Insurers would be under a legal requirement to settle claims within a “reasonable time” if new laws introduced to the UK parliament are passed in their current form.
Out-Law.Com reported that the new requirement is included in the Enterprise Bill, which is currently before the UK parliament. Although it would apply to every contract of insurance, it would particularly benefit those businesses whose “ability to continue or re-start trading after an insured loss” depends on prompt payment, the government said. It would be backed by a new right for policyholders to claim damages for late payment.
Insurance law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that the idea of policyholder redress for late payment by insurers had been an “on-going issue” in the industry. The proposal emerged from the Law Commissions of England and Wales and of Scotland’s joint work on insurance law reform, he said.
“Many market participants will welcome the change, though some have previously commented that it may lead to a multiplication of litigation and potentially negative behaviours by claims management companies looking to exploit the opportunities the reform could create for additional claims,” he said. “There is also the potential uncertainty around proving that a particular additional loss was in fact suffered as a result of late payment, where often numerous other factors may also contribute to the loss.”
“On balance this may be a positive reform, giving policyholders with legitimate losses a new avenue to redress, but there may well be uncertainties around how the new rights will operate in practice,” he said.
Currently, insurers in England and Wales are 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 have no right to claim damages for late payment or compensation for additional losses suffered due to the delay. They are, however, entitled to sue for the money they are owed under the policy plus interest if the insurer pays unreasonably late or fails to pay at all.
The provisions in the Enterprise Bill would require insurers to pay valid claims within a reasonable time unless they have reasonable grounds for disputing it. The bill also contains a non-exhaustive list of matters which may be taken into account when determining what is a ‘reasonable time’, and states that this will always include time to investigate and assess the claim. Policyholders would be given the right to general damages should they suffer additional loss because of the insurer’s unreasonable delay in payment.
The change would bring the law of England and Wales into line with general contract law principles, as well as with insurance law in other jurisdictions including Scotland, the USA, Canada and Australia. In Scotland, it would provide a statutory basis for the existing law.
Stephen Lewis, the law commissioner for commercial and common law in England and Wales, said that the change would build on those introduced through the 2015 Insurance Act, which implemented many of the Law Commissions’ recommendations for modernising commercial insurance laws in England and Wales and in Scotland.
“Insurance enables businesses and individuals to protect themselves against risk, but late payment of valid claims undermines that principle,” he said.
“Fire, flood and other such events can be devastating for a business. If a valid claim is then not paid, the loss suffered can be catastrophic, preventing the business from getting back on its feet. This can have serious consequences not just for business owners but also for employees, suppliers and the wider economy,” he said.