Avoiding damages for late payment: far-reaching consequences to affect claims process
On 4 May 2017 changes to UK law will provide policyholders with remedies for late payment of insurance claims.
The 12 month lead-in period from when the Enterprise Bill received Royal Assent will end, bringing into force a new section 13A of the Insurance Act 2015. The practical implications will have a major impact on the approach of insurers, brokers and insureds to claims.
In this article we summarise the effect of the provisions and provide some practical advice on the steps insurers may wish to take now to prepare themselves for these changes.
Damages for late payment
Under the current law an insurer cannot be liable in damages, even for deliberate late payment of claims, and an insured’s redress for late payment is limited to the additional payment of interest.
The Enterprise Act 2016 (“the Act”) takes effect through an amendment to Section 13 of the Insurance Act 2015 by introducing an implied term into all insurance contracts entered into after 4 May 2017 that insurers must pay any sums due to their insured within a “reasonable time”.
The Act does not provide prescriptive guidelines as to what constitutes a "reasonable time", but instead states that “a reasonable time includes time to investigate and assess the claim”. It then goes on to provide a non-exhaustive list of matters which may need to be taken into account, including:
- 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
The Act provides a defence where the insurer can show that there were "reasonable grounds for disputing the claim”, whether as to the amount of any sum payable, or as to whether anything is payable at all.
The conduct of the insurer will be an important factor in deciding whether there has been a breach. However even where there are reasonable grounds, the insurer may still be in breach, for example if the investigation was conducted unnecessarily slowly.
There may be a range of reasons for the delay, some of which might be outside the insurer’s control. One concern for insurers is if they want to rely on this defence, they may have to disclose privileged documents (such as those containing legal advice or the substance of it) and potentially sensitive internal documents in order to demonstrate they acted reasonably.
Likely flood of claims?
To succeed, an insured must prove that there has been a breach (an unreasonable delay in paying a claim) which caused loss that was foreseeable at the time of entering into the insurance contract. Any claim must be brought within one year from the date the insurer has paid the claim. This, hopefully, will allow insurers greater certainty with regard to reserves.
Whilst these hurdles should avoid a flood of damages claims, we anticipate that insureds and their brokers will make full use of this provision to bring early pressure on insurers to pay out claims / drop potential defences. We also anticipate claims for late payment may become a standard add-on, thus making it harder to negotiate an early exit from difficult claims.
Also the risk of damages may put insurers off seeking to investigate possible policy breaches, for fear that they will incur greater liability (possibly greater than the policy limits) if the policy is found to respond.
Preparation for insurers
Insurers may wish to consider taking the following steps over the coming months to seek to minimise their risk of exposure to this change.
Insurers can contract out of these provisions in non-consumer contracts, providing they follow the strict transparency requirements in s17 of the Insurance Act 2015. Insurers will need to decide whether they wish to contract out of these provisions and, if so, for which class(es) of business. In a soft market there is a risk that in doing so they become less competitive.
Insurers should undertake a review of third party contracts to ensure liability for damages for late payments can be passed down to TPA’s, adjusters etc. acting under a delegated claims authority.
Insurers may also require that delegated authority partners commit to providing their staff with training on the implications of the new provisions where these act as an extension of the Insurers’ brand.
Insurers themselves may be fixed with liability through no fault of their own. For example cedants, excess or following market insurers may incur liability for damages by reason of reinsurers (having exercised claims control), or primary/lead insurers being slow to act. Therefore closer monitoring of the claims process may be needed.
Claims record keeping
Insurers will need to hone record keeping and claims monitoring practices to avoid giving rise to claims and to be able to defend the reasonableness of their actions. We may also see the setting of long-stop dates for decisions on the payment of claims become the norm. This is likely to result in more time-consuming work and an increased strain on claims staff such that numbers may need to be increased.
Regular updates to the insured about the progress of their claim will be important and, where appropriate, insurers should consider making interim or payments on account to assist with the insured’s cash flow.
Insurers may wish to obtain legal advice on the merits of a claim prior to denying cover, in order to demonstrate that they had "reasonable grounds for disputing the claim". Insurers will need to carefully monitor any issues arising from potential waiver of legal privilege and/or if the merits of the case change.
Reserves / premiums
Insurers should be aware of the prospect of damages for late payment when setting reserves for difficult claims.
Finally Settlement Agreements for claims should contain a release of liability which is broad enough to encompass any claim for late payment.
Whether the Act results in a flood of damages claims remains to be seen. What is clear though is that this Act will certainly impact on the way in which insurers and insureds approach and consider claims from the outset.
This article was first published by Insurance Day on 30 September 2016