The Enterprise Act brings into force a right for insureds to claim damages where insurers have failed to settle claims within a reasonable time. Whilst not a movement towards punitive US based bad faith actions, the provisions are intended to lead to more prompt handling and settlement of claims. This bulletin examines the potential impact of the new legislation.
What is the Enterprise Act?
It has long been an anomaly of English insurance law that an insured could not claim damages where it suffers loss as a result of late payment by an insurer. For example, a company going out of business as a result of an insurer delaying payment on a covered claim would, historically, have had no remedy.
The Enterprise Act 2016 (the “Act”) came into effect 4 May 2017, inserting Section 13A into the Insurance Act 2015.
The Act incorporates into relevant insurance policies an implied term 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 legislation has no retrospective affect and so will be of no assistance to insureds pursuing claims under policies entered into before 4 May 2017 (even if the claim arises after that date).
What is reasonable?
What is a reasonable time within which to pay the sums due under the policy will depend on all the relevant circumstances, but the legislation lists the following as factors to be taken into account:
(a) the type of insurance
(b) the size and complexity of the claim
(c) compliance with any relevant statutory or regulatory rules or guidance
(d) factors outside the insurer's control.
The Act also provides that insurers will have a reasonable time to investigate and assess the claim. Insurers are therefore not precluded from taking time to investigate suspected fraud or coverage issues. Each claim will be assessed on its own merits and there is no set timeframe for what is reasonable.
As with certain other provisions of the Insurance Act, insurers are in some circumstances able to contract out of the requirement to pay claims in a reasonable time. To contract out, the transparency conditions of section 17 of the Insurance Act must be met and insurers can only contract out under non-consumer policies. In our view, it would be a bold insurer that would seek to contract out of the legislation, as they would essentially be giving notice that they do not necessarily intend to pay claims within a reasonable time. Our experience to date on the Insurance Act 2015 is that insurers are prepared to embrace change.
That said, it could, however, be envisaged that where the other party is a sophisticated insured, working in a novel area, insurers may look to cap or limit the damages recoverable, just as with any other form of contract.
What does this mean for insureds?
As a starting point, insureds should bear in mind that the legislation is not intended to be punitive in the vein of US bad faith awards. Insureds should not expect a windfall; the position under English law is that damages are intended to put the party who has suffered a loss in the position as if the breach had not occurred.
To bring a successful claim an insured must therefore prove an actual loss arising from the unreasonable delay, and that loss must be one which was in the contemplation of the parties at the time that the insurance contract was entered into. Unlike other contracts such as, for example, a supplier contract, an insurer will have a detailed understanding of an insured’s business from the presentation of the risk prior to inception and so there should be a stronger argument that the losses in question were foreseeable by the insurer.
Insureds must also take steps to mitigate any loss; large insureds can often afford to settle claims themselves or secure alternative borrowing. Smaller businesses are in a more precarious position: a business interruption fire claim could cause significant loss to a SME, or even put them out of business where an insurer fails to meet its duties under the policy.
There is also a distinction to be drawn between first and third party claims. For third party claims the more urgent issue for an insured will be the advancement of defence costs so that a claim can be defended. It will be interesting to see whether insurers, where there are coverage issues and there is no clear duty to defend in the policy, elect to pay defence costs under a reservation of rights to avoid allegations of late payment in the future.
What does this mean for insurers?
The legislation should lead to improved claims handling from insurers, both as to accuracy and speed. We would expect insurers to strengthen their claims teams; ensuring that they are properly resourced with experienced staff, that they are properly trained on the Act as well as ensuring adequate and proper procedures are in place to ensure assessment, settlement and payment of claims is compliant with the legislation.
The Act has potential to lead to an increase in claims spend, in terms of headcount, training and damages; in turn this could affect balance sheets and lead to an increase in premiums.
Successful claims, which take the amount paid by insurers above policy limits, may lead to an increase in claims by insurance companies on their own professional indemnity or directors and officers policies. What remains to be seen is how reinsurers will treat any damages awarded against an insurer for late payment: it may be that such sums will be excluded as a matter of course unless specifically provided for in the reinsurance cover.
Insurers should also be aware that, in defending a claim for late payment, they may need to consider waiving privilege in the legal advice they have received in disputing coverage if they wish to run this point. Any such advice could be relevant in determining whether they acted reasonably in delaying payment.
Insurers could also face reputational damage where they are successfully sued for failing to pay claims in a reasonable time.
The legislation also introduces a short limitation period by which an action for damages for late payment should be brought, being just one year from the date that the insurer has paid the sums due under the policy. Insureds should therefore be aware that limitation is not the usual six years and keep a close eye on limitation approaching.
The legislation is also relevant to lawyers, loss adjusters, third party claims handling companies and other service providers instructed by insurers to handle and advise on claims. Where an insurer is let down by a service provider, either by bad advice or delay and faces a late payment claim as a result, insurers will be within their rights to seek a contribution from these providers.
For further information, please contact Sophie Robson, Legal & Technical Advocate on +44 20 7459 5576 or email firstname.lastname@example.org