By Andrew Milne, Sedgwick London
The UK Government recently proposed legislation to provide policyholders with the right to sue their insurers for damages caused by late payment of valid claims. This new section on late payment damages was introduced in the Enterprise Bill in September 2015, and is currently being considered by the two chambers of the UK Parliament, the House of Lords and the House of Commons. If passed by the UK Parliament, as is expected, the Enterprise Bill would bring insurance policies governed by English and Welsh law into line with that of many other jurisdictions, including most US states. It could lead to a new clause being inserted into the Insurance Act 2015 (which becomes effective in August 2016), and would introduce an implied term into every insurance and reinsurance contract requiring payment of any sums due in respect of a claim within a reasonable period of time. Insurers that fail to adhere would be liable to pay damages in addition to claim payments and interest. Damages could be substantial where insureds or reinsureds can demonstrate that late payment had a significant impact on their business.
Assessing what is a reasonable time in which to pay a claim depends on the facts of each case, but is likely to be influenced by (1) the type of insurance, (2) the size and complexity of the claim, (3) the need to comply with any relevant legislation, and (4) factors outside an insurer’s control. Insurers that can show they are waiting for information from an insured which is reasonably needed before paying a claim are likely to have a solid defense. Insurers will be able to contract out of these changes when dealing with business insurance, provided they draw the relevant term to the insured’s attention before the policy becomes effective. It remains to be seen whether insureds would agree to this.
The determination to include this section to the Enterprise Bill comes as a surprise given that a similar provision in the Insurance Bill (now the Insurance Act 2015) was eliminated because it was deemed too controversial for inclusion in that bill. It has not received a unanimous welcome in the insurance market, as concerns have been raised that the new term could be exploited by policyholders and give rise to US-style bad faith litigation. Lloyd’s reportedly is lobbying for the section to exclude insurance for large risks; however, the proposed changes likely will be retained given the UK Government’s concerns about the effect a delay in paying a claim can have on an insured’s ability to resume trading after an insured loss. Insurers should consider reviewing their internal claims risk management procedures, and perhaps ensure that claim denials, and situations involving delayed payment of a claim, are reviewed and approved by management. Insurers also should confirm that third-party administrators or other entities involved in claims handling are aware of the new provisions, and further review their own insurance coverage to ensure cover for any damages awards.