Battle hots up over damages for late claims payment under UK law

After initial battle lines were drawn on this issue, both sides of the risk transfer divide have told Commercial Risk Europe that they are working together to find a suitable solution for all parties. It remains to be seen if agreement can be reached or whether one side will be left feeling aggrieved. The latest development in the saga has seen the Lloyd's Market Association (LMA) and the International Underwriting Association (IUA), which represent the interest of the Lloyd's and wider London market, put forward, on behalf of members, an amendment to the UK's Enterprise Bill that is set to introduce the law change. The proposal waters down the bill's late payment provision in favour of a clause proposing that damages should only be available if an insurer has deliberately or recklessly–as opposed to unreasonably, incompetently or negligently–failed to pay a claim within reasonable time. The potential solution is being discussed with buyer representative body Airmic and insurance governance expert Mactavish, which is behind much of the campaign to see the damages for late payment provision laid out in the Enterprise Bill become law. CRE has also been told that the Association of British Insurers (ABI), British Insurance Brokers' Association (BIBA) and the UK's Law Commission, all of which reportedly support the bill, are being kept in the loop. The amendment is currently under review by Mactavish's legal counsel, we have learnt. A full legal response is expected early next week that may be able to break the current deadlock. Despite the latest LMA and IUA concession, which follows previous attempts to further reduce the scope of the proposed law, there is doubt over whether the amendment is acceptable to insurance buyers. Airmic and Mactavish, which specialises in the reliability of insurance contracts arranged under English law, would still like to see the original proposal contained in the bill become law. But they are willing to work with the IUA, the LMA and the UK government to find a suitable solution for all concerned, as long as it doesn't stray from the provision's original intention.hideThe progress of the Enterprise Bill's claims provision has huge implications for all those policyholders that buy cover in the UK and the London market, including insureds in Europe. Mactavish, for one, believes it is a watershed moment for the London insurance market as it decides whether to risk reputational damage by fighting consumer protection or embraces an opportunity to position London as a client-focused place to do business by backing law change. Should the bill proceed as planned, damages for late payment would apply to insurance contracts incepted sometime in 2017. The contentious provision in the Enterprise Bill simply says that all insurance claims must be dealt with in a reasonable period of time. Under this definition insurers would be allowed to investigate legitimate claims disputes. It recognises that time is needed to carry out certain enquiries. Insureds would then be able to rely on courts to decide if an insurer has behaved unreasonably, incompetently or negligently on a claim. If a court were to find in an insured's favour, and in addition the policyholder can prove that they have suffered foreseeable financial loss, damages can be awarded on top of the original claim. Airmic told CRE that it 'unequivocally' supports this provision as laid out in the bill. "It is the right thing to do and will be good for both customers and for all those insurers who are committed to the sort of excellent services which our members enjoy. It is part of the professionalisation of the market and creates a framework where policyholders will no longer just have to rely on goodwill," Airmic CEO John Hurrell said. He believes that the response from the LMA and IUA to the proposal does not take 'into account what is the right thing to do for their customers'. "I think that LMA and IUA have responded on the basis of whether this provision puts their underwriters in a worse legal position that that which they currently enjoy," he said. "Looking at the professional way in which Lloyd's and IUA underwriters treat their customers already, they should have nothing to fear in this new legislation," he added. Airmic's and Mactavish's swift response to the actions of London market representatives are borne out of surprise and frustration at their reaction to the publication of the Enterprise Bill. A letter to the UK Treasury written on 7 October by the LMA, Lloyd's and the IUA, expresses 'deep misgivings' about the part of the Enterprise Bill relating to late payment of insurance claims. In the letter that has been obtained by Commercial Risk Europe but is not yet in the public domain, the organisations wrote that the part of the bill which allows policyholders to claim damages if an insurance settlement is not paid in a reasonable time should not apply to contracts of insurance for large risks as defined by the Solvency II Directive. This would define 'large risks' as policies for firms with a balance sheet of £4.4m and a turnover of £9m. This raised eyebrows because it would mean that many SMEs, as well as large companies, would be exempt from the claims protection provision. As Mactavish's CEO Bruce Hepburn explained: "In short, it seemed the signatories would like thousands of small and medium-sized companies to be exempt from the rule allowing businesses to claim for consequential losses should an insurance claim be paid late by an insurer. But the message here to large businesses is equally worrying. Lloyd's is putting the FTSE 250 and their European counterparts on notice that they want to retain the right to be unreasonable in delaying payment of large claims, to damage their customer's business as a result, and have no consequences for the damages arising as a result of such conduct." CRE spoke to the LMA this week and it conceded that this 'carve out' for large risk is not necessarily the right course of action. Following this realisation it proposed its latest amendment that is being discussed with other stakeholders. Speaking to CRE on behalf of the IUA and the London company market, David Gittings, the LMA's CEO, explained the London insurance market's objections to the late payment provision currently in the Enterprise Bill. They centre around speculative litigation that could result in higher insurance costs for all. "Our real concerns are around the risk of additional speculative and vexatious litigation where there are complex claims. The experience of London market carriers, particularly in the US, is whenever you get litigation around a complex claim you often get allegations that the claim is being paid late as well. That is often used as a way of persuading the insurer to make an early decision on paying the claim to get rid of the speculative litigation. That is really the root cause of our concern," he said. Adding: "The cost of some of these vexatious cases is significant and can leave the cost of defending it spread amongst other insureds that are having their claims paid