All insurance policies entered into, renewed or varied after 4 May 2017 contain an implied term for an insurer to pay sums due within a reasonable period of time when a claim is made under the policy.
If an insurer fails to do so then a policy holder can make a claim for compensation in addition to the payment they are owed under the policy (plus interest). In the case of an individual policy holder a claim for compensation can arguably include an element for mental distress and anxiety if the nature of the insurance policy warrants it.
There is no definition of a ‘reasonable’ period of time, as this will depend on the circumstances, but factors to take into consideration include the size and complexity of the matter and factors outside the insurer's control, such as delay by the policy holder. However, an insurer is allowed time to investigate and assess a claim. Case law will no doubt, over time, help to provide clarity on what constitutes a ‘reasonable’ period of time.
It is up to the policy holder to prove that there has been a breach of the implied term and that they have suffered foreseeable loss as a result. Of course it should be borne in mind that an insurer will naturally have a certain amount of insight into how its policy holder’s business operates and the likely effect on a delay in payment. The insurer has a defence if the delay was caused by a genuine dispute and it behaved reasonably but it is up to the insurer to prove this. An insurer may not wish to waive privilege by divulging any legal advice it obtained regarding a particular claim under a policy and therefore would be wise to ensure that internal notes are retained separately and detail the decisions made and the rationale behind those decisions. Of course if there is ultimately no sum due to the policy holder then this will defeat a claim for compensation.
It may also be prudent for an insurer to review its policies in light of the new law and to ensure that terms with its service providers, such as loss adjusters, mirror its own policies in relation to the timely processing of claims. An insurer can seek to contract out, or limit their liability, in relation to policies with non-consumers. However, this is only possible if the terms are clear and unambiguous, are drawn specifically to the policy holder's attention prior to entering into the policy and the insurer does not breach the contract deliberately or recklessly (i.e. without caring if it is in breach). Such clauses are likely to come under scrutiny by the Court and the Financial Ombudsman Service if a claim is issued or a complaint raised by the policy holder. It is important to note that an insurer cannot contract out or limit liability in respect of consumer policies.
There is a one year long stop date for claims for compensation, running from the date that the payment due under the policy is made. This assists an insurer to build reserves to deal with potential late payment claims. However it may be worth insurers entering into suitable settlement terms with policy holders who receive a payment for a claim made on their policy, waiving entitlement to claim compensation for late payment, but the payment of the insurance claim and the settlement relating to the potential compensation claim must be separate.
Ultimately, if an insurer is in breach of the implied term, then it is the insurer’s responsibility and it is unlikely that it will be able to look successfully to reinsurance to cover it for any compensation it has been ordered to pay. It is therefore important to be aware of the implied term and ensure that procedures are designed to limit the number of claims for delay and to provide supporting evidence to defend any claims issued.