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New UK Act gives policyholder rights

Source: Middle East Insurance Review | Apr 2018

A new UK Act will give policyholders the right to claim damages in the event of late claims payment. This will have implications for the region as many policies written in the UAE are reinsured in London, says Mr John Barlow of HFW.
 
 
The United Kingdom Enterprise Act 2016 (the “Act”) gives insurance and reinsurance policyholders an implied right to claim damages in the event of late payment of claims. 
 
   This has resulted in the inclusion of new “Reasonable Time to Investigate and Assess Claims” clauses in (re)insurance contracts which address the ramifications of the Act. 
 
   From the outset, it should be noted that it is possible for parties to a non-consumer (re)insurance policy to contract out of the implied term (see below). 
 
   Many policies written in the UAE are reinsured in the London reinsurance market. 
 
   Given many of the reinsurance programmes in the region involve facultative placement and a considerable degree of control and reliance on reinsurers, late payment can significantly impact all components in the value chain. 
 
   This article considers: 
  • The background to the Act; 
  • Impact of the Act; 
  • Time limitation under the Act; 
  • Contracting out of the implied term; and
  • Other practical points to consider.
 
Background to the Act
The old position under English law was that an insured was not entitled to damages for the late payment of claims under a (re)insurance contract (the analysis being that where an insured loss occurred that gave rise to a claim in contract (ie, a breach of contract) under the policy which gave rise to damages, ie, the indemnity). 
 
   An insured could only recover what was owed to them (ie, for breach of contract) under the policy and was not entitled to additional losses suffered due to the delay of (re)insurers. 
 
   The UK Law Commission made recommendations for reform in 2014 for what was considered to be an unacceptable and insurer-friendly legal position (“a blot on the landscape”). 
 
   The Act, which came into force on 4 May 2017, will apply to all insurance and reinsurance contracts entered into on or after that date and inserts new provisions into the Insurance Act (IA) 2015 to address this imbalance.
 
   The Act creates an implied term for all contracts of (re)insurance that if the insured makes a claim under the policy, the (re)insurer must pay any sums due within a reasonable time. The breach of this implied term may give rise to a claim for damages against the (re)insurer. 
 
   This has led to the inclusion of clauses which create an express burden on the (re)insurer to ensure that all payments under a (re)insurance policy are paid within a reasonable time or risk a claim against them for damages. 
 
   Clearly this clause has a significant impact where reinsurers are exercising claims control over underlying insured claims. 
 
What is a reasonable time?
The Act provides that a “reasonable time” includes a reasonable time to investigate and assess the claim.
 
   What is a reasonable time will depend upon the relevant circumstances. 
 
   However, the Act provides examples of relevant factors which may need to be taken into account, including:
  • The type of insurance;
  • The size and complexity of the claim;
  • Compliance with relevant statutory or regulatory rules; and
  • Factors outside the (re)insurer’s control, such as a third party delaying in providing evidence to the (re)insurer.
 
   An insured (reinsured) will need to show that they sustained additional losses arising from the late payment by the (re)insurer.
 
Defence to a claim for damages
Under the Act, the (re)insurer is entitled to raise a defence to a claim for damages if it can show that there are reasonable grounds for disputing the insured’s claim under the (re)insurance policy (either as to its validity or its quantum). 
 
   The (re)insurer will not be in breach of the implied term merely by failing to pay the claim while that dispute is continuing. 
 
Time limitation under the Act
It is important for (re)insurers to be aware that claims for breach of the implied term must be brought no later than one year from the date on which the insurer has paid all the sums due in respect of the loss. 
 
   This means that time will not start to run until the final payment in relation to a loss has been made. After the expiry of the one-year period, claims for damages against a (re)insurer will be time-barred. 
 
Contracting out of the implied term
The Act allows parties to a non-consumer (re)insurance policy to contract out of the new implied term. However, the re(in)surer must comply with the “transparency requirements” of the IA. 
 
   Any attempt to contract out which is deliberate or reckless (where the (re)insurer does not care whether it is in breach) has no effect. 
 
   Any attempt to contract out of the implied term in consumer insurance contracts which would put the consumer in a worse position is negated entirely by the Act. M 
 
Mr John Barlow is Partner at HFW.
 
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