The Enterprise Bill 2015: Late payment of claims
Policyholders will now be able to claim damages for late payment of claims
The Insurance Act 2015 was originally going to include provisions introducing damages for late payment of claims. However, this was considered to be too controversial to pass through Parliament under the special procedure that is reserved for non-contentious Law Commission Bills. The relevant clauses on late payment were therefore removed from the draft Insurance Bill.
While it was generally known that late payment provisions would be re-introduced at some point in the not too distant future, this has now happened earlier than many had anticipated.
On 16 September 2015, the Enterprise Bill 2015 was introduced into the House of Lords. Along with provisions about apprenticeships and small businesses, the Bill includes, at Clauses 20 and 21, the late payment clauses omitted from the Insurance Act. If passed, and subject to any amendments, these clauses will insert two new sections into the Insurance Act 2015 (sections 13A and 16A).
In short, the new proposals impose a duty on insurers to make prompt payment of claims and would mean that policyholders will be able to claim damages in the event of breach of that duty. This represents a significant departure from the law as it currently stands.
Under Clause 20 of the Bill (Section 13A(1) of the Act), it is to be an implied term of every insurance contract that claims are paid within a “reasonable time” of being made. A failure to meet this obligation can result in liability to pay damages to the insured for any foreseeable loss which results (Section 13A(5)).
This will mean an end of the “hold harmless” principle, the basic reason why recovery of damages for late payment of claims is not currently possible. This principle is based on the notion that insurers make a promise to hold the policyholder safe from harm, and if harm occurs (e.g. a fire or burglary) the policyholder can claim damages (represented by the claims payment). If insurers are guilty of late payment, the policyholder cannot claim damages as that would amount to damages on damages.
Clause 20 of the Enterprise Bill (Section 13A(2) and (3)) addresses what amounts to a “reasonable time” to pay a claim, which is to be assessed by reference to all of the circumstances including:
the type of insurance;
the size and complexity of the claim;
compliance with any relevant statutory or regulatory rules or guidance; and
the extent to which relevant factors are outside the insurer’s control.
The time allowed expressly includes a reasonable time “to investigate and assess” the claim.
Under what would be Section 13A(4)(a), insurers will have a defence (including where insurers fail to pay part of a claim), if there are “reasonable grounds” for disputing the claim (or that part of it). Insurers will not be liable “while the dispute is continuing”; it follows that once policy liability is agreed or established, the claim will need to be paid within a reasonable time.
Section 13A(4)(b) makes it clear that the conduct of the insurer in handling the claim is potentially a relevant factor in deciding whether the implied term has been breached and, if so, when.
It follows that insurers may have a defence to an allegation of failure to pay a claim within a reasonable time if they can show they have acted reasonably, even if they have incorrectly refused to pay a claim. Though not stated as such specifically, taking legal advice might well exculpate an insurer in these circumstances or at least mitigate any breach of the implied term. Further, since the conduct of claims handlers will be under scrutiny, the need for good training and systems will be even more to the fore.
An insured’s claim against an insurer for failure to pay a claim will be a separate cause of action from the policy claim against the insurer itself and it will have its own separate limitation period. This is already the case with Section 150 of Financial Services and Markets Act 2000, which gives limited rights to damages where FCA regulations have been breached. In the authors’ view, issues around the accrual of the cause of action are likely to be problematic in practice. An insurer will have to adjust a claim within a “reasonable time”, but even given the guidelines in the Bill, it will be difficult, if not impossible, to define this with precision for the purposes of ascertaining the deadline by which a claim has to be brought. This could even have ramifications for solicitors advising policyholders.
While insurers should not think that the late payment clauses (if enacted) will expose them to a “Bad Faith” American style culture, we anticipate that insureds will make full use of this provision and insurers and their advisers will have to be seen to be proactive in handling claims.
Contracting out is only possible in limited circumstances. In non-consumer insurance, contracting out of the implied term as to payment of claims within a reasonable time is allowed. However, this is subject to the provisions as to contracting out which already appear in the Insurance Act 2015 (in particular, the transparency requirements of section 17). It is also important to note that it will not be possible to contract out when breach is either “deliberate or reckless”. A breach is defined as “deliberate or reckless” if the insurer “knew that it was in breach or did not care whether or not it was in breach”.
Whilst it is possible to contract out of the implied term in non-consumer insurance contracts, we cannot imagine that this will be happening in practice in the London insurance market. Apart from the fact that the insured would have to agree and apart from regulatory implications, how marketable would a policy be which expressly provides that the insurer does not agree to pay valid claims within a reasonable time?
Consistent with the recent reforms to insurance law, it will not be possible to contract out of the implied term in a consumer insurance contract. Settlement agreements resolving insurance claims are also expressly not affected by this proposed new provision.
The Enterprise Bill provides that the provisions as to late payment will come into effect one year after the Bill is passed into law, and will then apply to insurance contracts entered into after that date.
Since the Enterprise Bill is a Government Bill, there is no consultation process, but the Bill will proceed through the normal Parliamentary stages. We are aware that there is already some disquiet about the Bill, particularly about it creating a separate tort and widening the scope of late payment damages outside good faith and intentional misconduct or dishonesty. This is not, however, the universal reaction.
The Second Reading of the Enterprise Bill in the House of Lords is currently timetabled for 12th October 2015. We will be monitoring the passage of the Enterprise Bill 2015 through Parliament, and will release further Briefing Notes.
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.