Update – Enterprise Bill passes second reading in the House of Commons

On 2 February 2016, the Enterprise Bill had its second reading in the House of Commons. The Bill passed its second reading and will now be considered by a Public Bill Committee.

Prior to the second reading, on 27 January 2016, the House of Commons produced a briefing paper informing MPs of the key issues surrounding the Bill. In relation to Part 5 of the Bill (Late payment of insurance claims) the briefing paper stated:

There may be few industries where the expectations of the customers and their actual experience are so widely different. This is partly due to the complexity of the industry, the sometimes difficult maths and legal framework within which it works, and partly because when it is called upon it is frequently at a time of loss or stress.

The briefing paper states that the targeted measure in the Enterprise Bill is to continue the government’s aim to “balance the rights of insurers and policyholders.”

The Bill

• Clause 22 of the Bill amends the Insurance Act 2015 by inserting a new section 13A which provides: “It is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time.” The clause confirms that a reasonable time includes time to investigate and assess the claim and gives examples of things which may need to be taken into account such as complexity of the claim, type of insurance and factors outside the insurer’s control. It also confirms that if an insurer can show reasonable grounds for disputing a claim, then it will not be in breach of the new obligation to pay within a reasonable time while that dispute is continuing (although the insurer’s conduct in handling the claim may be a relevant factor in determining whether the term was breached).
• Clause 23 of the Bill inserts a new section 16A into the Insurance Act restricting the insurer’s right to avoid the new implied term by inserting a term or “contracting out” of the term.
• Clause 24: during the committee stage in the House of Lords and amendment to the Bill was proposed which would have excluded reinsurance contracts and large risks (of over £6 million) from the new provisions regarding late payment of claims. Some Lords felt that there was a risk that big “premium” business could otherwise become bogged down in claims and that the market could therefore move abroad. Others felt that the proposed exclusion would affect the very people that the Bill was seeking to help. Ultimately, at the Bill’s third reading an amendment was proposed which would add a new provision to the Limitation Act 1980 to the effect that a policyholder must bring any late payment claim within one year of the insurer having paid all sums due in respect of the initial insurance claim. The amendment was agreed to and is now included at Clause 24 of the Bill.

Comment

The concept of providing a remedy to policyholders who suffer loss as a result of unreasonable delay by insurers was proposed by the English and Scottish Law Commissions in their 2014 report on insurance contract law, which ultimately led to the Insurance Act 2015. Reform was not included in the Act, however, being considered too controversial for the Law Commission procedure for non-controversial bills. Whilst portions of the insurance market, notably the reinsurance market, remain hostile to the idea of reform, the general insurance market, including the Association of British Insurers, has given its support to the Enterprise Bill. It is hoped that the introduction of a one year limitation period for claims will provide some comfort to those insurers who remain concerned about potential exposure.

At the committee stage in the House of Lords, much was made of the London market’s international reputation and concern was expressed that reform of the law on late payment of insurance claims could lead to a reduction in capital in the London market. Whilst we should be concerned about protecting the London market’s historic reputation, in the United States (which boasts the largest insurance market in the world) many states offer far greater protection to policyholders whose claims are paid late than Part 5 of the Enterprise Bill would, if it became law.  In the US, not only are policyholders entitled to seek damages for breach of contract when an insurance claim is paid late, but in some states they may even seek punitive damages as a result of the insurer’s “bad faith”.

It is certainly not suggested that English law should be brought in line with the law in some US states by providing for “bad faith” claims against insurers, but if the United States can maintain the largest insurance market in the world whilst at the same time offering policyholders strong (and arguably undue) protection against late payment by their insurers, then it is submitted that the London market could equally retain its historic reputation notwithstanding the measured reform proposed by the Enterprise Bill.