We have previously reported on the Joint Review of Insurance Contract Law Reform being undertaken by the Law Commission and Scottish Law Commission (the Commissions) (see our previous blog here). The Commissions’ second consultation paper, Post Contract Duties and other Issues, sought responses to, amongst other things, the issues of (i) Damages for Late Payment; and (ii) Insurers’ Remedies for Fraudulent Claims.
The Commissions have recently published the responses that it received in relation to these issues.
Damages for Late Payment
The current position in English law is that an insured is not entitled to damages for any loss suffered as a result of the insurer’s delay in settling a valid claim.
In the Consultation Paper, the Commissions proposed that an insurer who unreasonably delays or wrongfully repudiates a claim should be liable to pay damages according to normal contract law principles i.e. for proven and foreseeable losses. The Commissions also proposed that a definition of reasonable time should be flexible and take into account market practice and the type, nature, and size of the claim. As regards business insurance, the Commissions proposed that parties should continue to have freedom to contract therefore an insurer would be entitled to contractually limit or exclude its liability to pay damages for late payment provided that the insurer had acted in good faith.
A significant number of respondents agreed that insurers should be under a contractual obligation to pay claims within a reasonable time (87% of those respondents who answered the question) and that an insurer who fails to meet that obligation should be liable to pay damages for foreseeable losses that follow (81% of those respondents who answered the question). Although the general responses to the two questions show broad support for these reforms, responses by the insurance industry showed less support with only 78% of insurers/insurance organisations agreeing that insurers should be under a contractual obligation to pay claims within a reasonable time and only 57% agreeing that an insurer should be liable to pay damages.
Insurers unanimously agreed that an insurer should be able to contractually exclude or limit its liability to pay damages for late payment of a valid claim although a number suggested that use of such an exclusion would likely be rare. However, half of the respondents from the insurance industry agreed that such an exclusion of liability should only be exercisable where the insurer had acted in good faith.
Insurers’ Remedies for Fraudulent Claims
The Commissions have previously highlighted the confused state of the law following an insured committing an act of fraud. The Commissions proposed that fraud should invalidate the contract from the date of the fraudulent act (leaving the insurer to pay any earlier valid claims but not any later claims).
The respondents largely agreed with the Commissions that a policyholder who commits a fraud should:
(1) forfeit the whole claim to which the fraud relates (92% of respondents);
(2) forfeit any claim where the loss arises after the date of the fraud (75%); and
(3) be entitled to be paid for previous valid claims which arose before the fraud took place (94%).
There was also overwhelming support that insurers be able to add to the statutory remedies for fraudulent claims through express contractual terms.
To view the Responses in full, please click here.