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Insurance disputes: how quickly must an insurer pay out?

10 Aug 2018

If the most common complaint made against insurers (rightly or wrongly) is that they unjustifiably reject valid claims, the second must surely be that they take too long to pay out once a claim has been made.  To tackle this perceived problem, legislation has been introduced which seeks to impose a new implied term into every insurance contract, requiring the insurer to pay out within a “reasonable time” if a claim is made.

What is a “reasonable time”?

The legislation does not define what constitutes a “reasonable time”, which will obviously depend on the facts in each individual case, and as the legislation is relatively new there is still very little guidance from the Courts. For the time being, we do know that the legislation expressly allows the insurer a “reasonable” period in which to investigate and assess the claim.

What happens if the insurer breaches the implied term?

If the insurer fails to make the payment within a “reasonable time”, it will give rise to a claim for damages against the insurer.  The claim for damages will not be limited to just the sum payable (plus interest), and so the claim could potentially include claims for other losses, such as consequential damages and loss of profits.  It also means that an insurer might not necessarily be able to rely on a contractual cap of its liability if, for example, the claim for damages under the new Act exceeds the purported contractual cap.

But will it apply to all insurance contracts?

The part of the Act which imposes the implied term requiring prompt payment can be “contracted out” of by mutual consent.  However, because there is clearly going to be a risk that insurers will want to contract out of protective measures in the legislation to the insured’s detriment, an insurer can only do so if it meets the Act’s “transparency requirements”. 

In short, to satisfy the “transparency requirements”, the insurer must:

  • take sufficient steps to draw the “disadvantageous term” to the insured’s attention before the policy is taken out; and
  • ensure that the “disadvantageous term” is clear and unambiguous in its effect.

Not only will these requirements depend on the facts of each case, but the legislation also specifically states that the characteristics of the type of insured persons, as well as the circumstances of the transaction, will be taken into account when assessing whether the “transparency requirements” have been satisfied.

Even if the insured and insurer agree to “contract out” of the implied term requiring payment within a reasonable time, they cannot “contract out” of the implied term in relation to any “deliberate or reckless” breaches of the term by the insurer.

A shift in power towards businesses

Recent years have seen the biggest overhaul of business insurance in a generation, with the Insurance Act 2015, the Enterprise Act 2016 and the Third Parties (Rights Against Insurers) Act 2010 all coming into force in the last 18 months.  We are still waiting for a clear indication from the Courts as to how they will apply and interpret some of these new statutory provisions in specific cases, but there can be little doubt that these changes have already shifted the balance of power from Insurers towards businesses.

If you would like to know more about these or any other issues relating to insurance disputes, please contact Michael Axe today for more information.

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