Enterprise Act: Paying the price for paying late

With the Enterprise Act coming into force on 4 May, policyholders will now be able to claim damages for late payment of claims. Are insurers ready?

Delaying payment of valid claims following major incidents can turn a drama into a crisis, but under English common law (Sprung v Royal Insurance) policyholders could not claim damages for resulting consequential losses. They can after 4 May, when the Enterprise Act 2016 will imply a term into insurance contracts that valid claims must be met within a reasonable time, or give rise to a claim for damages.

So do insurers haggle unreasonably when it comes to indemnifying policyholders making valid claims? “No, this provision is aimed at ‘the mad and the bad’ in terms of poor behaviour by insurers, but the protocols and procedures now in place make it doubtful it would be established in many cases,” says Nick Young, a partner at DAC Beachcroft.

Concerns about US-style bad-faith litigation fuelled insurers’ resistance to reform, so this was not included in the Insurance Act 2015, explains Bruce Hepburn, CEO at Mactavish. “Ultimately, the unique English law position that an [insurer] could pay a claim as and when it liked with no regard to the consequences proved untenable [and] Mactavish had a key role in persuading the London market that [its] resistance to change would damage [its] reputation, and delivered this benefit to policyholders.”

SME claimants stand to gain the most, as consumers are already protected, notes John Hurrell, CEO of the Association of Insurance and Risk Managers. “It won’t make much difference to our members as they are big buyers, well treated by the market. But we think the principle is sound and it is good practice that there could be potential action.”

It is good news for policyholders, agrees Angus Tucker, managing director at loss adjusting firm Lorega Solutions. “It’s not a punitive thing” for insurers and claimants do have to prove they have suffered a loss, he points out. Following an incident like a factory fire, SMEs often need interim funding to rent temporary premises and equipment, for instance, to carry on trading. “If insurers don’t provide money, and procrastinate to the point that the SME is trading insolvently, it would be a major claim under the Act. Insurers can say, at present, that it’s not their job to fund the business, but they may have to under the Act.”

Young challenges this, pointing out that insurers are only obliged to make the final payment. “If an interim payment is not a contractual obligation, what is the breach and what has it got to do with the Act?” he asks. Interim payments might not be a contractual right, comments Shaun Kelly, risk & compliance director of international operations for Crawford, but they are the ‘norm’, especially around loss of profits, so it is custom and practice, and might be litigated on that basis if there is a delay in processing such a payment.

Insurers should be ready for the changes, says Hepburn, given the wide discussions and 12-month implementation period, and changes to processes are needed because this represents a new risk. Kees van der Klugt, director of legal & compliance at the Lloyd’s Market Association, notes: “We believe there is a high state of awareness about the new law in the Lloyd’s market. The LMA has published detailed guidance, a short practical steps guide for underwriters and claims handlers and also a set of model clauses for those preparing policy wordings. This is in addition to workshops and seminars.”

As well as reviewing internal claims-handling procedures, insurers will need to scrutinise practices adopted by their agents, including loss adjusters. Malcolm Hyde, executive director of the Chartered Institute of Loss Adjusters, comments: ”Loss adjusters are currently under pressure to get claims paid as soon as possible and the pressure won’t change. The Act codifies what is already happening and loss adjusters will just embrace it, but guidance for members will be ready by 4 May.”

Little communication

Meanwhile, there has not been much communication from the market as to how this is going to affect the way insurers pass things down to loss adjusters, reports Ross Macpherson, a director at Questgates. But David Walker, executive director at McLarens, expects a ‘business as usual’ message: “This is unsurprising as, in recent years, loss adjuster panels have been selected with a strong focus on customer service and the prompt and fair payment of claims is at the forefront of any adjuster’s key performance indicators.”

Irene Davies-Foo, casualty operations director at Cunningham Lindsey, says loss adjusters have become more customer-focused since a thematic review by the Financial Conduct Authority noted failings across insurers and adjusters. “A lot of internal processes are now in place, and adjusters will have to be sure record keeping is better, as they will have to justify everything they do,” she adds. “They should also try to innovate within the financial boundaries, and be commercially astute.”

A key issue will be what amounts to meeting the claim within ‘a reasonable time’. This will depend on factors such as the type of insurance and value and complexity of the claim, observes Matthew Rogers, head of commercial litigation at Keoghs. “The clock won’t start ticking until certain steps have been taken. Insurers would need to spell out how the claim will be handled and what information will be needed.”

Managing policyholders’ expectations will be crucial, comments Kelly, and investigations often rely on information from claimants. So, while loss adjusters should explain to policyholders what the timescale will be, they should also spell out what is expected of policyholders, and the consequences if they don’t deliver. John Curran, a partner with Fenchurch Law, which acts for commercial claimants, comments that many people anticipate that insurer behaviour might change: for example, they will have a greater interest in the impact of the loss on the insured and may be more inclined to partner with them in managing the consequences. This is not unusual, notes Kelly, who says it is often in the interests of the insurer to partner with the insured to get them up and running again, especially with loss of profits issues.

