Time to Act: new requirement of the Insurance Act comes into force today

Today marks the end of a 12 month lead-in period for the inclusion of section 13A of the Insurance Act 2015, under the terms of the Enterprise Act 2016.

Today marks the end of a 12 month lead-in period for the inclusion of section 13A of the Insurance Act 2015, under the terms of the Enterprise Act 2016.

Insurance contracts written from today’s date will be subject to a new requirement: to pay claims to insureds within a ‘reasonable’ period of time.

This article focuses on practical pointers for claims handlers, claims managers and underwriters to consider going forward.

Practical tips for claims handlers and claims managers

Consider what is reasonable for your class of business

The new section 13A to the Insurance Act does not specify what a reasonable period of time for payment will be.

Rather it provides a non-exhaustive list of factors which will be taken into account when considering what will be reasonable. These include the type of insurance and the size and complexity of the claim.

Claims handlers will no doubt already be mindful of the financial ramifications or complexities of their cases when making decisions as to payment, with factually complex claims — or claims where coverage is uncertain — taking longer to resolve whilst factual or legal issues are investigated.

Nevertheless claims managers can assist their handlers to adopt a consistent approach by providing guidelines for each class of business by reference to: claim quantum, claim type, and payment type (ongoing or one-off).

Begin investigations early

The Insurance Act 2015 provides a defence where there were “reasonable grounds for disputing the claim” — whether in whole or part. However, where a delay occurs — even for good reason — insurers may still be liable for damages.

Accordingly, getting investigations under way as soon as possible will minimise the prospect of damages being sought or becoming payable.

Consider how claims files are documented

  • Demonstrate investigations are ongoing:

1) When instructing lawyers to resolve factual uncertainties or to opine on cover, claims handlers should seek to record matters on file to ensure that they do not need to waive legal advice privilege in order to document prompt claims handling.

2) The easiest way for claims handlers to avoid this concern will be to request that their lawyers include a short summary within their updates on the factual matters under investigation which can be copied to the claims file.

  • Document any delays and from where they originate:

1) In order to ensure the best defence — or the best prospects of recovery from a third party e.g. loss adjusters — claims handlers and claims managers should document any delays and from where they originate.

2) Claims handlers may also wish to document where delays arise from their co-insurers, in the event that conflicts arise between lead/follow insurers in relation to delay.

  • Consider noting on claims files what payments are anticipated and can readily be agreed:

1) Any specific concerns as to more controversial elements of claims could also be noted on claims files so that claims payments can be more readily agreed or withheld when claims handlers are absent from the office for illness or annual leave.

Consider part payment of any uncontroversial elements of the claim

In order to minimise exposure to a claim in damages, claims handlers should consider part payment of any uncontroversial elements of the claim.

Ensure adequate releases in settlement agreements

Any settlement agreements on policies written from today’s date should include a specific waiver from insureds of any right to claim damages for late payment.

Consider the frequency of reporting to reinsurers

Ensure there is agreement as to what impact (if any) the new reasonableness requirement will have on the usual process by which reinsurers are kept updated as to payments.

Practical tips for underwriters

Underwriters should consider altering their wordings to contract out of these provisions for non-consumers

To achieve this, sufficient steps should be taken to draw the term to the insured’s attention prior to concluding/amending the contract.

Any such policy term must be clear and unambiguous as to its effect.

Directors and officers (D&O) liability underwriters, in particular, may wish to consider adopting this approach, given D&O insurance is not a consumer product (per Regina (Bluefin) v FOS [2015]).

However, we appreciate that for underwriters in some classes of business, market conditions may render such an approach uncompetitive.

Market dynamics

Underwriters should speak to claims handlers to get feedback over time as to whether any market participants in particular are causing concerns.

The impact of the new requirements will be more complex in market instructions, where co-insurers will be reluctant to make a payment before market agreement has been reached.

The speed with which the lead insurer acts will be key. Even one slow follow market insurer who is a claims agreement party will make matters difficult.
Related items:

Enterprise Act 2016: damages for late payment of claims to come into force May 2017
Avoiding damages for late payment: far-reaching consequences to affect claims process

Enterprise Act 2016 – implied term about late payment of insurance claims is late addition to the Insurance Act 2015