;
- Considering with actuaries and auditors the possible effects on reserving levels and on insurers' internal models/standard models for Solvency II purposes;
- Having underwriting and wordings teams trained so that insurers can, if they so wish, contract-out of the implied term in commercial policies;
- Considering outwards reinsurance programmes to assess the recoverability of any damages awards.
The Bill is due to have a second reading on or around 12 October 2015.