“Next year” is nearly upon us and in 2017 the “late payment” amendment to the Insurance Act 2015 introduced by the Enterprise Act 2016 will apply to policies entered in to (or variations) from 4 May. Time will pass incredibly quickly yet there are steps that should be considered now in relation to policy wording if the underwriter wishes to contract out of the new implied term.
We fully recognise that there are commercial considerations that will apply and that moderating a term that is the insurers’ promise to pay is a sensitive issue. We note too that there was no systemic evidence of “late payment” presented to the Law Commission and so limiting liability in circumstances where there is not a problem may not be high on the 2017 list of New Year Resolutions. Yet we are stepping in to the unknown and there are concerns about the effect of the new implied term where every claim not paid promptly (perhaps for valid reasons – many of which are detailed in the statute itself) could trigger a request for damages for breach of the implied term. It is commonplace for commercial contracts to adjust, alter and limit liabilities between contracting counterparties and in bringing some certainty to what can be an uncertain situation there is a commercial attractiveness to both sides. Thus insurers should consider whether they wish to “contract out” of the “late payment” term.
Having said that the opportunities to do so are limited. Firstly the new term to pay a claim within a reasonable time will apply to all consumer contracts – there is no contracting out. Similarly an insurer may not contract out of the term in commercial (or non-consumer) contracts where the late payment by the insurer is “deliberate or reckless”. Thus the circumstances where an insurer can contract out are where its conduct is neither deliberate nor reckless when dealing with a claim arising from a commercial policy. Any clause might exclude liability entirely or limit it to a specific amount, to a multiple of the premium or to some, but not all heads of damages that might follow a breach (e.g. – no claim for loss of revenue).
Any limitation of liability clause will need to satisfy the transparency test, drawing the disadvantageous term to the attention of the insured and ensuring that the term is clear and unambiguous.
On a separate but related point it would now be appropriate to consider whether a clause might be included in the contract, preserving the legal professional privilege that arises where lawyers are instructed for the insurer. This issue arises because the Act states that a defence is available to the insurer who shows that there were reasonable grounds for disputing the claim. It would be natural where there is a coverage issue for legal advice to be obtained and an insurer may well wish to bolster its case and demonstrate those reasonable grounds by disclosing that advice was obtained. There is a concern that the usual rules of legal professional privilege might be waived in these circumstances with the policyholder arguing that the substance of the advice should be disclosed. An amendment to the law to clarify the point was made when the House of Lords considered the Enterprise Bill but was rejected by the Government which did not want to create a new class of privileged advice and felt that the present law was sufficient. Whilst the latter point is probably right it may nevertheless be useful to adopt a contractual clause confirming that there is no waiver of privilege of the substance of the advice received where the fact that the advice has been obtained has been disclosed.
Similarly it may also be appropriate to consider including within the terms of the policy some clauses relating to the type of investigations that would be contemplated by the parties when a claim arises. Agreement between insurer and insured before an event occurs will be persuasive to a judge even if it is the case that precise factual details cannot be anticipated.
Clauses covering the above issues were published by the Lloyd’s Market Association in October and may be found here. Careful consideration of whether they are appropriate and how they should fit within a policy will be needed but should certainly be considered well before the new implied term comes in to effect on 4 May 2017.
Written by Terry Renouf, consultant, BLM