Enterprise Act adds to buyers’ arsenal

The Enterprise Act is not expected to result in a flood of disputes over late claims payment, but long term the Act could help speed up the settlement of large and complex claims. The Enterprise Act 2016, which came into force on 4 May, was welcomed by the UK risk and insurance managers’ association Airmic. The Act, which amends the Insurance Act, gives policyholders a right to claim damages in the event of late payment of claims. “Airmic supported the Enterprise Act as it was the right thing to do. It harmonises the law with the rest of the world and corrects an arcane and unfair contract law,” says John Hurrell, Airmic’s chief executive. Prior to the Act, there was no consequence for late payment of claims for insurance contracts in the UK, explains Mr Hurrell. “Clearly, there needs to be a consequence for unreasonable behaviour and where policyholders suffer damage,” he says. However, the Act is unlikely to be used by large corporates, according to Mr Hurrell. “While we support it, we do not expect our members to resort to using the Act. Airmic members deal with professional insurers and if there were delays in paying a claim they would have access to financing,” he says. The Act does not give insureds “carte blanche” to claim or recover damages from insurers in all cases, according to Ian Martin, head of claims and client advisory services at Marsh. “The Act is an extra weapon in the armoury of insurance buyers, but in reality the hurdles that need to be jumped to receive damages are significant,” he says. Under the Act, insurers must pay any sums due within a reasonable time. However, “reasonable time” is not defined, suggesting it would require an “egregious level of behaviour” in order to make a claim for damages, explains Mr Martin. And to recover damages for late payment, an insured would have to show that it had a valid claim, the insurer failed to pay within a reasonable time and that it had suffered a loss caused by the insurer’s breach of the implied term. An insured also needs to show that the loss caused by any delay was foreseeable. “Large buyers are extremely unlikely to resort to the Act. Large and complex claims take longer to settle and there is no definition of what is a reasonable time,” says Mr Martin. The right to claim damages for late payment under the new legislation has yet to be tested in court. Given the complex nature of large claims and the Insurance Act, it will likely take three to four years before any legal disputes test the legislation. Even then, disputes could focus on SME claims, rather than the corporate market. “The Enterprise Act is likely to be tested in the courts at some point. And until it is tested I would not expect any real impact on market practice,” says Mr Martin. He doesn’t foresee a high volume of successful late payment claims against insurers, especially from large corporates. “We are unlikely to see the floodgates open for claims for late payment under the Act,” he says. Insurers do not expect the Enterprise Act to lead to a wave of legal disputes. “There is a high state of awareness in the London market and among LMA members about the new law and potential liability if a claim is mishandled and paid late,” according to Kees van der Klugt, director of legal and compliance at the Lloyd’s Market Association (LMA). “The FCA already has rules on good claims handling, and competitive pressure means that an excellent claims service is a commercial differentiator – therefore, the occasions when this new law really comes into play should be few and far between,” he says. The Act could, however, still work to the benefit of corporate insurance buyers, adding to existing pressures to improve claims service and behaviour. For example, the Enterprise Act could be used as a “bargaining chip” by insurance buyers and brokers in claims settlement negotiations or disputes, according to Mr Martin. It may also act as a wider incentive for insurers to process and pay claims promptly, he adds. “It might be expected that the Act would encourage insurers to improve the claims settlement process and a number are already doing that,” according to Mr Martin. The Act could speed up claims processes for programmes with excess and reinsurance layers, where disputes can break out between carriers and slow down claims payment, suggests Mr Hurrell. “The Act should create the environment where people ask if behaviour is unreasonable, which should accelerate the process. The point of the Act is exactly to address these types of disputes,” he says. The Act should also address situations where an insurer is tempted to just sit on a claim, for example if it believes a policyholder is “chancing it”, says Airmic’s CEO. “The Enterprise Act will probably not change the situation for large claims, but insurers will need to introduce a test of reasonableness in claims procedures,” says Mr Hurrell. While corporate risk managers are unlikely to ever resort to claiming damages under the Act, they do need to be aware of insurers’ moves to limit their liability under contract wordings. Insurers support the “principle” of the new law, but there is concern that they could face potentially “vexatious litigation”, explains Mr Van der Klugt. “There is concern that the Act will give rise to a culture of tack-on litigation, and that the new statutory implied contract term would create an environment for speculative litigation, which can only result in higher claims handling costs,” he says. The Law Commission and HM Treasury anticipated that insurers would include contract clauses in non-consumer policies to limit liability, so that exposure to damages is not open-ended. “This is usual in many types of contract,” says Mr Van der Klugt. The LMA has drafted model clauses that give insurers a range of options to limit liability for consequential losses under the Act. “Limiting liability in this way is a form of contracting out, but the Law Commission and HM Treasury do not expect insurers to carry unlimited exposure,” explains Mr Van der Klugt. The Act does not allow insurers to contract out of deliberate or reckless failure to pay a claim in a reasonable time – or at all in respect of consumer contracts. It also requires insurers to comply with transparency provisions so that the existence and effect of any contracting out clause is brought to the buyer’s attention. Mr Martin advises corporate insurance buyers to strengthen their hand by flagging up any potential circumstances with insurers that could give rise to further losses if claims are not paid promptly. In addition, buyers should make any insurer aware of the consequences of delayed payment as soon as they become aware a delay will cause financial difficulty.

Enterprise Act adds to buyers’ arsenal

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