On 4 May 2017, legislation came into effect that implies terms into new contracts of insurance. Following the commencement of the Enterprise Act 2016 on that date, the Insurance Act 2015 was altered to provide that sums due under all contracts of insurance will be paid to the person who is insured within a ‘reasonable time’. Crucially, where valid claims are not paid out within a reasonable time, damages may be payable. Below, we outline the rules around late payment of insurance claims.
What happens if a claim is not paid within a reasonable time?
If the time taken to pay out on a valid claim is deemed to be unreasonable, this will be a breach of the insurance contract. Insurers will then have to pay enough damages to the policyholder to put them in the position they would have been in, if the contract not been breached (i.e. if it had been made within a reasonable time). This means that insurers will have to pay to rectify any foreseeable losses experienced by policyholders as a direct result of their delay.
What if the claim is disputed?
The act includes a provision allowing time to investigate and assess the claim. Where insurers have genuine doubts about a claim’s validity or where more assessment is needed, they will not be liable for deferring payment until the areas of dispute have been resolved.
In light of this, where there are reasonable grounds to dispute a claim (whether in relation to the claim itself or the amount payable), insurers will not be expected to pay out while the dispute is ongoing. However, it should be noted that the insurers’ conduct in handling the claim could be a factor in deciding whether there has been a breach of the implied term. As such, rapid resolution of disputes will ensure that claims are still paid within a reasonable amount of time, as required. If investigations are unreasonably delayed by insurers, the implied terms could still be breached even if the claim is technically still in dispute.
Will the changes affect pre-existing policies?
No: the new rule will apply only to insurance contracts made on or after 4 May. However, you should note that it will apply to policies that started before 4 May but are renewed on or after this date.
What can insurers do to avoid paying damages?
1. Record every stage of each claim
These new requirements provide a further incentive to keep clear and thorough records of the entire claim process. This will allow insurers to evidence the reasoning behind any delays in payment and demonstrate the measures that have been taken to investigate any areas of dispute.
2. Ensure disputes are investigated and resolved swiftly
This will make sure payments can be released without delay, even where some – or all – of the claim is disputed.
3. Keep policyholders in the loop
Providing regular updates to the insured person will show them action is being taken and that their payments are not being delayed without reason.
4. Consider interim payments where appropriate
If a dispute arises over the amount of a claim only, interim payments of undisputed amounts will keep policyholders happy and will show that insurers are making an effort to avoid delayed payments wherever possible. Equally, where only part of the claim is disputed and this can be separated from the remainder, paying the undisputed part swiftly will protect against allegations that the claim is not being paid within a reasonable time.
What is a ‘reasonable time’?
There is no specific limit for how quickly payments should be released. However, the act lists factors that may be taken into account when assessing what is reasonable:
(a) type of insurance;
(b) size and complexity of the claim;
(c) compliance with any relevant statutory or regulatory rules or guidance;
(d) factors outside insurers’ control.
Where claims are complex or higher value, more time will be allowed for insurers to release payment.
How will damages be calculated?
In the event that a claim is deemed to have been paid outside a reasonable timescale, any foreseeable loss suffered by the insured party as a consequence of this will be payable by the insurer. For example, delayed payment on a property damage claim could lead to delays in carrying out repair works. If this delay then causes further damage, the insurer will be liable for the cost of rectifying that damage. Alternatively, a delay in paying the sums on a commercial insurance claim may prevent an insured business from carrying on with their business. The insurer would then be liable for the loss of income that resulted from the delay, though the insured party would need to provide clear evidence of what their income would have been, had there been no delay in payment.
In addition to damages, insurers will be liable to pay interest on a late payment. The default rate of interest will be 8 per cent above the Bank of England base rate, though this can be altered in the insurance contract for commercial insurance policies.
Can insurers contract out of the new term?
No: Insurers cannot contract out of the new term in a consumer contract. In the case of a non-consumer contract, insurers can contract out of the term but it will only be effective if the breach (i.e. the delay in paying out) is not deliberate or reckless. If the insurers knew they were in breach (or did not care whether they would be in breach), then the contracting out will have no effect and damages could still be payable. Also, terms that seek to contract out of the need to pay within a reasonable time will only have effect if the terms are unambiguous and brought to the attention of the insured person.
How long do policyholders have to bring a claim?
Policyholders have a year from the payment of their insurance claim to make a claim for damages for late payment.
Since insurers often rely on suppliers in the fulfilment of claims, this new term also increases pressure on the supply chain. Insurers will be liable to the policyholder for late payment, even where the cause of delay occurs further down the supply chain. The quick payment of claims not only enhances customer satisfaction, it could now also save insurers time and money in defending or paying claims for late payment. In order to avoid costly damages claims, insurers should redouble their efforts to investigate disputed claims quickly, document them carefully, communicate clearly and release payments as soon as possible.
For more information on the impact of late payment or any of the issues raised in this article, please contact Inga Mansfield in Lyons Davidson’s Property Insurance Litigation team by emailing [email protected] or calling 0117 904 6308.