The Enterprise Act and Insurers
In the next month or so, a number of articles may well appear relating to the Enterprise Act 2016. This is because on 4th May 2017, this legislation comes into force and will have relevance to the insurance industry as Part 5 is concerned with late payment of insurance claims.
As the law currently stands, there is no obligation on an insurer to pay valid insurance claims within a reasonable time.
This is because of a legal fiction which holds that an insurer’s primary obligation under a contract of indemnity is not, as you would expect, to pay money to the policyholder in the event of an insured incident but hold the indemnified person harmless against a specified loss or expense – that is, to prevent the event which is insured against from happening
Accordingly, any claim payment made is considered to be damages as a result of a breach of contract rather than as a debt under the contract.
English Law does not recognise a claim for damages for the late payment of damages and as such, policyholders are not able to claim damages for the non-payment of insurance monies due.
Incidentally, ‘Legal Fiction’ is a fact assumed or created by the courts which is viewed as being true for legal purposes. The fact, however, may be unproven or untrue. In this case, it does not reflect commercial reality of indemnity insurance.
In Scotland, the court has accepted that there is an implied term that the insurer should assess a claim reasonably quickly and with diligence.
Clearly, the situation in England and Wales was absurd and needed to be brought up to date.
Indeed, when the Law Commission and the Scottish Law Commission undertook their major review of insurance contract law leading up to the implementation of the Insurance Act 2015, they did include recommendations regarding payment of claims. These were not implemented at that time.
The Enterprise Act 2016 implements the Law Commission’s recommendations and this is done by an amendment to the Insurance Act itself.
From 5th May, it will be an implied term of every contract of insurance taken out or amended after that date that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of a claim within a reasonable time.
The Act states that a reasonable time does include a reasonable time to investigate and assess the claim.
What is reasonable will depend on all the relevant circumstances but the Act gives specific examples of things which may need to be taken into account:
Type of insurance
The size and complexity of the claim
Compliance with any relevant statutory or regulatory rules or guidance
Factors outside the insurers control
What constitutes ‘reasonable’ will be shaped by future case law. There are, however, examples which may provide some guidance. For example, in the case of Gentry v Miller (2016) – a relatively low value road traffic incident – it was held by the Court of Appeal that a period of two months to investigate was reasonable – this timescale included the Christmas period.
On the other hand, in Brit Underwriters v F and B Trenchless Solutions (2015), a period of 4-5 months was taken as being reasonable to allow for the investigation of what was a complex claim.
It will be a defence to a claim for breach of this implied term if the insurer can show that there were reasonable grounds for disputing a claim or a claim amount.
Furthermore, insurers will not be held to have breached merely due to non-payment whilst a dispute is ongoing although the conduct of an insurer in the handling of the claim will be taken into account.
Contracting out will not be allowed for consumer insurance contracts although it is possible to contract out of non-consumer contracts, subject – of course – to the transparency requirements already contained in the Insurance Act.
Whilst the new law will allow policyholders to claim damages for any late payment of claims in accordance with accepted principles, the introduction of the new law is unlikely to make a great deal of difference in terms of the service insurers should already be giving to their policyholders.
This is because of the existing regulatory rules and principles that are set out in the Financial Conduct Authority’s (FCA) Handbook.
For example, under ICOBS (Insurance Conduct of Business Sourcebook) 8.1.1, an insurer must:
1) handle claims promptly and fairly; 2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress; 3) not unreasonably reject a claim (including by terminating or avoiding a policy); and 4) settle claims promptly once settlement terms are agreed.
Furthermore, the following Treating Customers Fairly (TCF) outcomes may need to be taken into account:
Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect. Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Most insurers should need to make no more than minor changes in their day-to-day practices but of course any new legislation does bring with it uncertainty and a need to review, update and monitor matters.
Finally, it is important to be aware that claims against insurers for breach of the implied term must be brought no later than one year from the date on which the insurer has paid all the sums due in respect of the claim. After that time, any claim damages become time barred.