4 May 2017 marked the implementation of the Late Payment provisions introduced by the Enterprise Act 2016, which introduces a clause in the Insurance Act 2015 relating to the late payment of claims. For insurance policies entered into from this date, a term will be implied into the insurance contract that all claims will be paid ‘within a reasonable time’. This means insureds will have the right for the first time, to make a claim against their insurers for damages if their claim is paid late and the insured suffers a direct loss as a result of the delayed payment.
What is a reasonable time is not defined in the Act and each case will be decided on its own facts. The Act does however give some guidance on the factors to consider when considering whether the insurer has delayed payment on a claim. These factors include the type of insurance, the size and complexity of a claim, compliance with any relevant statutory or regulatory rule, and factors outside the insurer’s control. What is deemed reasonable in a complex claim will differ from what is reasonable in a straightforward claim, with no one size fits all approach.
In order for insurers to protect themselves as much as possible against claims for late payment they will need to ensure that their procedures, processes and record keeping are robust so that it is possible to evidence the claims process.
Examples of this may include:
- Clear and comprehensive internal claims handling procedures, which are kept under review;
- Good record keeping – ensuring that all steps and requests, and the reasons for them, are recorded;
- Comprehensive requests for information should be targeted at the crucial detail that is needed and a piecemeal approach avoided. If an insured responds in a piecemeal fashion this should be noted on the file and the request repeated;
- Keeping the channels of communication with the insured and broker open;
- Explaining any delays and managing expectations so that the insured does not form an unrealistic view of the timescale of the claim;
- Ensuring that agents or suppliers such as loss adjusters and experts involved in the investigation process are aware of the importance of the timely delivery of reports;
- If appropriate, early interim payments for uncontroversial parts of the claim, in order to fund initial steps for the insured to resume trading;
How much will damages for late payment be?
The level of any damages available will be formulated in accordance with ordinary and established contractual principles, that is, to put the insured in the position they were in before the breach of contract. In order to succeed in a claim for damages for late payment, an insured will have to prove causation, show that the loss was foreseeable and demonstrate that it took steps to mitigate the loss.
Insurers are assessed on the foreseeability of loss based on their knowledge of the risk and what they can anticipate might happen in the event of a breach occurring and the insured suffering a loss. This brings into focus the insured’s ‘fair presentation’ of the risk, because at the stage where the parties are agreeing the relevant facts about the risk to be insured, insurers are in possession of knowledge which will allow them to ‘foresee’ what might happen in the event of a late payment to that particular insured.
A free hand for insureds?
There is probably some concern within the market that insureds might use the threat of a late payment claim as a tool to pressure insurers into the early settlement of claims.
Whilst insureds and those acting for them will be alive to such a possibility, as set out in this article, there are a number of ways that insurers can protect themselves from unjustified claims for late payment, and what is critical to this discussion is the extent to which an insured has in fact suffered a loss and one that was foreseeable in all the circumstances.
The Act is clear that “if the insurer shows that there were reasonable grounds for disputing the claim … the insurer does not breach the term implied … merely by failing to pay the claim (or the affected part of it) while the dispute is continuing”. Provided steps taken by insurers when investigating the claim are justified and reasonable in light of the circumstances at the time, insurers will be able to defend a claim for late payment