Enterprise Act 2016 receives Royal Assent

The Enterprise Act 2016 received Royal Assent today, 4 May 2016, finally making damages for late payment a reality. The provisions introduce into every contract of insurance an implied term requiring the insurer to pay sums due within a reasonable time. Failure to do so entitles the insured to remedies including damages.

This Act concludes a somewhat controversial journey that has seen the provisions removed from the draft Insurance Bill and later carve outs unsuccessfully sought for reinsurance and large risks. The key provisions will slot in as ss13A and 16A of the Insurance Act 2015 but will not however come into effect until one year from today.

Practical implementation

Nick Young, partner at DAC Beachcroft, commented that: "Whilst the industry has been aware of these proposals for some time, insurers need to act now, if they have not done so already, to update their policies and procedures and to ensure that they can rely on the protections available to them. As a starting point they should ask the following questions:

  1. Do our policy wordings need updating? For example, insurers may want to consider whether to limit their liability in non-consumer insurance contracts, but this is only permitted where the breach is not deliberate or reckless and the transparency requirements set out in the Insurance Act 2015 are satisfied.  
  2. What is a reasonable time to pay sums due? This will certainly be a flashpoint for disputes between parties. The Act and explanatory notes provide further detail on what should be taken into account, including the type of insurance, size and complexity of the claim and factors outside insurers' control.  
  3. Do our claims handling processes acknowledge the various limitation issues? The Act inserts as s5A of the Limitation Act 1980 a new time limit of one year from the date that insurers pay all sums due. Where indemnity is refused, it would seem that time will only start to run once there has been any judgment against the insurer and that judgment has been paid.  
  4. What other procedures/training may be required or need reviewing? Insurers should certainly be looking at reserving; reasonable grounds for disputing a claim (including evidencing claims handling); the voluntary use of interim payments; settlement.  
  5. What is the reinsurance position? Insurers should check their reinsurance arrangements for any exclusion clause or positive statement of cover in relation to a cedant's liability arising from a late payment to an insured. Availability of cover may also be linked to the extent of a reinsurer's knowledge and control of the claims handling and settlement. It is unlikely that one approach will fit all and consideration will need to be given to what is appropriate for a particular class of business or type of reinsurance. Damages for late payment will be awarded as a consequence of how in the eyes of the court a cedant has handled an underlying claim, it is not related to the nature of the loss itself and so will not readily come within the terms of any treaty or facultative reinsurance arrangements, unless expressly covered as an extra-contractual liability.  

Clear guidance is only going to be available once these provisions are interpreted by the courts. The best thing that insurers can do for now is to clarify their policy wordings and procedures and ensure that targeted training is rolled out to all involved."

Key Dates

Key dates for your diary in light of the legislative reforms coming into effect:

Insurance Act 2015: 12 August 2016

Damages for late payment provisions in the Insurance Act 2015: 4 May 2017