Late payment damages – Enterprise Act 2016 provisions come into force on 4 May 2017
The “late payment damages” provisions contained in the Enterprise Act 2016, which amended the Insurance Act 2015 (sections 13A and 16A), come into force in one week, on 4 May 2017. This means that all English (and other UK) law insurance and reinsurance contracts entered into on or after this date will contain an implied term that a claim must be paid in a reasonable time. Breach of this term by the insurer or reinsurer would give the insured or reinsured a right to claim “late payment damages”.
The Law Commission and government were clear that they did not expect parties to insurance and reinsurance contracts to enter into open-ended liabilities and that they therefore expected limitation of liability clauses would become the norm (as in many types of non-insurance contract). Clauses which limit liability for late payment damages need to meet the transparency requirements in the Insurance Act, because this is a form of contracting out. It is only possible to contract out in this way in non-consumer contracts (it is not possible to contract out in consumer contracts or at all in respect of deliberate or reckless breach of the implied term).
Managing agents should consider their reinsurance arrangements and whether cover extends to liability for breach of the new contractual implied term.
Managing agents should also be aware that in risk presentations they may be put on notice of special or unusual circumstances or concerns which could arise if a claim is paid late – this may go to the foreseeability of loss in any late payment action for damages and would potentially increase the underwriting risk.
In addition to various seminars and articles, the LMA has produced the following material on the new statutory provisions:
This bulletin is a reminder and we do not repeat the guidance. However, we would like to highlight that:
- the Quick Reference Guide contains useful points to consider for underwriters, claims-handlers, subscription market leaders/followers and delegated authority managers
- keeping customers informed and record-keeping will be vital to show that the implied term has not been breached, if the insurer is faced with “late payment damages” proceedings
- if a coverholder or TPA (or leader/agreement parties on a subscription risk) with claims-settling authority fails to investigate and/or assess and pay a claim within a reasonable time, then the insurer (and co-insurers on a subscription risk) may become liable for breach of the implied term; therefore, binding authority and TPA agreements should contain appropriate service levels, safeguards (e.g. MI and audit) and terms specifying the consequences of any breach (the Lloyd’s Claims Scheme contains liability limits of leader/agreement parties to followers)
- the model clauses and explanatory notes contain examples of clauses which limit liability for “late payment damages” (as well as a model clause to contract out to the fullest extent possible).
Please email Kees.vanderklugt@lmalloyds or Alison.Colver@lmalloyds, if you have any questions.
Kees van der Klugt
Director of Legal & Compliance