Change is coming, and insurers need to be ready for it if they do not want further pressure on bottom lines
When the Enterprise Act 2016 was passed into law on 4th May 2016 a flurry of legal comment flooded the market as firms sought to be the first to lead the debate. However, as the new regime was not due to come into force for another year, the market’s attention turned quickly to the impending introduction of the Insurance Act 2015.
With only 3 months to go now until the Enterprise Act 2016 (“the Act”) comes into full force and effect, it is time for insurers to make certain that proper procedures are in place to ensure they do not fall foul of its provisions. Otherwise there will be very real financial consequences.
So, what’s changing? The detailed provisions of the Act were addressed at length back in May 2016; below is the real meat of the changes:
- Any policy issued or renewed from 4th May 2017 will incorporate an implied term that the insurer will pay any sums due on a valid claim ‘within a reasonable time’
- Breach of this term will entitle an insured to claim any damages flowing from that breach, subject to the usual rules on causation and foreseeability
- This reverses the current position at common law (laid down in the case of Sprung v Royal Insurance ) that an insurer could not have an additional liability for damages in such situations-even for deliberate late payment
- What is a ‘reasonable time’ will depend on a variety of factors such as the size and complexity of the claim, the type of insurance, and issues which may be outside of the insurer’s control
- It will not be unreasonable for an insurer to delay payment of a claim pending a fair investigation into certain issues, or where there may be justifiable policy coverage concerns
- Insurers can never contract out of these new provisions with consumer insurance
- Insurers can only contract out in respect of commercial insurance policies where that decision is transparent, and they can never do so where any breach of the Act is deliberate or reckless (i.e. they simply don’t care if they are in breach)
- There will be a tight timescale for bringing claims – up to 1 year from the date on which all sums due on the claim are finally paid out.
A practical Example…
Let's take a storm claim which has caused significant damage to a property's roof. Where there is an obvious, fortuitous cause and no other reason to challenge the claim, the insurer will be expected to accept liability and implement emergency measures promptly. If the insurer takes longer to accept the claim than reasonably necessary - even if that is purely down to slow internal processes - then it could be liable for further physical damage occurring to the property whilst exposed to the elements.
The provisions will also potentially cover additional financial losses, although these are ordinarily harder to link to any breach than for material damage. For example, if an insured is forced to take out emergency funding (such as a high interest bridging loan) to service its ongoing operations because of delays on the insurer's part, then there could be a claim for those additional interest charges and any other associated fees.
What's likely to happen?
Given the ambiguity of the phrase 'a reasonable timeframe', and the fact that the burden is on the insurer to establish that it has acted in accordance with the Act, it is to be expected that insureds and brokers will leverage the provisions to full tactical effect in order to encourage the prompt payment of claims. And for those substantial claims involving corporate clients with large revenues (and thus potentially huge financial exposures), it is not the type of issue that insurers will be eager to test through the Courts.
On the insurers' side, there may be attempts to exclude the Act in respect of larger corporate risks where additional financial liabilities could be significant, although this will of course have to be balanced against the commercial impact of offering a less favourable product. We are also likely to see a greater utilisation of claims co-operation provisions in order to provide validity and authenticity to requests for documents and information required before a decision can be reached.
Over time, however, it is to be hoped that a status quo will be reached on all sides where there is perhaps greater clarity and transparency on the insurer's part with respect to the decision-making process, and greater trust and patience on the insured's / broker's side once it is accepted that there is no benefit to the insurer in unnecessarily or unreasonably delaying matters.
What needs to be done?
If it has not already happened, reporting and approval procedures - both internally and with authorised agents - need to be revisited and the importance of prompt action re-emphasised to all parties within the claims process. This extends to any parties in the chain operating under delegated authorities and binders (e.g. loss adjusters, coverholders and MGAs).
Large claims involving subscription markets and / or reinsurance will require careful and efficient co-ordination between the various parties on coverage decisions. It will not be a defence to an alleged breach of the Act for the Lead to argue that it could not proceed without agreement from the following market, or without reinsurers' authority, if the delay in accepting cover is otherwise unreasonable.
Should it be necessary for the insurer to issue holding correspondence pending a final decision on cover then any communications should clearly state what still needs to be done, why it needs to be done, and when those actions are expected to be completed. If an intimated deadline is approaching and the insurer is still not in a position to confirm cover then a further letter should be issued explaining why, and setting a new timescale. Remember that the longer the delay, the greater the justification that will be required.
Where it is clear that a larger claim is covered but the precise quantum is unlikely to be known for some time, then early interim payments will offer insurers some protection under the Act.
Finally, given that there will inevitably be claims under the Act at some point, and that - however well run an insurer may be - there will occasionally be those cases which 'slip through the net', insurers may wish to consider holding a single contingent liability across reserves / books so that provision is made for any additional liabilities.
Although the Insurance Act 2015 codified many changes to how insurance cover is placed the reality is that many of those provisions had already been largely integrated within the commercial insurance market before they came into effect. The Act presents much more of an unknown, however, and has the potential to cause significant financial consequences to insurers - and particularly those writing larger risks - if the provisions are not properly implemented and respected.
Capital Law LLP can offer tailor made advice and recommendations in respect of the specific implications for any given business, at an agreed fixed fee, having carried out a thorough review of existing procedures, processes and any delegated authority /binder agreements which may be in place.
Authored by Nick Pester, Partner, Capital Law - To contact Nick click here