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Reforming insurance law: late payment of claims

This guide is based on the law of England and Wales. It was last updated in April 2017

The Enterprise Act 2016 (the Act) received Royal Assent on 4 May 2016 and comes into force on 4 May 2017.  When in force, insurers will have to pay damages for late payment of claims to their insureds.

Prior to 4 May 2017, if an indemnity insurer failed to pay a claim within a reasonable time, the insured had no remedy in damages for any loss it may suffer as a result. That is because the indemnity insurer’s duty was characterised as being to hold the insured harmless against the occurrence of insured loss. As a result of this so called "legal fiction", if the insured loss occurred, the insurer was liable in damages for breach of contract to the insured. English law did not permit a party to claim damages for a failure to pay damages. Consequently, it was impossible for an insured to recover damages for late payment of an insurance claim.

The key provisions of the Act slot in as ss13A and 16A of the Insurance Act 2015. After 4 May 2017, a term will be implied into all insurance contracts stating that the insurer must pay claims within a “reasonable time.” This will include a reasonable time to investigate and assess the loss. 

The implied term does not prevent an insurer from refusing to pay a claim if it has reasonable grounds for the refusal and has no obligation to pay the claim whilst the dispute continues, provided that it acts reasonably during this period. The implied term provisions are intended to catch bad claims handling and are not aimed at limiting fair claims handling decisions or encouraging compensation claims after the event. It is therefore expected that the practical application of these provisions will be relatively limited and claims for late payment are not likely to be common.

What is reasonable will depend on all the relevant circumstances and a non-exhaustive list of factors to be taken into account are set out in Act. They include:

The type of insurance: Relevant matters will include not only the type of the insurance itself but also the level of cover, the size and complexity of the insured and the structure of the insurance programme, as all of these factors impact on amount of time taken to assess a claim. For example, the assessment of claims under business interruption policies is often time-consuming and difficult, while travel insurance claims or claims for property damage are generally unlikely to require significant or lengthy investigation.

The size and complexity of the claim: This factor is likely to be the most relevant one in assessing what constitutes a "reasonable time". If the claim is of a high value, it will naturally be reasonable to spend more time assessing the loss than if the claim is a small one. However, new section 13A(3)(b) of the Insurance Act makes it clear that the value of the claim is not the only factor, since “complexity” is also a relevant factor. The case of Brit UW Limited v F&B Trenchless Solutions illustrates that where complex, technical or other investigations are required in an assessment of the loss then the process will understandably take longer.

Compliance with any relevant statute or regulatory rules or guidance: Such relevant material may include the FCA Insurance Conduct of Business Sourcebook (ICOBS) (in particular ICOBS 8 requirements for claims handling) as well as the FCA Principles for Business and Lloyd's Minimum Standards, all of which provide guidance relating to the fair and proper treatment of and communication with insureds throughout a claims process; and

 Factors outside the insurer's control: Relevant issues may include the occurrence of other  factors outside the insurer’s control as well as the non-availability of particular staff, the difficulty of investigating the loss, any suspicion of fraud or where the insured is slow to provide information.

Breach of the implied term will give the insured the usual remedies for breach of contract including damages.

The insurer will have a defence if it has reasonable grounds for disputing the claim.  However, the insurer’s conduct in handling the claim may be a relevant factor in deciding whether the implied term has been breached, for example, if it conducts its investigations unreasonably slowly or delays taking into account additional information provided by the insured.  The insurer's treatment of the insured when engaging in pre-action correspondence, unjustified refusal of ADR, failure to make or accept reasonable offers of settlement, unsuccessfully contesting applications made by the insured and appealing judgements may also be of relevance.

There will be a one year limitation period for the insured to bring a claim for breach of the implied term, running from the date on which insurers have paid all sums due under the policy. 

Insurers cannot contract out of the implied term in consumer contracts. For non-consumer insurance, insurers cannot contract out of deliberate or reckless breaches but can contract out where the “transparency requirements” under the Insurance Act have been met i.e. the insurer has taken steps to bring the disadvantageous term to the insured’s attention and that term is clear and unambiguous as to its effect.

Determining what a “reasonable time” is for paying claims is likely to give rise to disputes between the parties. To reduce the risk of late payment claims insurers will need to review and update their policy wordings, particularly in the case of non-consumer insurance contracts where the option to contract out may be available. Claims handling processes will need to be reviewed and insurers will need to ensure that claims handling staff are well informed and trained. Post 4 May 2017, insurers should continue to be pro-active when handling claims and, most importantly, be able to demonstrate pro-active behaviour if necessary before the  court.

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