At the moment, English law says that insurers and reinsurers are not under a positive duty to pay valid claims within a reasonable time. If an insurer/reinsurer delays in paying a claim, or fails to pay at all, an insured/reinsured can only claim the sums due under the policy and interest. An insured/reinsured cannot claim damages for late payment if it suffers additional losses by reason of a delay.
That position will change after May 4, 2017 when certain parts of the Enterprise Act 2016 introduce a new section 13A into the Insurance Act 2015. The result of the new legislation is that any insurance/ reinsurance (including retrocession) policy issued or renewed after May 4, 2017, and which is subject to English law, will contain an implied term that requires an insurer/reinsurer to pay claims within a reasonable period. If they act in breach of such a term, then they are potentially liable to pay contractual damages to the insured/ reinsured, as well as sums due under the policy and interest.
Going forward there is likely to be debate about what constitutes “reasonable time,” but it will include giving time to an insurer/ reinsurer to investigate and assess the claim. And what is “reasonable” will turn on issues such as the type of insurance in question, the size and complexity of the claim, compliance with relevant statutory and regulatory rules/guidance and factors outside an insurer’s/reinsurer’s control.
The new legislation also provides a defense to an insurer/reinsurer and they will not be in breach of the implied term if they can prove that they have reasonable grounds for not paying the claim. The manner in which the claim is handled will, therefore, be a factor in determining whether there has been a breach of the implied term.
An insured/reinsured must issue the court claim for damages within one year of the date that the insurer/reinsurer pays all sums due under the insurance contract. This introduces a new limitation period for legal claims under English law.
Insurers and reinsurers should note that it will be possible to contract out of the new provisions provided they do so in a transparent manner and draws this to the insured’s attention before the policy is entered into.
While on the face of it this is all good news for insureds, insurers can take comfort from the fact that claims for breach of the implied term will not be straightforward and may not, therefore, be widespread. In particular, insureds/reinsureds will still have to satisfy the court on issues such as causation, remoteness and mitigation before a claim can succeed. And insurers/reinsurers will only be liable for foreseeable losses suffered by their insureds/reinsureds.
Going forward, practical steps to be taken by insurers include responding promptly to an insured’s request for claims’ information, continuing to carefully document the claims process and to consider making interim payments to an insured if appropriate. These will significantly improve the chances of an insurer/reinsurer successfully defending any legal actions taken by insureds/reinsured alleging a failure to pay a claim within a reasonable time and claiming damages.