Enterprise Bill 2015

The Insurance Act 2015 is due to come into force in August 2016 and it is widely considered the biggest reform to insurance contract law in recent history (please review our article from edition 3 of Property AWARE which is available here). However, the changes do not stop there.

Further amendments to the Insurance Act 2015 are on the horizon in the form of the Enterprise Bill 2015 (“the Bill”), which was scheduled for its second reading in the House of Commons earlier this month.

The content of the Bill is far reaching and its purpose has been described by the Government as a bill to “make sure that Britain is the best place in Europe to start and grow a business and that people who work hard have the opportunity to succeed.”

However, one amendment proposed within the Bill (which is expected to take effect in 2017) will have a significant impact on insurers and their future claims handling processes.

The late payment of insurance claims - present position

At present, insurers are not restricted by any timescales when paying valid insurance claims (notwithstanding that there is a requirement to treat customers fairly).

Presently, a policyholder whose claim has been wrongly refused, or payment delayed, is not entitled to damages from the insurer in respect of any late payment. The well-known case of Sprung v Royal Insurance (UK) Ltd [1997] C.L.C. 70 is an example of this established principle.

In this case, the insurer refused to pay a claim for a prolonged period of time, which resulted in the insured being unable to continue its business. As a result, the insured brought a claim in damages for compensation. The court held that it was not possible to obtain damages for breach of an implied obligation on insurers to pay the claim within a reasonable time.

The only remedy currently available to policyholders in cases of late payment is to commence court proceedings to enforce payment under the contract of insurance (plus statutory interest on the sum awarded).

So what will change?

In line with the intended purpose of the Bill, the Law Commission identified that small businesses may be at risk of insolvency where claims were not paid within a reasonable time - particularly in cases of severe fire or flood. With this in mind, the Bill proposes to introduce into every contract of indemnity insurance an implied term that insurers must pay valid claims within “a reasonable time”.

Where an insurer fails to make payment within a reasonable time, a policyholder will be entitled to:

• Enforce payment of the claim under the contract of insurance; and
• Bring a contractual claim for damages in respect of any losses suffered as a result of the insurer’s failure to make payment within a reasonable time.

For example, where a factory owner makes a valid claim following a fire (which causes extensive damage to the property and the stock within it) and the insurer unreasonably delays paying the claim.

The insured will be entitled to payment under the policy of insurance as well as any consequential losses that flow from that delay, such as loss of profit / business interruption.

What is ‘a reasonable time’?

Understandably, insurers’ first question will probably be “what is a reasonable time?”.

As ever, each case will be looked at on its own individual merit; however, consideration will be given to the following:

• The type of insurance.
• The value and complexity of the claim.
• Compliance with any relevant statutory or regulatory rules or guidance.
• Factors outside the insurer’s control.

It is important to note that what is ‘a reasonable time’ will include time spent investigating and assessing the presented insurance claim.

Insurers should avoid the temptation simply to agree to the early settlement of claims without thorough investigation, in an effort to avoid being penalised for late payment.

Where there are reasonable grounds for disputing the value and/or validity of the claim, insurers will have a valid defence to any claim for damages arising as a result of a perceived delay in payment on the part of the policyholder.

Contracting out

It is also worth commenting that insurers are entitled to contract out of this implied term in consumer contracts of insurance, if the insured is put on notice that they are agreeing to a reduced level of protection.

Whether this is an approach that insurers will seek to adopt in a competitive insurance market remains to be seen. Based on our conversations with insurers to date, it seems unlikely.

What to do next?

Whilst the temptation for insurers (within this busy market) may be to worry about these changes once they take effect, it is recommended that insurers begin to review their claims processes and implement new procedures now, in an attempt to stay one-step ahead of their competitors. A non-exhaustive list of some of the issues that insurers may wish to consider (at this early stage) include:

• Review the current claims handling processes.
• Record those factors which impact upon the ability to investigate and resolve claims.
• Make a record of all claims investigations undertaken, and the reasons for the same.
• Identify and respond to potential complaints as early as possible.
• Consider how these complaints can be managed and resolved more efficiently.
• Where possible, seek to settle genuine claims as promptly as possible.

As well as reviewing internal claims handling procedures, insurers should also consider the approaches currently adopted by their agents, in particular loss adjusters.

Loss adjusters are often on the front line when it comes to investigating large insurance claims and insurers should work closely with them to ensure that claims are investigated efficiently, that all enquiries and investigations are fully recorded and that those valid claims are paid promptly.

A failure to implement these procedures may result in costly claims for damages for insurers when the Bill takes effect, which in cases involving loss of profit could ultimately significantly exceed their primary liability for the original insurance claim.