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Insurers to be liable to pay damages to insureds for late payment of claims
By Sophie Newton, Richard Breavington and Simon Greenley (RPC).
12 May 2016
For insurance policies entered into after 4 May 2017, insurers could be liable to policyholders for late
payment of claims. It will be an automatically implied term of the policy that sums due from insurers must
be paid within a reasonable time.
This change is set out in the Enterprise Bill,
which received Royal Assent on 4 May 2016.
It will come into effect for policies, both
of insurance and of reinsurance (although
reinsurance is less likely to be affected in
practice), entered into after 4 May 2017. The
provisions making the changes will be inserted
as an amendment into the Insurance Act 2015.
Damages for late payment of
insurance claims
Currently, insureds are not able to sue insurers
for loss insureds suffer due to late payment
of a claim. Sections 28-30 of the Enterprise
Act introduce an implied term into insurance
contracts that insurers will pay any sums due
in respect of a claim within a reasonable time.
If there is unreasonable delay in payment of
the claim, insureds will be able to claim for
loss suffered as a result.
This will act as an additional remedy for
insureds, alongside payment of the claim and
interest. There is no cap on the damages that
can be awarded.
What is a “reasonable time”?
Insurers must pay sums due under the policy
within a reasonable time. What amounts to a
reasonable time will depend on factors such as:
- the type of insurance
- the scale and complexity of the claim
- compliance with any statutory or regulatory rules
- any factors outside insurers’ control.
It includes a reasonable time to investigate
and assess the claim. Insurers will also not
be in breach during the dispute of a claim,
as long as there are “reasonable grounds”
for that dispute. The conduct of insurers in
handling the claim can also be a factor in
deciding whether there has been a breach.
Deadline for making late payment
claims – an important amendment
Insureds must bring any late payment claims
within one year from the date on which
insurers have paid all sums due in relation to
the claim. This limitation period was included
as an amendment to the Enterprise Bill as
it passed through Parliament. It provides
insurers with more certainty, avoiding a
potential tail of claims for late payment.
Can insurers contract out?
Insurers cannot contract out of the provision
in relation to consumer contracts.
Insurers are able to contract out in
commercial contracts. However, insurers
cannot contract out of any deliberate
or reckless breach, and any contracting
out clause must meet the transparency
requirements set out in Section 17 of the
Insurance Act 2015. No doubt there will also
be commercial pressure on insurers not to
contract out.
What could the impact be?
The impact on insurers could be significant.
Insureds will have a direct claim against
insurers for any loss caused by an
unreasonable delay in paying sums due.
Insurers will need to consider what practical
steps could be taken to avoid exposure to
claims (see below). Insurers will also need to
consider whether any payment made should
impact on loss ratio for the business, and
whether it needs to be identified separately in
P&L accounts. Absent specific policy wording,
a liability for late payment damages would
not be covered by reinsurance because it
would not fall within the indemnity under the
underlying direct policy.
What should insurers do to avoid
claims for damages?
A starting point is to ensure that teams
are aware of the changes. Insurers should
consider internal briefings to:
- claims teams
- compliance teams
- finance teams on the possible effect on
P&L accounts
- underwriting teams
In addition, insurers should consider:
- ensuring training on the Insurance Act,
including the additional measures is up
to date
- using diary systems to ensure timescales
for dealing with a claim are tracked and
kept to, particularly where third parties
such as claims adjusters are being used
- using claim handling protocols to
document appropriately the handling
of claims
- making interim payments on large claims
- amending reinsurance policies to cover the
potential liability.