When it was passed, the Insurance Act 2015 left out perhaps the most significant of the Law Commission’s proposals: to require insurers to pay all claims within a reasonable time or be liable for damages.
Insurers heaved a sigh of relief (and policyholders a sigh of regret) until last week, when the Law Commission announced that damages for late payment of claims was back on the legislative agenda.
What is proposed?
The Enterprise Bill had its first reading in the House of Lords last week, on 16 September 2015. Part 5 of the Bill will, if passed in its current form, add the following provisions to the Insurance Act to take effect on 12 August 2016:
- Insurance contracts will contain an implied term that insurers must pay claims within a “reasonable time”
- A “reasonable time” will include a reasonable time to investigate and assess a claim
- Exactly what is a “reasonable time” will depend on “all relevant circumstances” including the type of insurance, the size and complexity of the claim, regulatory compliance and any factors outside the insurer’s control
- If an insurer denies a claim, or disputes quantum, with reasonable grounds to do so this will not, on its own, breach the implied term but an insurer’s conduct in handling a claim will be relevant in deciding whether the implied term has been breached
- Breach of the implied term to pay claims in a reasonable time will be a separate cause of action all of its own
- Insurers can contract out of these provisions as they can for other aspects of the Insurance Act
What will it mean?
If Part 5 of the Bill is passed in its current form, it has the potential to affect profoundly the handling of claims governed by UK law:
- Insurers’ processes for investigating and either paying or disputing claims will need careful review and, in some cases, amendment
- Claims handlers will need additional training to avoid falling foul of the new law
- Litigation will be needed to establish what a 'reasonable time' may be in different circumstances and different lines of business
- In some cases insurers could find themselves liable for significant damages for consequential loss if late payment of a claim causes policyholders loss, or even insolvency
- Policyholders, on the other hand, will have extra leverage with insurers on claims and additional incentive to adopt a rigorous approach to pursuing claims
In short, the proposed new law will open up a separate front in any coverage litigation and is likely to move UK claims handling closer to the US model.
What comes next?
The second reading of the Enterprise Bill in the House of Lords is due to take place on 12 October, following which the Bill will go to the House of Lords’ Committee stage.
The Enterprise Bill as a whole raises a number of issues and there is the potential for lively discussion in Parliament - including in relation to these proposed changes. We note, for example, the Law Commission’s potentially controversial assessment of the possible cost of the new law to the insurance industry as a whole, namely: £200,000 for gearing up for the proposed changes; £500,000 litigation costs to establish the parameters of what is meant by 'reasonable time', spread over 5 years; and £3.75m to deal with unmerited claims for damages for late payment of claims, spread over 10 years.