Enterprise Act 2016: damages for late payment of claims to come into force May 2017
The new provisions discussed below will therefore apply to contracts incepting from 4 May 2017 onwards.
Under a new section 13A of the Insurance Act 2015, it will be an implied term of every contract of insurance that the insurer must pay any sums due in respect of a valid claim within a reasonable time, and will liable to the insured in damages in the event of breach.
This key provision will end the position under Sprung v Royal Insurance , which held that an insurer could not be liable in damages, even for deliberate late payment of claims and an insured’s redress for late payment was limited to the additional payment of interest. The change brings English insurance law closer into line with the position in many other major jurisdictions and will be welcomed by insured companies.
Going forward, it will not be possible to contract out of the new implied term for consumer insurance contracts or for any non-consumer contract where the breach by the insurer is deliberate or reckless. Otherwise, contracting out will be possible for non-consumer contracts only where the transparency requirements of section 17 of the Insurance Act 2015 are met.
One year time limit
The government made one significant concession during the passage of the Enterprise Bill in Parliament in response to an industry initiative. Under section 30 of the Enterprise Act 2016, section 5 of the Limitation Act 1980 is amended to introduce a one year time limit in which to bring an action in damages for late payment of insurance claims. Time runs from the date on which the insurer has paid all sums due in respect of the claim. This provision should help provide insurers with greater certainty in setting reserves and when closing off their books of claims, especially those that have been disputed or have been paid after significant delay.
The insurance industry now has just under a year to prepare and train for the further changes. Such action will follow on relatively quickly after the coming into force of the main provisions of the Insurance Act 2015 later this year. As with the other changes, it will be necessary to review both claims processes and wordings.
It remains to be seen in practice how widely insurers will be able to negotiate ‘opt outs’ from the new late payment provisions in non-consumer contracts. The clear intention of the change to the law is to give sharp encouragement to insurers to pay all good claims promptly, without depriving insurers of reasonable time to investigate claims. Nevertheless, the potential is real for insurers (and reinsurers) to come under extra pressure to make payment in cases where difficult loss adjustment or policy considerations apply. As with other changes brought under the Insurance Act 2015, a period of uncertainty is likely to follow over the next few years in which significant case law will be made (and hopefully provide some answers).