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Late payment of claims` by insurers in The Enterprise Bill 2015

Presented before the House of Lords on the 16th September, The Enterprise Bill 2015 contains (amongst other things) another attempt to include clauses relating to late payment of claims by insurers.

Such a clause was previously excluded from the Insurance Act 2015 on account of being regarded as too contentious to be passed under a procedure specifically retained for non-contentious bills. Yet the law commission seem determined to change the current standing on the law regarding late payment of claims deeming the ‘hold harmless’ principle a rectitude of ‘legal fiction’.

Currently under English law, insurers are not liable for damages where they may have caused further loss to the policyholder through wrongful, late or non-payment of an insurance claim. In fact, quite the opposite; the precedent within English courts is that the indemnity contract is undermined by the principle that the insurers dominant obligation is to prevent the circumstance the policyholder has been insured against from happening. Should the policyholder suffer harm, they make a claim, which is paid by the insurers in the form of damages.

This is known as the ‘hold harmless’ principle, the consequence of which is that insurance payments are viewed as damages for breach of contract. Notably, English law fails to allow for claims of damages for the late payment of damages; in other words you cannot claim damages for late repayment of damages. This principle excludes life insurance policies and policies that afford reinstatement.

The possible enactment of the Enterprise Bill 2015 will imposes a duty on an insurer to provide timely payment of claims; a failure to do so results in the insurer being potentially liable for any further damage the policyholder suffers from the insurer’s failure to pay.

The Bill seeks to insert a new section into the Insurance Act 2015; s.13A. S.13A (1) holds that is to be an implied term of every insurance contract that if you make a claim, any monies due in respect of this claim must be made within a ‘reasonable time’. This period includes a reasonable

time for the insurer to investigate and assess the claim under s.13A (2). A successive provision s.13A (3), states that what will be deemed reasonable will differ in different circumstances. Examples of factors which will need to be taken into consideration are listed and include;

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

Insurers will have a defence under s.13A (4) (a) if ‘reasonable grounds’ for disputing the claim can be found. Insurers will also not be liable for failing to pay the claim while the dispute is continuing. Therefore, it is only after policy liability has been acknowledged, that the claim is required to be paid within a reasonable time. It is made clear however, that the conduct of the insurer when handling the claim may be a relevant factor in deciding whether the term was breached. In other words if the insurer is able to prove that they acted reasonably even though they incorrectly refused to pay a claim, they may have a defence.

Despite this the Bill has many stages still to pass through in order to become law, and like any Bill is subject to amendments. The legislation had its second reading in the House of Lords on the 16th October, and has now been committed to a grand committee, where all decisions made on it must be unanimous. Should the Bill be enacted the provisions themselves will not come into effect until one year after it became law, and will only effect policies written after this date. Whilst the possibility of this legislation appears to have caused some uneasiness within the insurance industry, many are of the opinion that this Bill simply cements insurers’ regulatory obligation to treat their customers fairly.