Insurance: statutory requirement to pay claims within reasonable time in force

For insurance and reinsurance contracts entered into from 4 May 2017, a new statutory requirement is to be implied that (re)insurers must assess and pay valid claims within a reasonable time.

Damages may be awarded against insurers found to be in breach. Any award of damages will be in addition to the claim under the policy and may be in excess of policy limits. Applying the usual rules of contract, where an award of damages places the injured party in the position they would have been in had the contract been performed, the damages awarded could potentially be substantial (for example where a delay in payment has caused loss to an insured business).

The change in the law has been brought about by section 28 of the Enterprise Act 2016 which introduced a new section 13A into the Insurance Act 2015.

Reasonable time

What is reasonable in any given case will be fact-specific and depend on the “relevant circumstances”. The Act provides a non-exhaustive list of matters that may be relevant: the type of insurance, the size and complexity of the claim, compliance by the insurer with relevant statutory or regulatory rules or guidance (such as ICOBS), and factors outside the insurer’s control. Factors outside the insurer’s control could include delay caused by the insured or third parties failing to provide information promptly when requested.

In the case of coverage disputes, the insurer will have a defence to a claim under section 13A if it can show that there were reasonable grounds for disputing the claim. The burden of proof will be on the insurer and any uncontested parts of the claim must still be paid. The intention is that delay in paying a claim while cover is disputed (even if the claim is ultimately accepted) will not, by itself, be enough to allow a claim for damages against the insurer. Something more will be required, such as the insurer acting unreasonably slowly in investigating coverage issues.

Contracting out

For non-consumer insurance, the insurer can contract out of the late payment provisions. This can be done by including wording to disapply section 13A or by imposing a limit on the insurer’s liability. For the clause or limit to be effective, the insurer must satisfy the transparency requirements contained in section 17 of the Insurance Act 2015: the provision must be clear and unambiguous as to its effect and sufficient steps must have been taken to draw the term to the insured’s attention (or the attention of its broker) before the contract was entered into. In addition, an exclusion or limitation of the insurer’s liability will be ineffective if the insurer is shown to have acted deliberately or recklessly in delaying payment of a claim.

Limitation

As well as the usual limitation period of six years from breach of contract, a one-year time limit for bringing a claim against the insurer under section 13A will apply. The one-year period will run from the date when the insurance claim is settled and the claim for late payment will be time-barred by whichever period ends soonest.

Comment

This is an important change in the law. In a soft market there may be little appetite for insurers to seek to exclude or limit their liability and we anticipate that damages for late payment may commonly be added as a head of loss where claims are disputed.

The question of what is a reasonable time to investigate and pay claims is likely to be a contentious area and insurers will need to have systems and procedures in place to show that they acted reasonably if required. More documenting of claims handling and explaining the claims handling to insureds may need to be considered. Claims reserves may also need revising to reflect any potential increased exposure and reinsurance arrangements reviewed to check whether an award of damages would be recoverable.

Although the position of brokers is not explicitly dealt with in the Act, brokers should be aware of the need to pass on promptly information provided to them when dealing with claims - and, more generally, the provisions of the implied term when delegated, with the claims handling arising out of books of business.