Summary: From 4 May 2017, insurers and reinsurers will be liable for damages caused by late payment of a valid claim. Under the current law, insurers have no legal obligation to pay valid claims within a reasonable time. This will change next month with the coming into force of new provisions of the Insurance Act 2015.

Enterprise Act 2016

Part 5 of the Enterprise Act 2016 amends the Insurance Act 2015 by introducing into every contract of insurance an implied term that the insurer pay valid claims within a “reasonable time”.

These new provisions come into effect on 4 May 2017 and apply to all insurance and reinsurance contracts entered into on or after that date.

At present, an insured can only recover what it is owed under the policy plus interest. However, under the new provisions, damages will be payable by an insurer where a policyholder suffers additional loss because of the insurer’s failure to pay a claim within a “reasonable time”.

A “reasonable time” will depend on the specific circumstances of each case but will always include time to investigate and assess the claim. The insurer will have a defence to a claim for breach of the implied term where it had reasonable grounds for disputing the validity or value of a claim.

In addition, the Act provides a non-exhaustive list of factors that will be taken into account in determining what is a “reasonable time”:

  • 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.

Case law on “reasonable time” to investigate a claim

Precisely how much time will be “reasonable” to investigate and pay a claim will only become clear when the new law takes effect. However, two recent cases provide some guidance here.

In Gentry v Miller [2016] EWCA Civ 141, the Court of Appeal determined that a period of two months (including the Christmas period) for investigating a low-value road traffic accident claim “may not, in itself, be unreasonable”. However, the Court was critical of the fact that there was no explanation as to why it took so long (at least seven months from notification of the claim) for the insurer to commence its investigation. It also criticised the insurer for failing to respond to correspondence.

In Brit UW Ltd v F&B Trenchless Solutions [2015] EWHC 2237 (Comm), the Court held that a period of four to five months was not an unreasonable timeframe to allow for the investigation of a complex claim under a contractor’s combined liability policy. This period includes taking legal advice and deciding whether to avoid the policy.

These cases highlight how significantly a reasonable period of investigation may vary depending on the complexity of the claim. The Gentry case also serves as a reminder of the importance of commencing investigations as promptly as possible and communicating with an insured regularly.

Contracting Out

The Act allows for contracting out of these provisions in non-consumer insurance contracts, provided that the insurer satisfies the transparency requirements set out in the Insurance Act 2015. However, it is important to note that contracting out will have no effect where the insurer’s breach of the implied term is deliberate or reckless.

Limitation Period

The Limitation Act 1980 has been amended to include new provisions specifically dealing with breach of the new implied term to pay claims within a “reasonable time”. Policyholders will have one year from payment of their claim to issue a claim for late payment against their insurer.

Practical Points

A few practical points to help mitigate the risk of a claim for late payment of damages and assist in defending any claims:

  1. Ensure systems and processes for assessing and settling claims are followed and decisions documented throughout;
  2. Address any complaints and, if necessary, commence investigations as early as possible;
  3. Communicate regularly with policyholders and other relevant parties in respect of claims, including (where appropriate) explanations of timescale for assessing claims; and
  4. Ensure that external advisors (e.g. coverage counsel, coverholders and loss adjusters) are aware of the risks of unreasonable delay and work together efficiently to ensure that valid claims are paid promptly.