A new section 13A was added to the Insurance Act by the Enterprise Act 2016. Section 13A implies a term into all consumer and non-consumer insurance contracts that the insurer must pay any sums due in respect of a claim within a reasonable time.
Section 13A came into force on 4 May 2017.
What is a “reasonable time”?
Section 13A does not define “reasonable time” but says that it will depend on the relevant circumstances. This is in line with the approach that has generally been taken by the courts when interpreting the phrase, for example where notification of a claim is required to be within a reasonable time. The section sets out the following, non-exhaustive, examples of factors that the courts may take into account:
- The type of insurance;
- The size and complexity of the claim;
- Compliance with any relevant statutory or regulatory rules or guidance; and
- Factors outside the insurer’s control.
Section 13A states that a reasonable time will include a reasonable time to investigate and assess the claim. In addition, if the insurer can show that it had reasonable grounds for disputing the claim (including how much is payable), it will not be in breach of the implied term but the insurer’s conduct may be a relevant factor in deciding whether the implied term had been breached.
Time limit for bringing claim against insurer
There is a one-year time limit for bringing a claim against the insurer under section 13A. The one-year period for bringing a claim will run from the date when the insurance claim is settled. The intention behind the time limit is that it will assist insurers in reserving for claims where there is a risk of a claim for late payment.
The one-year time limit will operate in addition to the usual limitation period of six years from the date of breach of contract so that a claim for late payment will be time-barred by whichever period ends soonest. For example, a claim under a policy is made on 31 January 2016 and settled by the insurer on 31 January 2020. The limitation period for breach of contract (6 years) would expire on 31 January 2022 but under the new rule (1 year from settlement of the claim) would expire on 31 January 2021. A claim for damages for late payment would have to be brought by the earlier date, in this case 31 January 2021.
Can insurers contract out of the new duty?
For commercial insurance insurers can contract out of the new duty and exclude or limit their liability for late payment of claims if:
- they satisfy the transparency requirements, and
- they have not acted deliberately or recklessly.
An insurer would act deliberately or recklessly if it knew it was in breach of the duty to pay a claim within a reasonable time or did not care whether or not it was.
Parties to consumer insurance contracts cannot contract out of the late payment of claims provisions and substitute terms that would put the consumer in a worse position than they would be in under the Insurance Act.