Insurance law reform has been a long process with Law Commission consultations starting in the mid “noughties”, through CIDRA in 2012, the Insurance Act in early 2015 and the long haul of implementation to commencement already now more than 100 days ago. So it is all too easy to relax, having passed the finishing line but equally important to remember that full implementation will take place when the “late payment” clause comes in to effect next year.
It will be remembered that this clause will provide that a claim will be paid within a reasonable time and is to be implied in to all insurance contracts from 4 May next year (with only the non-deliberate / non-reckless behaviour being capable of modification for commercial insurances). We have dealt with this new provision in our dedicated Time for Change Guide launched at the ABI event considering the issue in January this year but, as the year turns and with implementation now only four months away we take the opportunity to highlight some of the practical issues that should be considered where steps can be taken to mitigate and apportion the risk of breach, in relation to supplier contracts and claims.
First and foremost in assessing risk, we note that the Law Commission concluded that “late payment” was not a systemic issue. Secondly, the Act and the common law impose many safeguards for the insurer who is after all also protecting the risk pool that affords protection for those policyholders who have not yet claimed. We do not say that there will not be many intimations of a “late payment” claim but do consider that few will succeed. Where they do (and ignoring the awards made by FOS) they are more likely to be in respect of claims made by SMEs and we also know that this is an area which has been subject to consideration by the FCA – though again, progress was noted by the regulator on further review.
We should also remember that in all discussions around late payment, the issue goes to the very heart of the insurers reputation: the promise to pay in the event of a claim. This determines of itself the importance of the issue, and the need for insurers to be able to manage and deal with any such allegations.
Nevertheless, it is appropriate for insurers to have regard to the contractual terms that apply to those managing or investigating claims on their behalf. Delay or default and consequent breach of the implied term by the insurer’s agent will be attributable to the insurer and procurement teams may well wish to consider the whether they wish to include a contractual indemnity for recovery of a late payment award that might have to be made to a policyholder. There should be clarity between the contracting insurer and its suppliers as to the respective responsibilities and standards of claims handling.
Regulatory guidance on the appropriate minimum standards will be included within the applicable FCA Principles and ICOBS and / or Lloyd’s Minimum Standards for Conduct of Risk. Service Level Agreements will also be relevant in defining the standard of service the policyholder may expect. Consideration should also be given to any regulations that prevent prompt payment (perhaps where illegality is suspected or where reports might need to be made under money laundering rules). Particular responsibilities of the parties should be outlined around reporting and how exceptional situations or complaints should be handled. A supplier might well argue for a limitation of the extent of any liability – it has not of course chosen to contract with the policyholder directly and the particular losses of a particular insured could not be within its reasonable contemplation when the insurance contract was incepted with the insurer – but, the availability of such a cap on liability will ultimately depend on commercial considerations. And finally, even where the contract is a model of clarity it would be prudent to consider a dispute resolution clause.
When should this be done? Whilst the late payment term is only going to apply from May 2017, there will be a number of procurement contracts that are being considered that will be within the tender process now and where the term of the supply contract will be current when “late payment” clauses will apply. Claims for “late payment” will be intimated and thus it would be good practice to have understood respective responsibilities and obligations well before the Spring of 2017 so that any contractual terms that might be appropriate can be in place for the commencement of the new law.
Written by Terry Renouf, consultant