New law on late payment of insurance claims comes into force

Introduction

Under the current law in England and Wales, there is no obligation to pay valid insurance claims within a reasonable period of time. The Enterprise Act 2016 (the Act), which received Royal Assent on 04 May 2016, will apply to all insurance contracts from 04 May 2017 (by adding a new section into the Insurance Act 2015) obliging insurers to pay sums due within a reasonable period of time. If the insurer breaches this obligation, policy holders will be able to claim damages (for the first time) according to the normal principles of contract law.

The new implied term

The Act, through the addition of a new section in the Insurance Act, will insert an implied term into every contract of insurance providing that if the policy holder makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a “reasonable time”.

A “reasonable time” includes a reasonable time to investigate and assess the claim, and what is reasonable will depend on “all the relevant circumstances”. In that regard, the Act says that the following “may” need to be taken into account:

• the type of insurance
• the size and complexity of the claim
• compliance with any relevant statutory or regulatory rules or guidance, and
• factors outside the insurer’s control.

Remedies for breach of the new implied term

In the event that insurers fail to pay claims within a reasonable time, then, for all insurance contracts entered into on or after 04 May 2017, policy holders will be able to claim damages (in addition to any right to interest on those sums).

Insurers will not be in breach of the new implied term by merely failing to pay the claim if “there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable)”. However, the insurer’s conduct in handling the claim will be a relevant factor in deciding whether that term was breached and, if so, when.

Time limit for claims

A policy holder will have one year - from the date on which the insurer has paid all sums in respect the claim - to bring a claim for breach of the implied term. After the one year has expired, any claim for breach of the implied term will be time-barred.

Contracting out of the new implied term

Insurers will be able to contract out of the new implied term, for non-consumer insurance contracts, provided that the insurer meets the “transparency requirements” in the Insurance Act 2015 (ie drawing the policy holder’s attention to the disadvantageous term before entering into the contract of insurance, and ensuring that the disadvantageous term is clear and unambiguous as to its effect).

Further, contracting out will not be valid where the policy holder is put in a worse position as a result of any “deliberate or reckless breaches” of the implied term. The Act states that a breach is “deliberate or reckless” if the insurer:

• knew that it was in breach, or
• did not care whether or not it was in breach.

Comment

The Act will, undoubtedly, have a significant impact on the way in which claims are handled. In particular, claims handlers will need to ensure that claims are progressed in a timely manner to avoid policy holders advancing late payment claims. We suspect that policy holders may use the "threat" of a claim to put pressure on claims handlers to speed up any ongoing coverage investigations.

It will be interesting to see how the courts interpret the “reasonable time” requirement, which has been left fairly open and, ultimately, will be fact sensitive depending on the size and complexity of the claim. Further, there will always be other factors outside the insurer’s control dictating the time in which a claim is handled (ie delay in information/documentation from the policy holder/third parties being provided). Therefore, in those circumstances, it would be unlikely that the insurer would be held responsible for the delay.

Finally, whilst there has been widespread support for reform (including from insurance companies themselves), there has also been some cause for concern in the insurance market. For example, sceptics consider that there will be abuse of the late payment provisions as a litigation tactic or by "claims farmers", leading to a large number of claims and increased costs for insurers - even though the claims may, ultimately, be unsuccessful.

It remains to be seen how this new legal rule will be tested by policy holders, and how insurers will react. However, we suspect that it will not take the courts long to test the new rule, and provide some guidance on the limits of the right to claim damages for late payments.