Paying indemnity insurance monies “within a reasonable time”
All contracts of insurance and reinsurance that are incepted, varied or renewed from May 4, 2017, are now subject to an implied term that the insurer will pay valid insurance claims within a reasonable timeframe.
At common law, indemnity insurance monies due under a contract of insurance are categorised as damages; not a debt due under the contract, as one might expect.
That categorisation, coupled with the common law principle that damages are not recoverable for late payment of earlier damages, resulted in insurers being in a position to delay payment under the policy with only the threat of simple interest (under the Senior Courts Act 1981) to incentives early settlement.
This has been described as “a blot on English law”, with particularly draconian consequences for policyholders. In Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep. I.R. 111, a four-year delay in Royal Insurance making payment under the policy resulted in Mr Sprung eventually going out of business, yet the Court of Appeal reluctantly upheld the anomaly in law.
Calls for reform were led by the Law Commissions for England and Scotland, and their recommendations for a statutory duty were enacted by the Enterprise Act 2016, section 28, incorporating the new duty on insurers in the Insurance Act 2015, Section 13A.
Insurance Act 2015, Section 13A: the implied term
The newly incorporated Section 13A states that “It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time.”
Whilst the 2015 Act makes it clear that a “reasonable time” will include a reasonable time to investigate and assess the claim, it does not seek to assert specific time limits for making payment under the contract.
What is “reasonable” will depend on all of the circumstances in the case, but by Section 13A(3), the court will take account of the type of insurance and the size and complexity of the claim, as well as having regard to factors beyond the insurer’s control, in assessing a claim for damages for late payment of indemnity monies under the policy.
Insurers therefore have a defence: where there are reasonable grounds for delaying payment under the policy, insurers will not be in breach of Section 13A. Such grounds may arise in circumstances where the loss claimed is substantial and difficult to accurately quantify, or because it is necessary to obtain expert opinion on the loss before payment under the policy can be made.
Policyholders will have a one year limitation period from the date the insurer made full payment of the claim (or otherwise settled it) in which to issue a claim for damages for late payment. It is worth noting that the onus will be on the policyholder to prove that the additional losses were foreseeable at the time of entering into the contract (or on renewal / variation), and that they have done all they reasonably could in order to mitigate further loss.
Avoiding the implied term
By Section 16A of the Insurance Act 2015, parties to non-consumer contracts of insurance / reinsurance will be free to contract out of the implied term in Section 13A, provided a delayed payment is not deliberate or reckless on the part of the Insurer. Where contracting out is not possible, parties to a non-consumer contract of insurance are also free to cap liability for damages (for late payment) but, whatever the variation from the default Section 13A, insurers are best advised to ensure the alternative term is drawn to the attention of policyholders.
Parties to consumer contracts of insurance cannot contract out.
Necessary changes to the handling of claims
The Law Commission has stated that the new duty under Section 13A does not seek to prevent insurers from vigorously investigating speculative or unmeritorious policy claims, but even in those circumstances it is clear that the insurer will need to be seen to be being proactive.
Insurers would be best advised to maintain full records of all conversations with their policyholders and third parties investigating a claim on their behalf (eg loss adjusters), and where a delay emerges, to explain the reasons for the delay to the policyholder.
Where only part of the claim requires a deeper assessment, it would be prudent for insurers to consider early settlement of the part of the claim that appears legitimate and reasonable. Where insurers are dealing with a substantial loss, and it is clear that payment under the policy would eventually be forthcoming, insurers might wish to consider an interim payment to the policyholder, particularly where that payment would assist the policyholder’s interim cash-flow position and prevent a cause of action accruing against the insurer.
