Legislation that will allow policyholders to claim damages for late payment of insurance claims received royal assent yesterday. A new section 13A will be inserted in the Insurance Act 2015 implying a term into insurance contracts that an insurer must pay sums due in respect of a claim within a reasonable time.
Under the existing law, where a valid insurance claim is made the insured is entitled to indemnity up to the sum insured but cannot claim in respect of additional losses caused by the insurer’s failure to pay the claim within a reasonable time. This has long been the subject of criticism and, as part of their review of insurance contract law, the Law Commissions recommended reform of the law.
Although not included in the Insurance Act 2015, proposals for reform were subsequently incorporated in the Enterprise Bill and have now received royal assent.
Section 13A will insert an implied term into every contract of insurance that the insurer must pay all sums due in respect of a claim within a reasonable time. If an insurer is in breach of the duty, the insured will be able to claim damages (or any remedy available to it for breach of contract) in addition to the right to be indemnified under the policy and interest. Applying the usual rules of contract, where an award of damages places the injured party in the position they would have been in had the contract been performed, the damages awarded could be substantial (for example where a delay in payment has caused loss to an insured business).
What is a reasonable time for payment of a claim is not defined. Section 13A simply provides that it will depend on the “relevant circumstances”, giving some examples of matters that may be taken into account,
- the type of insurance;
- the size and complexity of the claim;
- compliance with any relevant statutory or regulatory rules or guidance; and
- factors outside the insurer’s control.
Inevitably, the question of what is a reasonable time will be an area of dispute. While the (non-exhaustive) list of factors to be taken into account gives some guidance, we can expect the courts to expand on these factors and that what is reasonable may vary markedly depending on the type, size and complexity of cover in any particular case.
Importantly, the legislation recognises that insurers need to be able to investigate claims properly and section 13A expressly provides that reasonable time includes a reasonable time to investigate and assess the claim. Insurers will have a defence to a claim under section 13A if they can show that they had reasonable grounds for disputing a claim. Demonstrating that the insurer had reasonable grounds to delay payment may not, however, be straightforward, particularly where advice received by the insurer on the merits of a claim is subject to privilege. In deciding whether the insurer breached the implied term, its conduct will also be taken into account. So, for example, an insurer might act reasonably in delaying payment while investigating a claim but be in breach if it was slow to take into account further information confirming the validity of the claim.
For non-consumer insurance, insurers will be able to contract out of the late payment provisions either entirely or by imposing a limit on liability provided (1) the insurer satisfies the transparency requirements contained in section 17 of the Insurance Act 2015 and (2) it has not acted deliberately or recklessly.
To satisfy the transparency requirements an insurer must show that the contracting out provision is clear and unambiguous as to its effect and that it took sufficient steps to draw the term to the insured’s attention (or the attention of its broker) before the contract was entered into.
A breach will be considered deliberate or reckless if the insurer either knew it was in breach or did not care whether or not it was in breach.
Following market representations, a one-year time limit for bringing a claim against the insurer under the new section 13A will apply. The one-year period for bringing a claim will run from the date when the insurance claim is settled and will operate in addition to the usual limitation period of six years from the date of breach of contract, so that a claim for late payment will be time-barred by whichever period ends soonest. The intention behind the time-limit is that it will assist insurers in reserving for claims where there
is a risk of a claim for late payment.
There will be a twelve month transition period before the legislation comes into force, allowing insurers and brokers to prepare for the changes. There are important implications for market participants to consider, including:
- The question of what is a reasonable time to investigate a claim and how insurers can demonstrate that they have not unreasonably delayed payment is likely to be a contentious area; insurers should review their claims procedures and have systems in place to show that they acted reasonably if required.
- Where risks are written on a subscription basis, issues where non-claims agreement insurers have limited control over claims payments.
- Whether an award of damages would be recoverable under reinsurance arrangements.
- Claims reserves may need revising to reflect any potential increased exposure.
- For non-consumer insurance contracts insurers may wish to consider policy terms limiting or excluding their exposure.
Following in the wake of the introduction of the Insurance Act in August 2016, the new measures will inevitably introduce some further legal uncertainty for the insurance market. Insurers and brokers are, however, taking steps to prepare for the changes. Not only will insurers and brokers be undertaking appraisals of their claims procedures and systems in the light of the new legislation but where insurers are considering excluding or limiting their liability for damages, wordings will need to be reviewed to achieve this.