[co-author: George Bamber]

From today, insurers in the UK will be required to pay valid insurance claims within a reasonable time and may be hit with damages claims from insureds, if they fail to do so.

This change has been brought about by the Enterprise Act 2016, which inserts a new section 13A into the Insurance Act 2015 (the “Act“).  The effect of this change is that it will be an implied term of every contract of insurance (both consumer and business) that the insurer shall pay valid claims within a “reasonable time”.  Breach of this term will entitle an insured to damages for late payment, in addition to the proceeds of the claim itself plus interest.

“Reasonable time”

One key area of concern for stakeholders is the interpretation of “reasonable time” within which valid claims must be paid. The Act states that this will depend on the relevant circumstances at hand, but provides examples of factors which may need to be taken into account, as follows:

• The type of insurance;
• The size and complexity of the claim;
• Compliance with any relevant statutory or regulatory rules or guidance; and
• Factors outside the insurer’s control.

The Act also states that “reasonable time” includes the time taken by insurers to investigate and assess a claim.

“Reasonable grounds”

The Act provides that if the insurer has “reasonable grounds” for disputing a claim and delays payment whilst the dispute is continuing, the implied term will not be breached simply for that reason. However, the insurer’s conduct in handling the claim may be a factor taken into consideration by the courts in deciding if the term was breached.

Contracting out

Insurers cannot contract out of the implied term in consumer insurance contracts. However, it is possible to contract out of or vary the implied term in the case of non-consumer contracts, subject to the following provisions:

• Contracting out will have no effect where the insurer’s breach of the implied term is deliberate or reckless;
• The insurer must take sufficient steps to draw to the insured’s attention that the parties are to contract out of the implied term before the contract is entered into or varied; and
• The contracting out clause must be clear and unambiguous in its effect.