In August 2016 the Insurance Act 2015 came into force in the UK. The new Act represented the greatest change to insurance contract law in the UK in over 100 years and was widely heralded by the insurance sector as a welcome and long overdue overhaul of the law.
However, more recent legislative changes have caused concern within the insurance market. On 5 May 2017, the Enterprise Act 2016 will come into force in the UK and will make two key amendments to the Insurance Act. These are the addition of two new clauses as follows:
- Clause 28 of the Enterprise Act introduces a new section 13(A) to the Insurance Act which will makes it an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of a claim "within a reasonable time". A "reasonable" time includes time to investigate and assess the claim and what is reasonable will depend on various factors which I will consider further in a moment.
- Clause 29 permits contracting out of these changes (although not for consumer insurance). However, such contracting out will not be valid where there has been a deliberate or reckless breach by the insurer.
How is a "reasonable time" judged in individual cases?
Section 13(A)(3) states:
"What is reasonable will depend on all the relevant circumstances" but the following are examples of things which may need to 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;
- factors outside the insurer's control."
Section 13(A)(4) then goes on to provide that if the insurer shows that there were reasonable grounds for disputing the claim (whether as to the amount or as to liability) the insurer does not breach the implied term that payment must be made within a reasonable time merely by "failing to pay the claim while the dispute is continuing". However, the conduct of the insurer in handling the claim may be a relevant factor in deciding whether that term was breached and if so when.
Do insurers have to pay punitive damages, loss of profit, or other damages?
The rationale behind the introduction of the rule regarding damages for late payment of claims is that wrongfully delayed payment, particularly in the case of an assured who is a small to medium sized entity (SME), may damage the assured's business to such an extent that it becomes bankrupt and goes into liquidation. The damages for late payment are to be assessed as damages for breach of contract which means that the assured would have to prove in respect of the late payment:
- that the late payment had caused actual financial loss;
- that the type of loss was foreseeable by the insurers and within the contemplation of the parties as something likely to happen if insurers paid late (under the test in Hadley v Baxendale (1854) 156 ER 145) and;
- that the assured had taken reasonable steps to mitigate the loss.
If insurers can foresee that an SME with a large marine cargo claim will be reliant upon payment under the policy for its business to continue, then insurers could be liable for loss business or loss of profits if there is a delay in payment of the claim. In the case of a larger company where the costs incurred comprise financing costs in arranging a short term loan or bridging finance, damages are likely to be capped at cost borrowing the extra funds, depending on the facts of the case.
The amendments to be introduced by the Enterprise Act are significant in that they place a legal obligation on insurers to respond to a claim within a certain period of time and legal liability if the claim is not dealt with within that time frame.
Insurers have expressed concern that the late payment damages clause will introduce considerable uncertainty for their working practices in that:
- they might require additional expenditure, such as the recruitment of additional staff to handle claims;
- when suing insurers, assured claimants might include a claim for damages for late payment in order to pressure insurers into dropping defences.If a claimant is suing for cover under a policy and wants to bring pressure to bear on an insurer, including a large claim for loss of profits would probably be viewed as a smart tactical move;
- Insurers themselves may have to seek insurance against the risk of having to defend and/or pay out on damages claims, or raise premiums to cover this risk.
In the London market, the Lloyds Market Association, who have been coordinating responses by Lloyd's to the Enterprise Act and the Insurance Act 2015, are still considering the new provisions but have indicated that they intend to publish model clauses for policies designed to limit liability.
The above changes in the English legislation will no doubt affect those Chinese insurers who issue policies which provide for English law as the governing law or incorporate institute clauses into their policies. In such cases, the changes might give pause to Chinese insurers who insure against catastrophic risks (such as the claims involving the Tianjin Port fire and explosion that occurred in August 2015), where assureds may be motivated to pursue a claim for damages due to late payment in addition to laying a complaint with the regulator.
At this stage, it is too early to tell what the impact of these amendments is going to be. It is likely going to take at least several years of these issues being litigated before the Courts before there is a sufficient body of case law laying out principles as to what is a "reasonable time" and what an appropriate measure of damages is for particular classes of claims. Those in the insurance industry will therefore have to wait and see how these changes will play out.