The provision in the Insurance Bill (now the Insurance Act 2015) which provided insureds with a remedy for damages in the event of late payment of claims was dropped because there was no consensus across the insurance market.
This provision has now been reintroduced (in the same form as it was proposed for the Insurance Act) in the Enterprise Bill (the "Bill") which is currently before Parliament.
Under the current law, damages for late payment of claims are not recoverable from insurers. Although Financial Conduct Authority (FCA) rules require claims to be handled and settled promptly, any failure to comply does not entitle an insured to claim damages for late payment. The insured can only recover that which it is owed under the policy (plus the insured can claim interest on that sum if it brings legal proceedings against the insurer). There is no provision to recover any additional losses suffered due to any delay in payment by insurers.
The Bill provides that it will be 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 the claim within a reasonable time. Breach of this implied term will give rise to a potential claim in damages.
The Bill provides that a "reasonable time" includes a reasonable time to investigate and assess the claim. What is reasonable will depend on the circumstances but the Bill provides the following 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, and
- Factors outside the insurer's control.
The Bill also provides that if an insurer can show that there were reasonable grounds for disputing the claim (whether as to the amount payable or as to whether anything is payable at all), the insurer will not be in breach of the implied term 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 the implied term was breached and, if so, when.
The Bill does contain provisions to allow the parties to a non-consumer contract to contract out of the implied term if the transparency requirements in the Insurance Act 2015 are met. However, contracting out will not be valid where there has been a deliberate or reckless breach of the implied term by the insurer. Contracting out in respect of consumer contracts is not permitted.
The provision now included in the Enterprise Bill will, if passed, amend the Insurance Act 2015, although will not come into force until one year after the Enterprise Bill receives Royal Assent. This will be some time later than August 2016 when the rest of the Insurance Act 2015 comes in to force and it is not clear from the Bill how this will work in practice.
The second reading of the Bill is due to take place on 12 October.
The reintroduction of this provision in the Enterprise Bill has caught many by surprise. This provision was dropped from the Insurance Bill which received Royal Assent earlier this year to allow the Insurance Bill to follow the special procedure for uncontroversial Law Commission Bills.
Concerns have been raised by some in the insurance market that such a remedy may be exploited by policyholders and give rise to US-style bad-faith litigation. Others, in favour of the remedy, take the view that it is important that policyholders who are negatively affected by any delays in their cash flow are properly compensated.
It is important to remember that an insured's claim for damages for late payment of claims is a contractual one and that not all losses that flow from a breach of contract are recoverable. Any claim will be subject to the usual contractual hurdles which may restrict or, in fact, prevent an insured's right to damages:
- Causation – was the loss caused by the insurer's delay
- Remoteness – the loss will only be recoverable if it was in the contemplation of the parties at the date the contract was entered into
- Mitigation – the insured will be under a duty to mitigate its loss
Clearly, if an insured was permitted to claim damages for late payment of a claim, what the insurer knew about the insured's business at the time the insurance contract was entered into will be crucial.