The late payment provisions introduced by the Enterprise Act 2016 will apply to insurance policies entered into from 4 May 2017, a date that will be very soon upon us. That said, on the basis that any claim made for late payment will have to be ‘late’ as provided for by the Act it’s likely that it’s going to be some time yet before under any such policy there’s been an insurance claim made; the passage of time during which insurers have made no payment; loss sustained allegedly as a result of delay and a claim for late payment formulated. But as the insurance industry has largely recognised the time for ensuring that there’s the appropriate ‘bullets to fire’ in place to deploy by way of a defence to such a late payment claim is now. Continue reading
In just ten short weeks a term will be implied in to insurance contracts that means that policyholders will be able to seek damages for late payment of insurance claims. There are limited rights to “contract out” from non-consumer contracts.
The new term (inserted by s13A of the Insurance Act) arises because insurance law in England and Wales has adopted the “hold harmless” principle, which is the legal fiction that an insurer is in breach of contract at the moment when the loss occurs. Payment of the claim under the policy is therefore treated as damages and one effect of this is that, if an insurer fails to pay their insured’s claim, an insured cannot then recover damages on top of damages.
This problem is best illustrated by the case of Sprung v Royal Insurance (UK) Limited  Lloyd’s Rep IR 111 CA. Mr Sprung owned a family business, trading in the processing and distribution of animal products. Mr Sprung’s factory was broken into by vandals and his machinery was damaged. Mr Sprung made a claim with his insurers and they refused to pay. Mr Sprung could not afford to fund the repairs to the machinery himself and the business collapsed. Several years later, Mr Sprung brought a claim against his insurers and the court found that his insurers were wrong not to pay and awarded Mr Sprung the full amount of his claim, together with interest. However, with considerable judicial disquiet, the Court of Appeal said that Mr Sprung could not be compensated for losing the opportunity to sell the business (a loss estimated at £75,000) on the basis that there can be no award of damages for the late payment of damages. This will now change and Sprung (No2) v Another Insurer (2018) would have a different outcome: the insurers having breached their implied term to pay a claim within a reasonable time.
The types and levels of claims that insurers might expect to see are difficult to predict and will vary depending on the type of insurance contract and whether the policyholder is a consumer or a non-consumer. Applying the strict laws of contract (regardless of any FOS adjudication, which has always been based more on fairness), claims may range from simple distress and inconvenience for the non-corporate policyholder (a company has no feelings!) and where damages have traditionally been modest- (moderate to low level inconvenience for example that amounts to little more than a change in routine/unnecessary admin is unlikely to attract an award in excess of £500) to substantial claims for loss of profit which could potentially be an uncapped level of loss. As Sprung demonstrates (losses valued at £75,000), losses arising from business failure could be substantial. Late payment of claims can be costly for SME-type businesses damaged by fire or flood, who are greatly dependent upon payment from insurers to get them back on track. Delays by insurers can therefore have a devastating impact on business and insurers may face significant claims for business failure.
Written by Joanne McCartney, associate
In Joanne’s second blog tomorrow, consideration is given to the likely treatment of other heads of damage by the Courts and some of the underlying issues that arise as an unusual contract (that of insurance) aligns with commercial contract law
On the day that BIBA and Mactavish launch a dedicated guide to the Insurance Act, calling for the insurance industry to “embrace the underlying objective of fairness embedded in the Insurance Act”, it seems like an opportune time to remind our blog subscribers of the key attributes at the heart of the Act.