In a radical new departure from the current law, the late payment of insurance claims provisions of the Enterprise Act 2016 will come into effect on 4 May 2017. These provisions are likely to have a significant impact on insurers and claims handlers.
Section 13A Insurance Act 2015
The Enterprise Act 2016 inserts a new Section 13A into the Insurance Act 2015. This section will impose a duty on insurers to make prompt payment of claims. For the first time, policy holders will be able to claim damages if insurers breach that duty. The late payment provisions will come into effect on 4 May 2017.
Under the new provisions, insurers will have a "reasonable time" to pay a claim. What insurers consider a reasonable time is unlikely to be the same as what an insured thinks is a reasonable time. At the moment, there is no guidance on what could constitute a reasonable time. Is two months reasonable? Six months? A year?
Reasonableness is going to be assessed by reference to all the circumstances including:
The type of insurance
Straightforward household claims should be settled within a matter of weeks. Business interruption claims or third party claims are likely to take longer. Other relevant matters might be the level of cover, and the structure of the insurance programme.
The size and complexity of the claim
Large, complex claims are going to take longer to settle than small, straightforward claims, but it is not as simple as that. A high value claim could be easier and quicker to resolve than a difficult, small value claim. If there are complex technical or other investigations that have to be carried out, it is reasonable to expect that the process will take longer.
Compliance with any relevant statutory or regulatory rules or guidance
This would potentially include the FCA Principles for Business, FCA Insurance: Conduct of Business Sourcebook (ICOBS), and Lloyd's Minimum Standards for managing agents, covering principles such as providing reasonable guidance to help an insured make a claim, giving appropriate information on the progress of the claim, treating insureds fairly, and communicating information in a clear, fair and not misleading manner.
The extent to which relevant factors are outside the insurer's control
This is likely to encompass situations where the insured delays in providing information or documentation, or the loss adjustor cannot get access to a property to make an inspection.
The time allowed to pay any claim expressly includes a reasonable time to "investigate and assess". Again there is no guidance on what might be a reasonable time and it is going be case specific. An event like a flood that affects a large number of policyholders at the same time could legitimately delay payment. Or if there is a genuine suspicion of fraud, it is reasonable to expect that the insurer should take more time to investigate fully. However claims handlers should keep the insured informed of the progress of the claim whilst it is being investigated, in particular of the reasons for any delays.
Even if an insurer's refusal to pay a claim is ultimately held to be wrong by a court, it doesn't necessarily follow that the insurer will be in breach of the new duty to pay within a reasonable time, provided it had reasonable grounds for refusing the claim and acted reasonably. The new provision is not supposed to prevent insurers investigating claims thoroughly or taking robust claims handling decisions - in theory at least.
The new right to claim damages is in addition to the existing right to claim interest for late payment.
The insured will have to prove on the balance of probability that any loss for which it claims damages was actually caused by the insurer's breach of the implied term. In practice, this will mean that there is unlikely to be a flood of claims for late payment damages, as many insureds will not be able to show loss. In the majority of cases, claims are going to be limited to compound interest only, to reflect the cost of borrowing. However the threat of a claim will still be a useful bargaining tool for insureds.
An insured's claim against an insurer for failing to pay a claim within a reasonable time will be a separate cause of action from the policy claim against the insurer. It will have its own separate limitation period. A new provision will be inserted into the Limitation Act 1980 providing that a late payment action will be barred one year after payment of all sums that are due in respect of the insurance claim.
So the limitation period will run from the date on which the insurer makes a final payment to the insured. This one year limitation period is going to be useful for insurers because it will enable them to close off books of business rather than having to keep them open on the off chance that the insured will bring a late payment claim.
Even so, there are likely to be cases where it will be difficult to identify the precise date by which proceedings for breach of the implied term will have to be brought against insurers. That is going to be particularly likely if there is a dispute between the insurer and the insured about a claim. That in turn could lead to a claim against professionals if they fail to spot the one year limitation period is already running, so we could see some satellite litigation arising out of this.
Insurers will not be able to contract out of the late payment provisions in consumer insurance. In non-consumer insurance, contracting out of the implied term as to payment of claims within a reasonable time will be allowed. There will be various possible ways of limiting liability, such as a monetary cap, or an exclusion of loss of revenue or profits. However the disadvantageous term must be very clear and unambiguous, and will have to be drawn to the insured's attention before the contract is entered into.
A court must take into account the characteristics of the type of insured involved, and the circumstances of the transaction in determining whether these requirements have been met. For example, in the case of a small business purchasing insurance, the insurer might be expected to be more proactive and take more steps to bring the term in question to the insured’s attention than it would have to if the insured is a large business and a sophisticated buyer of insurance.
Another important point is that it will not be possible to contract out when breach of the implied term as to payment is "deliberate or reckless", ie if the insurer knew that it was in breach or did not care whether or not it was in breach. It is not going to be hard for insureds to at least argue that the insurer was reckless.
Implications for insurers
When the late payment provisions take effect in May 2017, we can expect that policy holders and their advisors will rely heavily on the late payment provisions to put pressure on insurers to settle claims quickly, or make interim payments to demonstrate that they are acting reasonably. There has been concern within the industry about the possibility of speculative claims being made, purely for tactical reasons, and possibly claims being made for late payment damages that are totally disproportionate to the amount of cover that was initially purchased.
In deciding whether a delay has been unreasonable, courts will consider the conduct of the insurer in handling the claim. For example, an insurer may be in breach of the implied term if it fails to respond promptly to developments or new evidence, or if it investigates the claim very slowly. Other issues that may be relevant are how the insurer treats the insured in pre-action correspondence, refusal of ADR, failing to make or accept reasonable offers of settlement or interim payments, and unsuccessfully contesting interlocutory applications and appealing unfavourable judgments.
To reduce the risk of late payment claims, insurers will need to be pro-active in handling claims, and be seen to be pro-active. Claims handling teams will need to be well staffed and well trained. Underwriting teams will need to consider their policy wordings, particularly for non-consumer insurance contracts where they may be able to contract out of the late payment provisions.
The uncapped nature of the potential damages for late payment claims will make it difficult to value the potential costs, with implications for insurers' reserves and reinsurance requirements.
Reinsurance and the subscription market
The new implied term could cause some interesting issues for the London market. For example, if the claim is subject to the Lloyd's Claims Scheme, if the lead syndicate is unreasonably slow in handling the claim, each member of the following market is also potentially liable to the insured for breach of the implied term. An insurer in a subscription market might want to limit its liability for late payment damages to the proportion of its risk under the insurance contract.
Similar considerations apply to the reinsurance market. The reinsurance contract will be subject to the implied term, so the reinsurer could be liable to the reinsured for late payment damages. Re-insurers may want to exclude or limit liability for breach which isn't deliberate or reckless.
Reinsureds will need to consider whether their current reinsurance provides cover if they breach the implied term, and if not whether they need to negotiate such cover. They should check whether their policy will provide cover if the reinsurer exercises control over the handling or settlement of underlying claims, but in doing so exposes the reinsured to a late payment damages claim.
Third Party Administrators
If a Third Party Administrator (TPA) fails to investigate or assess a claim within a reasonable time, the insurer may be liable for breach of the implied term. TPAs should be checking the terms of binding authorities or TPA agreements carefully, making sure they can comply with the service levels for claims-handling, and considering any terms which specify the consequences of a breach.
Whilst there may not be huge numbers of successful late payment damages claims, policy holders and their advisers are likely to use the threat of such claims to put pressure on insurers to make a quick and early settlement.