Rationale for change
It has long been an oddity of English Law that an insured has no right to claim damages for late payment of sums due under an insurance contract. This arises from a historical legal fiction whereby the claims payments themselves are considered to be damages for breach of contract by an insurer and the law does not permit the recovery of damages for losses suffered by the late payment of damages. The only claim that an insured has is for interest on the late payment. That was only ever at the discretion of the Court and so often irrecoverable in practice if a claim was settled prior to Court proceedings.
The potential unfairness for insureds is well-illustrated by the case of Sprung v Royal Insurance (UK) Limited  1 Lloyd’s Rep 111. In that case, the insurer wrongfully refused cover to a business owner who had suffered a break in at his factory. Due to the financial impact on his business, he was forced to close it down. The Court of Appeal (with some considerable reluctance) upheld the law and refused to award damages for losses caused by the failure to pay the claim on time.
The Law Commission recently considered this conundrum as part of its wider review of insurance law. It concluded that the legal fiction underpinning the law had no basis in commercial reality. Moreover, it created an unfair imbalance in the relationship between insurer and insured as it allowed for no remedy for an insured that had been unfairly prejudiced when, in almost any other contractual scenario, there would be a right to recover damages. A consensus on reform could not be reached in time for insertion into the Insurance Act 2015 but, as of 4th May 2017 and for all insurance contracts entered into after that date, the law will be changed to provide valuable additional rights for insureds.
Key Aspects of Reform
The central change is the insertion of an implied term into insurance contracts requiring that an insurer “must pay any sums due in respect of [a] claim within a reasonable time”.
The implied term relies upon the classic reasonableness test so familiar to English law. Such a fluid test will necessarily give grounds for uncertainty and legal argument but is appropriate given that every case is different, insurance policies themselves come in myriad forms and claims under insurance contracts are often complex and require differing degrees of investigation.
The Act does though give some guidance as to what is reasonable. Firstly, it expressly confirms that a reasonable time includes “a reasonable time to investigate and assess the claim”. It then goes on to list various ‘relevant circumstances’ (specified to be a non-exhaustive list) that may need to be taken into account including the type of insurance, the size and complexity of the claim, compliance with any relevant law or guidance and factors outside the insurer’s control (presumably to include any delay caused by third parties).
An important proviso is that if an insurer can show there were ‘reasonable grounds’ for disputing the claim, the insurer does not breach the implied term merely by failing to pay the claim while the dispute continues. This is a necessary counter-balance to ensure that an insurer isn’t unduly punished for carrying out justifiable coverage investigation. There are a couple of points to note:
1. The insurer must show there were ‘reasonable grounds’ for the investigation. There will no doubt be scope for dispute as to what constitutes reasonable grounds, but we suspect the bar will be set fairly low and will be satisfied so long as the investigation is not in bad faith;
2. However, while the insurer doesn’t breach the term by ‘merely’ failing to pay the claim, the insurer may still breach the term notwithstanding that it has reasonable grounds for coverage investigations. The Act expressly states that ‘conduct of the insurer in handling the claim’ is a relevant factor to determining breach. Therefore the position is far more nuanced than an insurer simply establishing that it had grounds to investigate. Its conduct (presumably to include the time taken and the extent and manner of investigations) will be highly pertinent to whether it has complied with or breached its obligations.
It should be noted that an insurer is able to contract out of these provisions in certain circumstances. Whether and to what extent the insurance market attempts to do that remains to be seen.
Care will need to be taken to ensure that any claim is brought in time. The Enterprise Act inserts a provision into the Limitation Act providing limitation will expire “one year after payment of all sums that are due in respect of the insurance claim” (or six years after date of breach, whichever is sooner).
The Act says nothing about the nature of damages that might be claimed by an insured. That will fall to be determined by normal principles of contract law. However, it is easy to see the sort of claims that might be made. The case of Sprung is not unique. For many businesses, the failure to promptly pay insurance claims can cause real practical difficulties. As for the business owner in Sprung, a failure to pay out under a first party damage policy can mean that premises or equipment cannot be utilised and productivity suffers. Orders might be missed. Liabilities could arise to suppliers or customers. If the insured has to pay to put right the damage itself, there can be a material diversion of cash-flow impacting the business in other ways.
A failure to pay out under a liability policy can equally cause difficulties. However, liability policies carry a different nuance given that an insurer is in law under no obligation to pay a claim until the liability crystallises. Therefore an insurer might (while a claim is ongoing) indicate that it will decline cover without actually having breached an obligation to pay but in circumstances where there are real practical difficulties for an insured (eg an insured may be forced to set money aside to cover a claim which in turn could again have a material impact on cash-flow and/or development of the business). Two things to note:
1. Liability policies will often include an obligation to advance defence costs and if an insurer fails in that obligation, that will itself potentially amount to a breach; and
2. Depending on the circumstances, there may be a range of tactics to employ, for example asserting grounds to terminate the insurance contract and seek damages or specific performance immediately on the basis of anticipatory breach.
Another common financial impact might arise when seeking future insurance cover, as renewal could well come around before any dispute with the insurer is resolved. Insurers will commonly ask questions regarding circumstance in which cover has previously been declined and negative responses will be taken into account in underwriting decisions regarding the cost and availability of cover.
The creation of the implied term is undoubtedly a real benefit to policyholders. But, as simple and straightforward as it looks, it is a sufficiently broad test that care must be taken to ensure that an insured takes full advantage.
Given the scope for an insurer to contract out, it is yet another reason to ensure that you engage an experienced broker with sound knowledge of the market to guide you. Of course, your broker’s role does not begin and end with obtaining the cover. If and when a claim is made, that is when your broker comes into his own. The availability of a proper claims advocacy service, both to assist in presentation of a claim and to ensure that any investigations by an insurer proceed smoothly and swiftly, has always been invaluable. However, if an insurer unreasonably refuses a claim and it causes a financial loss, the steps taken at those early stages could prove crucial. An insured will want to be able to show that it gave all documentation and information required by the insurer in a timely manner. It will also want the communications with the insurer to be properly documented so that it can exploit and evidence any ‘conduct’ failures by an insurer. The expert assistance of your broker will be invaluable.
Equally, if the worst comes to the worst and an insurer is steadfastly refusing cover, it will be important to obtain specialist legal advice. Care will need to be taken to properly document and build the evidence trail, both in terms of establishing breach and also to maximise recoverable loss. ‘Impact on business’ claims are notoriously tricky to establish if steps aren’t taken early enough to gather evidence and seek the necessary expert input. Equally, given that nature of the reasonableness test and scope for argument, a specialist solicitor will be able to guide you, both in terms of challenging the stance of the insurer but also spotting tactical opportunities to drive home any advantage. The earlier an insured seeks guidance, the better. Often some early informal assistance can help resolve a problem with an insurer before the dispute gets entrenched.
If you would like advice on the most suitable insurance cover for your business, please contact Kieren Windsor of PIB Insurance Brokers on 0117 926 9937 or email@example.com
If you would like to discuss any of the legal issues raised or any problems with your insurer, please contact Alistair Stewart of Loney Stewart Holland on 0117 9595437 or firstname.lastname@example.org