From 4 May 2017, a term will be implied into all contracts of insurance and reinsurance that the (re)insurer pay any sums due in respect of a valid claim within a reasonable time. The new provisions are contained in section 13A of the Insurance Act 2015, as inserted by sections 28-30 of the Enterprise Act 2016.
The key provisions
- If an insurer breaches this term they may be liable in damages to the insured for resulting loss that was foreseeable at the time the contract of insurance was entered into.
- An insured will have 12 months to bring an action for late payment. Limitation will run from the date the insurer paid all sums due in respect of the claim.
- The question of what is a ‘reasonable time’ will depend on the circumstances of each case. The courts will consider:
- the nature/type of the insurance
- the size and complexity of the claim
- any factors outside of the insurer’s control, for example, delays by the insured or a third party
- compliance with any relevant statutory or regulatory rules or guidance, and
- the conduct of the insurer, including any efforts made to investigate or resolve the claim, whether the insured was kept up-to-date and whether any interim payments were made. If coverage or quantum was disputed, insurers will need to show reasonable grounds for doing so.
Insurers can contract out or limit their liability for late payment in non-consumer (but not consumer) contracts. To do so they must comply with the transparency requirements in section 17 of the Insurance Act 2015 i.e. the contracting out must be clear and unambiguous and drawn to the attention of the insured before entering into the contract.
There may be some time lag before we see claims arising from breach of the implied term: it is only being implied into business written from 4 May 2017 onwards. It is anticipated, however, that the requirement for any loss suffered by an insured as a result of late payment to be foreseeable at the time of placement may limit the level of damages insurers have to pay in practice.
In the meantime it remains to be seen whether, as with other aspects of the Insurance Act, the new rules prompt the market to develop new wordings or clauses that go beyond or adapt the new rules.
Claims handlers across all lines must make themselves aware of the new law and insurers’ potential liability where claim payments are not made in a reasonable time. Since insurers’ conduct will be a relevant factor, insurers should keep their claims processes under review, in particular regarding how insureds and brokers are kept informed about claims.