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two minute guide to damages for late payment and the Enterprise Act

13 November 2017

Section 13A Enterprise Act (‘damages for late payment’) has been in effect since 4 May 2017. The new provision applies to all insurance and reinsurance contracts entered into after that date. In the first of a new series, we answer some of the common questions and provide some guidance on the practical considerations insurers should be making.

How is the Enterprise Act relevant for Insurers and claims handlers?

The new provision addresses the anomalous case law relating to ‘late payment’ by introducing an implied term that a claim will be paid in a reasonable time and that failure to do so can lead to compensation for a resulting loss. ‘Reasonableness’ is guided by the type of insurance, size and complexity of the claim, compliance with regulation and factors outside of an insurer’s control, whilst ‘time’ includes time to both investigate and assess the claim.

Do any changes benefit insurers?

There is a longstop of one year from the date when sums due were paid to bring additional damages claims. After this, no further claims can be paid. This provides some certainty for insurers, enabling them to close off books of business and not keep them open indefinitely. There may, however, be cases where it is difficult to identify the precise date by which proceedings will have to be brought against insurers, particularly if there is a dispute between the insurer and the insured over a claim. We could see some subsidiary litigation against professionals if they fail to spot that the one-year limitation period is already running.

What is anticipated to happen to claims as a result of the change in law?

The new provision will mean that there are fewer successful claims for late payment but, where successful, the awards for contractual damages may be higher. The burden of proof rests with the policyholder to show that (on the balance of probabilities) they have suffered a loss (for which it claims damages) as a result of the late payment itself. Many insureds will not be able to show loss and the majority of claims are likely to be limited to compound interest only, to reflect the cost of borrowing. Despite this, both policy holders and their advisers will likely use the threat of claims to pressurise insurers to make a quick and early settlement or make interim payments (to show they are acting reasonably).

Is it possible to contract out?

If the parties involve a non-consumer contract it will be possible to contract out of this implied term, subject to the 2015 Insurance Act’s transparency provisions. Such a term will be considered disadvantageous term and so it must be both clear and unambiguous. The term must also be drawn to the insured’s attention before the contract is entered into. It will not be possible to contract out when the breach as to payment is deliberate or reckless.

What practical considerations should insurers and their agents make? 

  • Insurers should be proactive – and seen to be proactive - in handling claims.

  • Claims handlers should be well trained and aware of potential exposure.

  • Underwriters should consider their policy wordings, particularly in relation to non-consumer insurance contracts and contracting out. 

  • Re-insurers should consider whether their current reinsurance provides cover if they breach the implied term, and if not whether they need to negotiate such cover.

  • Insurers’ actuaries should consider increasing reserves by a certain percentage to allow for claims for late payment. 

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