COVID-19 considerations: Damages for late payment of insurance claim

Introduction

The enormous human and economic cost of the COVID-19 pandemic is clear. The pandemic has meant widespread supply chain and travel disruption, with lockdowns and business closures across the world; we considered the insurance implications here.

With the insurance industry facing potentially its most expensive event in history, we are seeing discussions about the scope of insurance cover for COVID-19 losses across multiple lines.

As insurers consider policy wordings and the scope of relevant cover they must be mindful of their obligation to pay claims within a reasonable period of time, or risk insureds claiming damages for late payment on policies entered into from 4 May 2017 onwards. Our article here covered the introduction of this provision into the Insurance Act 2015. As yet, there have been no successful claims for late payment damages since the legislation was introduced, but COVID-19 may change this.

What is the insurer’s obligation?

The Insurance Act 2015 (s13A) introduces an implied term into all contracts of insurance entered into from 4 May 2017 onwards. This obliges insurers to pay sums due within a reasonable period of time. If the insurer breaches this obligation, policy holders are able to claim damages according to the normal principles of contract law.

What amounts to a “reasonable time”?

As yet, this is not clear. Insurers will have a reasonable time to investigate and assess a claim. What is reasonable will depend on the facts of each claim with consideration given to:

• the type of insurance contract;
• the size and complexity of the claim;
• factors outside the insurer’s control – ie any regulatory or third party issues, and delay in information/documentation from the policy holder/third parties being provided; and
• the conduct of all parties – ie insurers conducting investigations slowly, refusals to engage with the other party, and failure by insurers to make interim payments, especially where parts of the claim are not in dispute.

Evidently, the more complex and significant a claim, the longer the period which is likely to be regarded as a “reasonable time”.

For any claim for late payment damages, the insured must show that the insurer’s delay in payment caused the loss, and that the loss was reasonably foreseeable at the time the relevant contract was entered into (not at the date of breach). A key point will be whether the insurer was aware that the insured would be relying on the insurance monies. Further, the insured should take steps to mitigate any losses arising from the insurer’s delay, where possible.

A claim must be brought within the one-year limitation period from the date the payment is made in full. Where insurers can show that there were reasonable grounds for disputing the validity or value of the claim, this will be a defence to any claim for late payment.

What practical steps should insurers consider?

Insurers are looking at the increased likelihood of coverage issues and disputes due to COVID-19. Policy holders may well use the "threat" of a damages claim to put pressure on claims handlers to speed up any ongoing coverage investigations.

Claims handlers will therefore need to consider the following practical steps for their organisation’s processes:

• deal with claims in a timely manner and consider making early commercial decisions in order to resolve claims;
• keep detailed written records showing how a claim is being progressed, noting any issues preventing or delaying claims settlement;
• consider making a partial or interim payment on an undisputed element of a claim under a reservation of rights for the disputed element;
• take into account that disputes between layers will likely not be considered a reasonable reason why payment was delayed; and
• keep in mind that to establish reasonableness it may be necessary to disclose underwriting files and waive privilege in respect of legal advice received.

Contracting out: is this possible?

Finally, it is worth noting the insurer and insured can agree to contract out of this obligation for non-consumer insurance policies. The exclusion clause must meet the “transparency requirements” – be clear, unambiguous and brought to the policyholder’s attention before the contract is agreed – and the late payment by the insurer must not be deliberate or reckless. Insurers should review policies to confirm this in each claim.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.