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The Enterprise Bill: Payment of Insurance Claims - James Gibbons, Browne Jacobsen LLP

28/10/15. The Enterprise Bill (“the Bill”) was published in September 2015 and contains provisions which, if enacted, would imply terms into all insurance contracts that require an insurer to pay sums due to insureds within a reasonable time. The changes are likely to have the most significant impact on first party loss policies. However, any crystallised loss indemnified under a liability policy will also be affected meaning all insurers and their advisers will have to consider the impact of the Bill.

Background

English law has been reluctant to follow the lead of other common law jurisdictions and has generally been reluctant to allow the recovery of consequential damages for late payment of insurance claims. The English courts have long considered contracts of insurance to form a promise by an insurer to hold an insured harmless against loss, meaning that the payment of a claim under a policy is deemed to be a payment of damages in itself.

To rectify what is objectively a legal oddity, and with the reforms brought about by the Insurance Act in mind, the concept of requiring prompt payment of insurance claims has risen up the political agenda. Provisions catering for such a change were included in the original drafts of the Insurance Act 2015 but were removed on the Act’s journey through parliament to ensure that the Insurance Bill (as it then was) maintained its “uncontroversial” status, so as to benefit from the parliamentary fast-track procedure.

It is therefore significant that the Government has decided to reintroduce these provisions under separate legislation. Given that a provision so clearly in the interests of insureds is unlikely to face opposition in Parliament, there is a good chance that these changes will come into force with the Insurance Act in August 2016.

The proposals

If enacted, the Bill would insert a new section into the Insurance Act which would imply a term into every contract of insurance that requires an insurer to pay sums due in respect of a claim by an insured, within a “reasonable time”. What constitutes a “reasonable time” will depend on various factors including the type of insurance, the size and complexity of the claim and matters outside of an insurer’s control. Insurers will also be allowed time to investigate claims and, if appropriate, dispute them (so long as the insurer acts reasonably in doing so).

Significantly, a breach of the implied term would give an insured a right to damages, in accordance with normal contractual principles. This means that in the event of a delayed payment, an insured may not only seek to enforce the relevant policy terms and claim for interest, but it may also bring a claim against an insurer for foreseeable loss arising from the delay.

While an insurer may contract out of the changes, to do so it must make its intention clear and unambiguous, as well as bring the relevant policy terms to the insured’s attention, prior to policy inception. Whether or not this will be commercially acceptable remains to be seen.

The impact of the Bill

It is worth noting that insurers are already under a regulatory obligation to pay claims “promptly” and that individuals acting in their private capacity have a right to bring a claim directly against a firm that breaches its regulatory obligations. Therefore, insurers should already be paying claims within a reasonable time period and there is a route for private individuals to seek damages if they do not.

However, the changes would clarify insurers’ obligations and, for the first time, allow commercial insureds to bring claims for consequential losses. The changes would also make these claims more straightforward for individuals. Therefore, if the Bill is enacted, claims for late payment may become commonplace, both in the form of complaints to the Financial Ombudsman Service and through the courts. As claims arise, the threshold for what constitutes a “reasonable time” period on any given occasion will hopefully become clearer, but until that happens there is likely to be a considerable period of uncertainty.

A cause of particular concern for insurers is likely to be the potential for unlimited exposure arising from the risk that damages payable may exceed the sums claimed under the policy or even the limit of indemnity (given that a payment of damages will not erode the level of cover). Specifically under liability policies, there is risk of recoverable losses arising from a delay in paying agreed settlement sums, or in confirming an insured’s entitlement to defence costs. Those losses may well ultimately fall to be recovered from solicitors or other suppliers, where the loss arises from those suppliers’ acts, omissions or delays.

The success of such claims will depend upon whether the losses suffered were reasonably foreseeable at the time the policy was incepted but in any event it is clear that the provisions might open up a new avenue for claims against insurers.

Practical considerations

The changes will have a significant impact upon insurers’ approach to claims investigations as the speed of settlement will be more important than ever. In the event of a dispute over coverage, but where any delay in payment could result in substantial consequential losses for the policyholder, we can certainly see the scope for insurers to make payments without prejudice to policy liability to enable an insured to remedy the effect of the insured peril, with insurers’ retaining the right for the indemnity payment to be repaid in the event of the court or Ombudsman agreeing that the policy doesn’t respond. That could be more attractive to insurers in some cases, particularly where the coverage dispute is a marginal one.

In summary if the proposed changes are enacted, the likely consequences are that we will see:

  1. more decisive approaches being taken to claims screening and settlement;

  2. the updating of procedures and processes to ensure that coverage investigations can be undertaken as efficiently as possible; and

  3. a review of contractual arrangements between insurers and suppliers in order to remove barriers to timely settlement. This may in turn result in more delegated authorities being used.

 

James Gibbons is a solicitor in Browne Jacobson LLP’s Financial and Professional Risk team who specialises in insurance and financial services law

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