The long-standing position under English law has been that no extra-contractual heads of damage can be claimed in relation to a failure to pay under an insurance contract. An insured's legal remedy is thus currently limited to the benefit or indemnity offered by the policy, with the Court having discretion to award both interests and legal costs as it deems appropriate.
That is set to change with the introduction of the new s.13A to the Insurance Act 2015 which will be brought into force on 4 May 2017 with the passing of the Enterprise Bill 2015, which received Royal Assent on 4 May 2016.
S.13A of the Insurance Act introduces an entirely different head of damage which would enable the insured to claim potentially un-capped levels of loss.
Specifically, this section provides that it is an implied term of every insurance contract that an insurer must pay sums due under it within a reasonable period of time (which will include a "reasonable time" to investigate and assess the claim).
A breach of the implied term will provide grounds for insureds to claim for usual contractual remedies, including damages (s.13A (5)).
Unsurprisingly this is causing some concern to insurers as s.13A appears to represent a fundamental shift in the risk insurers accept when underwriting polices, in that the provision effectively ends the ability of insurers to cap their exposure by reference to a defined limit. There is also a concern that the possibility of recovering consequential losses will increase the number/complexity of consumer claims, leading to increased costs for insurers to deal with them.
Business insurance would be able to contract out of this implied term subject to transparency requirements (though contracting out will not be valid where there has been a deliberate or reckless breach by the insurer), but for consumer insurance lines the implied term will be compulsory. We anticipate that group policies will be considered consumer policies where the individual insured persons are the beneficiaries although this is not specifically addressed in the legislation.
The Relevant Test
Some guidance on how the new provision will operate can be gleaned from the established law in other jurisdictions.
In Australia, for example, the Courts have historically implied a term into all insurance contracts that the insurer must perform its obligations thereunder within a reasonable time.
It is interesting to note in this regard that the Law Commission considered regimes in different jurisdictions and ultimately adopted a position similar to the Australian regime, which does not seek to stipulate the meaning of "reasonable time" for claim settlement, unlike some other jurisdictions where a specific timeframe is specified (e.g. California).
We would expect the English Court to refer to case law in such established jurisdictions to interpret matters within its own jurisdiction and Clyde & Co's Australian offices have been providing their experience to assist us in preparing for the new regime.
First of all, reasonable time will always include time to investigate and assess the claim. Australian case law such as Moss v Sun Alliance Ltd (1990) 55 SASR 145 and Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office  NTSC 46 have indicated that valid claims should be paid within a matter of several months, depending on when the insurer received key information regarding the claim. This appears in line with English case law, such as the case of Brit UW Ltd v. F&B Trenchless Solutions Ltd  EWCA 2237 (Comm), it was indicated that a period of 4-5 months might be a reasonable timeframe to allow investigation of a complex claim under a contractors' combined liability policy, while in Gentry Miller  EWCA Civ 141, the Court of Appeal held that a period of 2-months was deemed reasonable for the investigation of a low-value road traffic accident claim.
Reasonable time will also depend on the particular circumstances of each case, taking into account such factors as the type of insurance, the size and complexity of the claim and compliance with any relevant statutory or regulatory rules/guidance. Taking time to obtain all relevant information or secure legal advice would be part of an investigation.
Further, section 13A (4)(b) provides that the insurer's conduct of the claims handling process could be taken into account in assessing whether a claim has been paid promptly. This appears to indicate, as in Australia, a claims handler should carefully paper their file with each step undertaken.
Secondly, it will be a defence for the insurer to show that there were reasonable grounds for disputing the claim, either as to liability or quantum (Section 13A (4)(a)). Australian colleagues indicate that it is not the case that where a declinature is unsuccessful this will automatically lead to late payment damages. It appears to us that even an unsuccessful declinature, if based upon clear reasons, could constitute "reasonable grounds for disputing the claim". The phrase itself is nonetheless open to interpretation and may require clarification from the Courts.
Thirdly, a late amendment to the Enterprise Bill provided that a claim for late payment damages must be brought within one year of the expiry of the "reasonable time" in which the claim should have been paid, thus providing a long-stop date beyond which insurers will not be held liable.
Preparation for May 2017
It has been commented that most insurers, certainly within the London market, should already have adequate systems in place to ensure prompt payment of claims, in accordance with the fair claims handling requirements under ICOBS. Indeed the Financial Ombudsman Service already has the right to impose a financial penalty on insurers where it considers there to have been delays in claims handling or payment, perhaps in recognition of the fact that consumers and micro-businesses are more likely to sustain losses as a result of late or non-payment of a claim. However, such awards are small token amounts and do not constitute damages.
The potential exposure for consumer business is significant if insurers are unable to satisfy the reasonable time requirements. In the circumstances the new regime naturally encourages insurers to sharpen their claims handling and management procedures.
In addition, there are uncertainties surrounding the impact of the provision where the reinsurer directs the handling or settlement of a claim or where a delay in payment arises out of the Lead insurer's conduct, impacting the following market which has little control in the claims process. Insurers may also wish to look at their contracts with external parties (such as reinsurers and loss adjusters) to see if they can pass on liabilities for delays.
It appears that early legal advice as to whether there is an issue that reasonably requires investigation or whether the claim has now become payable may also be useful. Clyde & Co offers that service from its Oxford office.
Further pressures on consumer business lines are unwelcome in the current financial climate but the true practical impact of s.13A will take time to assess. Overall insurers would be well advised to ensure that their claims handlers are fully prepared for the new regime.