The Enterprise Bill: “late” payment of insurance claims
Long-heralded and reportedly dropped from the recent Insurance Act 2015 so as to make the passage of that statute through Parliament more ‘uncontroversial’, the Enterprise Bill now tackles “late” payment of insurance claims by introducing an implied contractual requirement on insurers to pay claims within a ‘reasonable time’. If successfully navigated through Parliament, the Bill will achieve its aims by retrospectively adding to the Insurance Act 2015 the provisions previously removed from that Act for its own parliamentary progress.
Under ordinary contract principles, where one party breaks a promise and the other suffers loss, the contract-breaker is liable to pay damages in addition to any other contractual entitlement. However, insurance contracts have hitherto been treated differently, with the effect that where an insurer initially refuses to pay what is ultimately a valid claim, the policyholder may seek the insurance payment plus interest, but is not entitled to damages for consequential losses even where those are caused by the decision of the insurer not to pay sooner.
The Enterprise Bill addresses that as part of a range of measures aimed at helping SMEs to improve the UK’s economy, for example creating a Small Business Conciliation Service to help small businesses settle disputes with large businesses, including over late payment practices.
A reasonable time
What is a reasonable time for payment by insurers will depend on all the circumstances of a particular case and inevitably no hard and fast timeframes are proposed. The Government has expressly set out that a reasonable time should always include time to investigate and assess the claim, bearing in mind the (1) type of insurance; (2) the size and complexity of the claim; (3) compliance with any relevant statutory or regulatory rules or guidance (thus arguably giving further heightened force to such rules or guidance in practice); and (4) factors outside of the insurer’s control.
Disputes will, still, plainly arise in the future as between insurers and insureds as to what is reasonable eg will the fact that a claim arises out of a major weather event such as the flooding in 2000 or 2007 enable an insurer to argue that delay was an inevitable consequence due to the sheer volume of claims?
Whilst on the topic of time, it should be noted that the alleged breach of this provision will have its own contractual Limitation Period running ie for the claim for damages for late payment.
Allowing damages for late payment might inhibit the full investigation of fraudulent or dubious claims
Understandably, whilst supporting the general theory, insurers have expressed some concerns and thus, the proposal provides insurers a defence to a claim for late payment where they incorrectly refuse to pay a claim but can show that they acted reasonably in so doing.
The recognition that payment need not necessarily be ‘immediate’, seeks to protect the ability of insurers to take a robust approach to decision making where fraud or non-compliance with policy terms is suspected. However, this will inevitably create a further controversy. Will an insurer realistically wish to reveal to its policyholder that delays are being, or were, caused as it was seeking to establish fraud, which it subsequently was unable to establish perhaps only due to the higher burden of proof? Or likewise, will the insured be prepared to accept being told during the course of a claim that there is a delay the reasons for which it is not being told?
As a result of regulatory requirements and reputational pressures, most insurers do already pay claims fairly and within a reasonable time, so it was little surprise that during the Consultation process, the majority of insurers supported the need for reform, particularly in the general insurance market. In the consumer and micro-enterprise market, the FOS already seeks, in effect, to sometimes award what amount to damages for late payment. So, the proposal is revolution of law but more evolution of practice.
It could be though, that the change might provoke speculative and unmeritorious claims, which would take time and resources to investigate and dispute. The Government has sought to combat these concerns by requiring, in the proposed law, policyholders to show six elements before damages for late payment will be awarded. While these provisions are not contained within clauses 20 and 21 of the Bill as it is currently drafted, but in the Impact Assessment accompanying it, it may be possible to rely on them as a statement of the Government’s intentions in bringing forwards the Bill under the principles set out in Pepper v Hart .
The policyholder has to prove:
It has a valid claim.
The insurer is responsible for unreasonable delay. The Bill expressly allows for the possibility of reasonable disputes on a claim or part of it, noting that the insurers will not be liable ‘whilst the dispute is continuing’. But that assumes of course that the dispute was, and remained, reasonable.
The policyholder has suffered actual loss.
The loss was caused by the unreasonable delay.
The loss was foreseeable, in that it was within the ‘reasonable contemplation’ of both parties at the time the contract was made. Whilst on the one hand this usual rule of contractual damages can act as a cap on what can be claimed, it can also have the opposite result in that what might otherwise be deemed too remote a consequence can be claimed in contract damages if it was within the reasonable contemplation of the parties.
The policyholder took all reasonable steps to mitigate its loss. This aspect might be particularly important.
In light of the above, the Government states that late payment damages are intended for exceptional cases rather than routine claims, though in reality, the above 6 principles mostly just reflect the general law of contractual breaches and we envisage that late payment damages will soon be routinely added to claims, if only in order to negotiate a greater level of settlement from the insurer.
The way ahead
The second reading of the Bill is scheduled for the House of Lords on 12 October 2015, with the Bill noting that the provisions would come into effect one year after coming into law and then applying to polices written after that date. During the intervening period, insurers may wish to take this opportunity to consider the following:
Do the standard terms with suppliers such as investigators and loss adjusters specify turnaround times for investigations and site visits (and do the PI insurers of those suppliers understand the increased risk of claims against them)?
Review policy wordings to ensure that it is clear what a policyholder can expect from its insurer following a claim? Would insurers wish to contract out of the Enterprise Bill proposal?
Consider the importance of documenting on claims files reasons why aspects are being looked at and investigated; any problems being encountered on the claim; and any delays being caused by the policyholder or its agents.
The greater the impact that any period of non-payment is having on an insured, for example if it is hampered in continuing to trade, then not only would there be a more likely claim, for higher levels of damages for late payment but the actual period which constitutes ‘a reasonable time’ could also be deemed by the courts to be shorter than for other claims where the needs of the insured are less pressing.
It should also be considered whether insurers wish to contract out of this proposed implied term in business insurance (it will not be possible to contract out in Consumer insurance). Where it is desired to do so, the insurer must comply with the transparency requirements of contracting out set down in the 2015 Act.
Note also that a deliberate or reckless breach cannot be contracted out of, with recklessness as usual being noted to be where the insurer ‘does not care whether it is in breach’. In most markets however, we are not expecting to see much contracting out of these provisions in any event.
Reserving guidelines (with Solvency II in mind) are likely to need to be reviewed so that cases with potential large “late payment” damages claims are catered for appropriately but sensibly, remembering that once into the sphere of valid claims for damages for late payment, the underlying policy limits or categories of cover are no longer the issue.
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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.