At present there is no right to damages if an insurer in the UK takes an unreasonable period to settle a claim. Late payment of claims can create genuine hardship for an insured. This could all be set to change from 4 May 2017.
In a significant change to English law, from 4 May 2017, an insured will have a right to claim damages in the event that an insurer fails to pay sums due in respect of a claim under an insurance policy within a reasonable time.
Policyholders do not currently have this right due to the legal fiction that payments under insurance contracts are, in fact, payments of damages for breach of the insurer’s contractual obligation to hold the insured harmless. This is important as English law does not permit a claim for damages for the late payment of damages.
The new provision adopted in the Enterprise Act 2016 will apply to all insurance and reinsurance contracts entered into after 4 May 2017.
It will amend the Insurance Act 2015 (creating a new section 13A) resulting in a term being implied into all insurance contracts providing that insurers and reinsurers must pay sums due in respect of a claim “within a reasonable time”. Breach of the term entitles an insured to damages, quite separately from the insured’s right to the proceeds of the claim and interest on the claim (section 13A(5)).
The nature of the damages
The general principles applicable to contractual damages shall apply. In broad terms, the insured will need to show that:
actual loss was incurred;
the loss was foreseeable at the time the contract was entered into;
the failure to pay caused the loss; and
the insured has taken reasonable steps to mitigate the loss.
Insurers must pay "within a reasonable time"
There is no guidance to identify what is reasonable and it will, of course, depend on “all the relevant circumstances”. Such circumstances include (new section 13A(3)):
the type of insurance;
the size and complexity of the claim;
compliance with any relevant strategy or regulatory rules or guidance; and
factors outside the insurer’s control.
"Reasonable grounds" for disputing the claim
If the insurer has reasonable grounds for disputing the claim and delays payment while the dispute is continuing, the term will not be breached merely for that reason, although the insurer’s manner of conducting the claim will be taken into account (new section 13A(4)). The uncertainty surrounding what constitutes “reasonable grounds” may push insurers to settle disputed claims.
It is possible to contract out of or vary the implied term in the case of non-consumer contracts, save in respect of deliberate or reckless breaches of the term by the insurer (new section 16A). It will be interesting to see whether insurers propose contracting out although if they do they will need to be mindful of the transparency requirements for such a term to be clear and unambiguous as to its effect, and that the insurer has taken sufficient steps to draw the disadvantageous term to the insured’s attention.
Implications for the insured
From the insured’s perspective, the availability of damages will create some additional leverage to ensure that claims are paid promptly although it is important to note that such claims must be brought within one year of the date of final payment and the insured will have to prove causation in the usual way.
Implications for the insurer
From the insurers’ perspective, it will be important to ensure that claims handling is carried out efficiently and to manage carefully any part of the claims process that is contracted to third parties. The operation of the implied term may well give rise to issues between insurers where, for example, there is a subscription market with a lead insurer responsible for claims or where there are primary and excess layers. It would be sensible to pay attention to wordings to deal with the potential risks.