Contract out of provisions

Parties to non-consumer policies can contract out of these provisions, provided the insurer meets the transparency requirements in the Insurance Act 2015. Curran says one issue will certainly be whether insurers introduce wording to exclude the Act or limit their exposure to damages by making them part of the policy limit. But Kelly does not think insurers will contract out, observing that most commercial enterprises are represented by brokers, who would not want that to happen. That said, van der Klugt makes the point that the Law Commission and HM Treasury, in promoting the provisions, were aware they could prompt speculative claims, and thought insurers would seek to limit liability in business insurance and reinsurance contracts, so it was not open-ended, as with many types of contract. He adds: “This would be a form of contracting out. However, this is the clear expectation of government [and] the LMA has included in its set of model clauses a number of options for limiting liability.”

The Act will give insureds an additional string to their bow, and Walker predicts some might use it to bring pressure to bear, particularly where an immediate decision cannot be reached on policy liability. One thing that might need to change, according to Kelly, is the ability for adjusters to abridge narrative reports to insurers for smaller claims. “Some insurers hold fast on requiring the longer report [usually for claims above £100,000] for all claims, but in the context of the Act, it creates the perception of delay.”

Damages claims will have to be brought within a year and van der Klugt explains: “When the LMA, with others, promoted the amendment to the legislation to limit the period for bringing a late payment damages claim to one year after payment of the underlying claim, the purpose was to reduce the possibility of prolonged litigation and reserving problems. The shortened period is not detrimental to policyholders, since this is by reference to the known underlying claim. The government agreed that this would offer some extra degree of certainty for the market and adopted the amendment.”

Davies-Foo says fraudulent claims are the main concern, as investigations will take longer and spurious claims might be brought because of this. She adds: “One concern is that we may carry out a thorough fraud investigation and not be able to prove it. Just because we haven’t found it does not mean it isn’t a fraud but the test is tough.” Walker sees the impact on adjusters as likely to be felt mostly on complex claims where fraud might be suspected or policy liability might be challenged.

Young comments that brokers hold the commercial hand and will lean on insurers to pay when they might not need to, with demands for damages showing scant concern for supporting evidence. “They will exert pressure in fraud cases and the insurer might not want to share with them what they are investigating, such as suspected non-disclosure or fraud, so the broker could feel aggrieved because it could put them in an invidious position as they have to pass on information to their customer.”

Disputing a claim

If insurers can show reasonable grounds for disputing a claim – on liability or quantum – it will not be in breach of the implied term merely by failing to pay while that dispute is continuing. Some claims require specialist investigation. Jim Lygate, chairman and

principal investigator at IFIC Forensics, examines fire claim scenes. He predicts the Act will drive the industry in two ways: “Some will pay but others will look at it properly and investigate. The worry is where there is a surge event and loss adjusters are distracted, dealing with floods for instance. With fires, it is crucial to get in quickly or the trail goes cold.”

Lygate notes it is sometimes necessary to bring in other experts, such as a metallurgist, and to make enquiries of public officials, who might not provide speedy responses. “Under the Act, insurers should not have a problem, provided there is a strict timeline and a record of all that was done. Delays by police or fire services responding to enquiries could scupper this, but good quality control and case management systems can demonstrate compliance.”

It won’t be a pushover. Policyholders will bear a “strong onus of proof”, says Walker, as they will need to demonstrate that they took all reasonable steps to avoid a consequential loss that was foreseeable by the insurer. Adjusters operating under delegated authority, particularly with access to funds held in escrow, could find themselves in the front line, although complex claims will probably be handled in close consultation with insurers, he observes.

Triggering litigation

The Act could certainly trigger litigation against adjusters by insurers, acknowledges Kelly: “It is the magnitude of business claims that make it a worse risk. If the adjuster was responsible for a delay that caused the insurer to have to pay, it is our expectation that they would ask us to indemnify them.” David Lennon, director of claims and broking at Reich Insurance Brokers, says: “It is difficult to imagine how this will play out. [We] have had no claims yet as a result of late payments [which] are few and far between and we haven’t seen insurers seek to increase rates or premiums, thus far, with a specific reference to the Act as a driver. As matters progress, this may change, but there is no correlation at this time.”

There could be turbulent times ahead, and van der Klugt voices concern about speculative litigation, which would increase industry costs: “We hope the courts would not allow the floodgates to open for consequential damages claims that are disproportionate to cover bought and premiums paid.” One thing the Act might do, Walker comments, is encourage a more transparent exchange over the issues under investigation, to evidence the test of reasonableness, in relation to the dispute and the timeframe needed for enquiries.

That can only be a good thing.

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• Topics
• Chartered Institute of Loss Adjusters (CILA)
• Crawford & Company
• Cunningham Lindsey
• DAC Beachcroft
• Enterprise Act
• Financial Conduct Authority (FCA)
• Fraud
• HM Treasury
• Insurance Act
• Keoghs
• Legislation
• London Market Association (LMA)
• McLarens
• Questgates
• Reich Insurance Brokers
• SME
• United Kingdom (UK)
• Claims
• Commercial
• Regulation
• Broker
• Association of Insurance and Risk Managers in Industry and Commerce (Airmic)
• Insurer