The Enterprise Bill which had its first reading in the House of Lords on 16 September proposes an amendment to the Insurance Act 2015 to enable insureds to claim damages for late payment of insurance claims. The introduction of the Law Commissions’ proposal in this Bill has come as a surprise to the market which opposed the introduction of such consequential damages. As English law currently stands, damages for late payment of an insurance claim are not recoverable from insurers (see Sprung v Royal Assurance (UK) Ltd  I Lloyd’s Rep IR 111). The insured’s remedy is limited to interest. Proposals to require insurers to pay claims under policies within a “reasonable time” were included in the Law Commissions’ review into Insurance Contract Law, however, this proposal was not included in the final Insurance Bill which went through Parliament to become the Insurance Act earlier this year. The industry was against the inclusion of such a requirement on the basis that it would impair insurers’ ability thoroughly to investigate claims before taking a decision on liability and make it almost impossible to calculate future liabilities. The Government believes that this change in the law will incentivise insurers to pay claims promptly and allow for damages to be paid to policyholders who have suffered loss as a result of late payment.
What is proposed?
Part 5 of the Enterprise Bill amends the Insurance Act 2015 to introduce new section 13A requiring that insurers pay claims within a reasonable time. This will be a term implied into both consumer and non-consumer contracts of insurance, breach of which will give rise to the usual remedies for breach of contract, including damages. Reasonable time should always enable the insurer sufficient time to investigate and assess the claim. What is “reasonable” will depend on all the circumstances and a non-exhaustive list of factors can be taken into account. Included in the list of factors are the type of insurance, size and complexity of the claim, compliance with any relevant statutory rules (including for example requirements in the FCA Handbook) or guidance and factors outside the insurer’s control. The explanatory notes to the Bill explain that some types of insurance, such as business interruption, are likely to take longer to assess than simple claims for property damage. Factors beyond the insurer’s control might include delays to an investigation due to the failure of a third party to supply relevant information or where a market follower in a subscription market is dependent upon a decision or action of the lead insurer.
Defences available to insurers
The Bill provides insurers with a defence to a claim for damages for late payment where it had reasonable grounds for disputing the validity or quantum of a claim. This would enable an insurer to defend a claim for late payment where they suspect that the claim is fraudulent. However, even where an insurer has grounds for conducting further investigations they may still be found to have breached the Insurance Act where it conducts an investigation unreasonably slowly.
It will not be possible to contract out of this implied term in consumer insurance contracts. It will be possible to contract out of these requirements in non-consumer contracts but, like other aspects of the Insurance Act, where this is done the insurer must comply with the transparency requirements in the Act so that the effect is clear and unambiguous. It will not be possible to contract out of the implied term where breach has been either deliberate or reckless.
If this amendment to the Insurance Act is successful, it will come into force a year later – that will be some time after August 2016 (when the Insurance Act as originally enacted comes into force).
The Enterprise Bill can be viewed here.