perfectly reasonably. So it could affect pricing." He also said that there is not a systemic problem with late claims payment in the UK and London market. Airmic agrees with him on this. Mactavish has serious concerns over large claims taking far too long to settle but does not see this arising from systemic abuse of current law. Mactavish believes that problems are more likely to arise from incompetence, unreasonableness or negligence, rather than deliberate or reckless conduct. It also recognises that delays are often a result of policyholder incompetence too. The UK’s Treasury and Law Commission have said that there is not a systemic claims issue in the UK in terms of deliberate or reckless abuse of the current law. Mr Gittings also argued that there is a common misconception that the UK is out of kilter with other jurisdictions when it comes to damages for late claims payment. "There are a couple of other jurisdictions where there is this kind of statutory provision, but it is not as common as people are trying to make out. It is quite uncommon and isn't in place in major insurance hubs around the world," he said. Despite these arguments, Mr Gittings said the London market is acutely aware of the interests of its policyholders. It is therefore working with Airmic, Mactavish and other interested parties to try and find a solution that would allow compensation for cases where there has been a 'deliberate mishandling of a claim'. "We are looking for a solution that we feel gets to the root of the sort of behaviour that we feel everybody would want to deal with-and that the Law Commission wanted to deal with-but at the same time avoids increased speculative litigation," he told CRE. "We are absolutely sympathetic to where Airmic and Mactavish are coming from, but we are trying to balance that with where some of the London market insurers are coming from and find a solution that meets everyone's ambitions." The LMA's most recent amendment was first submitted to the Law Commission late last year when it looked like damages for late payment might come in under the UK Insurance Act. The provision was removed because it proved too controversial. It seems its reinstatement in the Enterprise Bill caught many, including the insurance industry, on the hop. "When the provision was removed from the Insurance Act it was widely thought that it would only be reintroduced to further legislation after consultation. That consultation hasn't happened. So we had to act quickly when we first saw it had been put back into the Enterprise Bill," said Mr Gittings. "The first suggestion we made was this large risk carve out using the Solvency II definition. But we recognise that that solution isn't ideal and so we have offered as an alternative the same thing that we offered last time around," he explained. The amendment may not appease other interested parties, however. Therefore the LMA is very much open to working with buyer representatives and other interested parties to find a solution to late claims payment that suits all concerned. "If Airmic or Mactavish can come up with another solution and formulation for us to look at then obviously we are open to listen and would like to find a solution that is an agreement between all parties. Ideally we would work through this together to find a solution that is amenable to all concerned. By consulting all the stakeholders together we hope we can come up with an answer that is well informed and balanced," said Mr Gittings. Airmic and Mactavish are still very keen for the bill to pass through as originally drafted but are prepared to negotiate an alternative solution as long as the bill's original intention is maintained. As Mr Hepburn told us: "As of today we support the Enterprise Bill as drafted but if our senior counsel advises us over the coming days that we should support certain amendments then we would likely do so if the core government policy objective was preserved." He said that Mactavish is liaising with Airmic, BIBA, the Law Commission and the ABI on the this issue. "We have instructed one of the most senior and respected insurance QCs in the UK to review both the Enterprise Bill drafting, the LMA's proposed amendment and thirdly the LMA's concerns. The LMA do have some legitimate concerns and we would like to think that they can be addressed. By early next week Mactavish will be able to provide a full legal response to try and break the deadlock. I think we can break the deadlock," he said. He believes the insurance market stands at a crossroads and must decide whether to embrace claims professionalism and consumer protection or risk reputational damage. "We as a group are on the cusp of doing something that will either damage London's reputation with European and worldwide policyholders or will actively enhance it. We are on the cusp of doing something that is hugely appealing to customers or massively unattractive to customers. That is the choice. I don't know which way it will go," he said. Mr Hepburn believes damages for late payment is crucial to both big and small firms. Limits of insurance tend to increase with the size of the company and so being without funds is a problem for all, he explained. But crucially he believes damages would raise standards in claims practices and procedures across the board. "Insurers won't want to run the risk of having to pay damages on top of claims. As a result of this law I think insurers would put in place a whole series of processes, rules and standards that will benefit everybody. It would, for the first time, set a professional standard for insurance claims in law. There is currently no legal incentive to be professional," he said. He believes that the LMA and IUA are against the proposals because they fear it may hit supply of capital into London as investors choose other jurisdictions to put their money. But he argues that law change would make London more attractive to customers and increase business coming into the market. Capital will go where the business is, he said. "We believe in future capital providers will go where the policyholders go. So we don't believe this law represents a threat to London, we actually believe it represent a huge opportunity for London. If this legislation isn't passed it will reflect poorly on London and we think if it is passed it will trigger a new era for the market. In this day and age when the world is awash with capital we should be doing everything we can to attract customers to London," he stressed. "In every other area of business life a responsible party would be liable for the foreseeable consequences of their fault. As Lord Nicholls noted in a case that did not relate to insurance 'those who default in a contractual obligation to pay money are not possessed of some special immunity in respect of loss caused thereby'. At the moment the insurance industry does have such immunity and we believe this legal incentive to behave reasonably needs reinstating. It is time for the immunity to be lifted," he added.

Battle hots up over damages for late claims payment under UK law

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