What this means for you:
• Amendment to Insurance Act 2015 provides that a term is implied in to all contracts of insurance that a claim will be paid within a reasonable time.
• The new implied term will apply to policies incepted or renewed one year after the Enterprise Bill is enacted.
• Relevant factors in assessing what is reasonable includes the size and complexity of the claims, the type of insurance and factors outside the insurer’s control.
• Where an insurer shows that there were reasonable grounds to dispute the claim there is no breach merely by failing to pay the claim.
• Contracting out only possible in commercial contracts but not where failure to pay within a reasonable time is deliberate or reckless.
It has long been an anomaly of English law that insurers are not responsible in damages for the consequences of failing to pay a valid claim within a reasonable time. Although there is no evidence of systemic failure by insurers nonetheless, following consultation the Law Commission suggested reform of the law. For reasons of process those proposals were not included in the Insurance Act 2015, though the issue was subject to scrutiny in the House of Lords and an amendment put to the Committee examining the Bill. Indeed, it was the only amendment that went, unusually, to a vote and although rejected, all parties in the House of Lords agreed that it should be reintroduced.
The Government has quickly followed up on that agreement and the Enterprise Bill 2015 introduces a clause that deals with “late payment” of claims. This Bill has only just started its Parliamentary journey with First Reading in the Lords on 16 September and Second Reading on 12 October 2015.
The Bill states that it will be an implied term of every insurance contract that the insurer pay claims within a reasonable time: failure to do so could lead to compensation for any loss that results. The Bill confirms that a reasonable time includes time to investigate and assess the claim – though this is not carte blanche to investigate slowly as the Bill states that the time taken to investigate should itself be “reasonable”. Further, what is “reasonable” will depend on all of the relevant circumstances which may include the type of insurance, the size and complexity of the claim, factors outside insurers’ control and the necessity to comply with any statutory or regulatory rules. In short insurers will not be liable for delays caused by genuine disputes.
Whilst the Insurance Act 2015 applies in general to commercial insurance the amendment introduced by the Enterprise Bill will apply to all contracts of insurance and will be implied in to contracts of insurance renewed or incepted one year after the Bill is enacted. Royal Assent is likely in 2016 and so the new “late payments” clause will apply to contracts of insurance incepted from a date in 2017.
For consumer insurance contracts it will not be possible to contract out of the new term, though the likelihood is that consumers will in any event prefer the Financial Ombudsman Service (FOS) jurisdiction where awards for inconvenience have been made for some years.
For commercial insurance contracts it will be possible to contract out of the term provided that the breach was not deliberate or reckless though contracting out will be subject to the transparency requirement of the Insurance Act itself.
The reform will bring general insurance law into line with contract law, life insurance, FOS practice and most other jurisdictions including Scotland. It will also provide more protection to insurers than the Supreme Court would have done, had it overturned the current authorities.
A small number of insurers have expressed concern that despite the protections in the bill the change may be exploited by policyholders and particularly those used to bad faith litigation. However, insurers will be able to contract on different terms if they wish.
Terry Renouf is a partner at insurance and risk law firm, BLM
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