The new implied term to pay valid insurance claims within a reasonable time represents a significant change in insurance law, which is likely to have a real impact on the manner in which claims are handled by all parties involved.
Insureds and their brokers
Insureds should not assume that pursuing a claim for late payment will be easy. In addition to proving that the insurer failed to pay a valid claim within a reasonable time, they will need to jump through the hoops of factual causation, remoteness and mitigation of damage before their claim for damages for late payment can succeed. In particular, an insured will need to prove that the additional losses suffered were foreseeable at the time the insurance contract was entered into. It is therefore important for insureds and their brokers to consider drawing the attention of insurers, at the time of contracting, to the type of losses that the insured may incur if insurers delay in paying a claim. This might include, for example:
- That the insured may be unable to keep up with mortgage repayments should its business be destroyed by an insured peril.
- That if the insured asset is destroyed it would be unable to continue its business.
- That it does not have sufficient cash-flow to withstand a delay in payment.
In order to prove that insurers were duly informed, any records of communications with insurers will come in handy.
These are early days still, but it is possible that insurers will seek to contract out of the implied duty or to limit their liability for damages. Insureds and their brokers should give careful consideration to any such attempts.
Insureds and their brokers should also take note that insureds only have one year from the date when the insurer has paid the sums due under the policy to make a claim for late payment. If the insurer does not pay the insured sum at all or makes an interim payment, time will not start to run.
The new implied term recognises that complex cases take time to investigate and that insurers should not be liable for delays caused by genuine disputes. In fact, the Law Commissions have stated that the new law does not seek to prevent insurers from taking a robust line against speculative or unmeritorious claims. However, insurers should be aware that if they seek to argue that, in deciding to dispute a claim, they were relying on legal advice they may risk waiving privilege on the substance of the advice. Professional bodies, such as The Lloyd’s Market Association, have produced model clauses to deal with this risk, but their effectiveness is yet to be tested in the courts.
It is clear from the legislation that the manner in which an insurer handles claims will play an important part in determining whether it has breached its duty to the insured. Unless they have contracted out of the new duty, insurers must be seen to be proactive in handling claims. They must monitor claims closely, especially if third parties such as loss adjusters are involved. They should engage with the insured promptly and, if there is a delay, explain the reasons for it. In order to address allegations that they have failed to make payment within a reasonable time, insurers should ensure that they keep records of their investigations and of their communications with the insured. This will require providing adequate training to claims handling teams.
Being proactive will probably also require insurers to consider whether they should engage in alternative dispute resolution (ADR) and make an interim payment to the insured, especially if faced with a large claim. Importantly, if they reach a settlement with the insured in relation to the claim for the insured loss, it should be considered whether the agreement should also settle any liability for damages for late payment.
Insurers can contract out of the new duty in non-consumer insurance cases provided the breach was not deliberate or reckless, but they will need to ensure that they explain that they are doing so to the insured (arguably, when dealing with a sophisticated insured, this is unlikely to be a difficult condition to meet) (section 17, Insurance Act 2015). Insurers should also consider how this might be perceived in the market.
If contracting out is not an option, it should be possible to cap or limit any damages liability in non-consumer insurance cases, provided the breach of duty was not deliberate or reckless and the term is drawn to the insured’s attention. This will be of particular importance since it is possible for a claim for damages for late payment to exceed the amount that an insurer has to pay under the policy. A liability to pay damages is, therefore, likely to have an impact on reserves and will require insurers to reassess their pricing structures. A cap on their damages liability, if agreed to by the insured, will make it easier for an insurer to adjust reserves and comply with the relevant capital requirements.
Finally, insurers should consider the impact that a liability to pay damages to their insured would have on their reinsurance arrangements and should contemplate introducing policy wording that makes the position clear. Arguably, a reinsurer who delays in paying a reinsured may be liable in damages if the reinsured suffers additional losses as a result of the delay. However, unless this is expressly provided for in the reinsurance contract, it is not clear whether an insurer’s liability in damages may be passed on to reinsurers.
The introduction of a right to claim damages where an insurer has failed to pay a claim within reasonable time is a welcome development which addresses an anomaly in English insurance contract law. However, it introduces a degree of uncertainty in the insurance market which could benefit from guidance from the courts in due course. For example, what constitutes reasonable time? What is the effect of the new duty on reinsurance arrangements? Also, it cannot be denied that one of the objects of insurance contracts, even commercial ones, is to provide security and peace of mind, and paying promptly is key to providing the insured with such security. In the circumstances, it remains to be seen whether the liability in damages includes a liability to compensate for any distress to individuals caused by a delay in payment.
It will be interesting to see whether this change in the law will incentivise insurers to process and pay claims promptly, especially as insurers have now lost some of the strategic high ground in litigation that, arguably, they had previously enjoyed. There is much speculation in the market as to whether the right to claim damages will open the floodgates and lead to US-style “bad faith” actions. Only time will tell whether this is the case, but one thing is clear: the negotiation landscape between insureds, brokers and insurers has changed.
For Part 1 of the discussion, see Blog post, Insurers no longer have time on their side to pay claims: part 1/2: what has changed?