The Law Commission has published an Issues Paper considering whether an insurer should be liable for loss caused as a result of its unjustified refusal to pay a claim. The paper suggests that the current position regarding an insurer's post-contractual duty of good faith be changed so that damages would be available where an insurer breaches its duties by refusing to pay out on time. At present, the only remedy for breaches of good faith is avoidance, which is often inadequate for an insured awaiting payment from its insurer for a loss suffered.

The Commission's Insurance Contract Law Issues Paper 6 refers to the decision in Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd's Rep IR 111; [1997] CLC 70 to illustrate the unfairness of the current system. In that case, Mr Sprung lost his business after vandals damaged his factory but his insurer refused to pay out. Although four years later he eventually received an indemnity for damaged property plus simple interest and costs after the insurer abandoned its defence, he was not allowed to recover for the lost opportunity to sell his business. The Issues Paper refers to many criticisms of the case and points out that in Scotland damages for late payment is allowed because insurance is not considered an exception to normal contract rules.

The paper is aimed at promoting discussion before final proposals are formulated. Responses are requested by 24 June 2010. The full paper can be viewed by clicking here.