Business and consumer insurance policyholders may now pursue their insurers in the courts if they do not settle claims within a reasonable amount of time.
The 2016 Enterprise Act inserted a new section 13A into the 2015 Insurance Act, which introduced a new implied term into all insurance and reinsurance contracts entered into on or after 4 May 2017. This will require insurers to pay claims within a 'reasonable time' unless they have reasonable grounds for disputing it.
Although some have predicted a surge of claims against insurers as a result of the new legislation, insurance law expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com, said that this was fairly unlikely.
"Experience from other jurisdictions where damages for late payment have been permitted for a number of years suggests there will not be a deluge of formal disputes," he said. "Whilst the new rules might give insureds and their brokers an extra stick with which to beat insurers on speedy settlement of claims, it remains to be seen whether this will lead to more litigation. In my view, in many instances, causation will be a difficult obstacle for any insured to establish."
"As with the rest of the new regime brought in by the Insurance Act which has now been in play since last August, there will be a period of uncertainty while insureds, insurers, brokers and other third parties involved in the claims process work out what the new rules mean in practice. Look out for changes to the ICOBS rules which will come into effect in August, to reflect practice consistent with the new legislation," he said.
Previously, insurers in England and Wales were under no legal obligation to pay valid claims under contracts of indemnity insurance within a reasonable time. Financial Conduct Authority (FCA) rules require claims to be handled and settled promptly, but policyholders had no right to claim damages for late payment or compensation for additional losses suffered due to the delay. They were, however, entitled to sue for the money they were owed under the policy plus interest if the insurer paid unreasonably late or failed to pay at all.
The new law requires insurers to pay valid claims within a reasonable time, including a reasonable time to investigate and assess the claim, unless there were reasonable grounds for disputing the claim. The legislation incorporates a non-exhaustive list of matters which may be taken into account when determining what is a 'reasonable time'. These are the type of insurance; the size and complexity of the claim; compliance with any relevant statute or regulatory rules or guidance; and factors outside the insurer's control.
The implied term will not prevent an insurer from refusing to pay a claim if it has reasonable grounds for the refusal. However, its conduct in handling the claim may be a relevant factor in deciding whether the implied term has been breached - for example, if it conducts its investigations unreasonably slowly or delays taking into account additional information provided by the insured. The insurer's treatment of the insured when engaging in pre-action correspondence, unjustified refusal of ADR, failure to make or accept reasonable offers of settlement, unsuccessfully contesting applications made by the insured and appealing judgements may also be of relevance.
Insurers will not be able to contract out of the implied term in consumer contracts. They will be unable to contract out of deliberate or reckless breaches of the implied term in non-consumer contracts, but will be able to contract out of other breaches where the transparency requirements set out in the Insurance Act have been met.
Although this means that reinsurers will be able to contract out of breaches of the implied term when covering business risks, insurance expert Nick Bradley said that the changes raised an "interesting question" about whether reinsurers "will end up picking up the tab for any underlying settlements that are inflated because of provision for an element of late payment within the overall negotiated compromise".
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