The Enterprise Act 2016 (“the Act”) received Royal Assent yesterday. Among other reforms, the Act changes English law’s approach to remedies for late payment of insurance claims and now gives policyholders a potential right to claim damages in the event of late payment. These provisions will come into effect on 4 May 2017, and will apply to every contract of insurance made after the provisions come into force.
The Enterprise Act 2016
Damages for late payment of claims are not currently recoverable under English law. The Act amends the Insurance Act 2015 and introduces an implied term into every insurance contract that “the insurer must pay any sums due in respect of the claim within a reasonable time“. Breach of this term can give rise to a claim for damages.
The Act does not provide prescriptive guidelines as to what constitutes a “reasonable time”. Rather, it states that a reasonable time includes time to investigate and assess the claim, and provides a non-exhaustive list of matters which may need to be taken into account, including:
- the type of insurance;
- the size and complexity of the claim;
- compliance with relevant statutory or regulatory rules or guidance; and
- factors outside the insurer’s control.
The Act further provides a defence where the insurer can show that 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)“.
The new legislation also allows parties to contract out of these provisions in respect of non-consumer insurance contracts, subject to the “transparency” requirements of the Insurance Act 2015. However, contracting out will not be effective where the insurer’s breach is deliberate or reckless.
Claims for breach of the implied term must be brought no later than one year from the date on which the insurer has paid all the sums due in respect of the claim.
It will be some time before we see any claims for damages for late payment as a result of the provisions. The relevant provisions come into effect on 4 May 2017, and will then only apply to contracts of insurance made after the provisions come into force.
In order to claim such damages, an insured must show that:
- The insured has a valid claim under the policy;
- The insurer has failed to pay within a reasonable time (including a reasonable time to investigate and assess the claim);
- The insured suffered loss, which was caused by the insurer’s breach of the implied term; and
- The loss was foreseeable (ie, the loss was in the reasonable contemplation of the parties at the date the contract was entered into).
Further, the insured will not be able to recover any loss which could have been avoided by taking reasonable steps.
There are conflicting views on what the impact of these new provisions will be. However, given the various elements a policyholder will need to prove in order to establish a successful claim for damages, it seems unlikely that the Act will lead to a flood of damages claims for late payment. What a court will consider a “reasonable time” within which to pay a claim will be highly dependent on the particular circumstances of the claim. Further, the impact of the provisions is likely to be limited by the “reasonable grounds” defence and the ordinary hurdles of establishing a claim for damages for breach of contract.
What seems more likely is that the provisions in the Act will affect the dynamics of negotiations between insurers and insureds in relation to claims.
Both policyholders and insurers should be aware that the following points may be relevant in any potential consideration of a claim for damages for late payment:
- Claims co-operation – insureds’ responses to requests for information by the insurer (as the insurer must have the opportunity to investigate and assess the claim);
- Contracting out – whether insurers have successfully contracted out of the late payment provisions;
- Mitigation – whether insureds have taken steps to mitigate any losses suffered as a result of the insurer’s delay (as damages for late payment are subject to the usual limitations of contractual damages); and
- Foreseeability – if there are particular circumstances which might cause the insured to suffer exceptional losses as a result of delayed payment whether these had been communicated to the insurer prior to the policy being placed.
We would also observe that damages for late payment are plainly not a substitute for business interruption cover and should not be seen as such. Insureds should obtain appropriate business interruption cover if there is a risk that their business will be disrupted by an insured loss.
Finally, there are a number of steps which insurers and reinsurers can take to minimise the risk of facing unnecessary claims for damages for delay. Most of these are simply good claims handling practices, which insurers should already be familiar with:
- Keep clear records of claims handling procedures – Insurers should maintain clear records of the handling of each claim, including when information was received, steps taken to investigate the claim, and information requests submitted to the insured.
- Merits advice – In appropriate cases, insurers may wish to obtain written legal opinions on the merits of a claim prior to denying cover, in order to demonstrate that they had “reasonable grounds for disputing the claim”. Insurers will need to monitor carefully any issues arising from potential waiver of legal privilege.
- Interim / part payments – Where appropriate, insurers should consider making interim or part payments to insureds.
- Reserves / premiums – Insurers should be aware of the prospect of damages for late payment when setting reserves and premiums.
- Reinsurance arrangements – Insurers should also be aware of the possibility of such damages when negotiating their reinsurance arrangements. As damages for late payment are not payable under the insuring clause of the contract, it seems unlikely that they would be recoverable under most current reinsurance agreements. Insurers may wish to consider revising their reinsurance arrangements to provide for the recovery of such damages.
- Settlement Agreements – Settlement Agreements for claims should contain a release of liability which is broad enough to encompass any claim for late payment.