Enterprise Bill

Written evidence submitted by Hill Dickinson LLP (ENT 69)

House of Commons Public Bill Committee on the Enterprise Bill

1. Preliminaries

2. Hill Dickinson LLP is a full service international law firm offering a comprehensive range of legal services including a dedicated insurance group of more than 500 people making it is one of the largest defendant insurance practices in the UK. We act for a wide range of clients including insurers and reinsurers (including UK insurers, Lloyd’s syndicates and (re)insurers based outside of the UK), brokers, PLCs and other corporates, SMEs and individuals.

3. This is our submission to the House of Commons Public Bill Committee on the Enterprise Bill. It is limited to the intention within clauses 20 and 21 of the Enterprise Bill to:

Introduce new measures intended to prevent the late payment of insurance claims to businesses

4. In forming this submission we have spoken with a number of our clients for whom we act in relation to insurance matters and this submission therefore reflects some of their views and observations as well as our own.

5. Executive summary

6. We make the following submissions:

6.1. More time should be allowed for implementation, in particular to allow the insurance community as a whole an opportunity to:

6.1.1. Reach some preliminary consensus about what is a ‘reasonable time’ to pay claims in different lines of business and how the time is to be calculated; and

6.1.2. make it clear whether limits are eroded by and/or reinsurance will provide cover for, damages for late payment of claims (failing which the point should be expressly dealt with in the legislation).

6.2. The liability of co-insurers with no say on claims decisions should be expressly addressed in the legislation.

7. Our submission

8. Implementation timescale

9. When the Insurance Act 2015 was passed on 12 February 2015, Parliament gave the insurance industry 18 months to prepare before it came into force.

10. The proposals within clause 20 and 21 of the Enterprise Bill (‘the Bill’) were initially contained within the draft Insurance Bill produced by the joint Law Commissions in 2014 but did not make it into the Insurance Act 2015 because they were deemed too controversial to be passed using the ‘non-controversial bills’ special process.

11. If passed in their current form, clauses 20 and 21 of the Bill will introduce a law for damages for late payment of claims which takes effect with the rest of the Insurance Act 2015 on 12 August 2016.

12. In order to properly prepare for new law such as this the insurance market needs to update:

12.1. contract wordings;

12.2. pricing matrices;

12.3. claims systems and processes; and

12.4. key internal documentation such as underwriting and claims guidelines.

13. There is also, as discussed below, no firm guidance for insurers on the length of the ‘reasonable time’ within which claims will need to be paid. In these circumstances, it is desirable to give the insurance community an opportunity to formulate some consensus about what a ‘reasonable time’ might be for particular lines of business. Without a reasonable lead-in period this is impracticable.

14. The changes which clauses 20 and 21 of the Bill will bring about will require substantial work on the part of the insurers, brokers and policyholders to understand the changes and to be compliant. We recommend that a lead-in period of 12 – 18 months from the date the clauses are passed is put in place to enable this to be done.

15. Definition of a ‘reasonable time’

16. The Bill at present refers only to payment by the insurer under the policy within a ‘reasonable time’ which includes the time to investigate and assess the claim; and that a reasonable time will depend on "all relevant circumstances including the type of insurance, the size and complexity of the claim, regulatory compliance and any factors outside the insurer’s control".

17. This definition of the term ‘reasonable time’ remains necessarily vague. It is likely to lead to differences of interpretation and, potentially, litigation where insurers seek the certainty of judicial guidance and/or policyholders are dissatisfied. Different jurisdictions around the world take different views on what length of time is reasonable for claims to be paid so it is not possible to derive meaningful guidance from outside the UK.

18. There is also some room for uncertainty as to when the time for payment of a claim arises, particularly in relation to costs that are incurred by insureds in defending claims (in third party liability insurance) and in mitigating their loss (in business interruption insurance). These points could also be addressed with additional contractual language, if there was time enough to do so.

19. We believe it would be beneficial for the insurance community as a whole – insurers, brokers and policyholders – to be given the opportunity to reach some consensus on what a ‘reasonable time’ might constitute (and/or to provide expressly for what it ought to be in policy wordings, which in the London market are typically the responsibility of the brokers acting on behalf of policyholders). The current implementation timescale does not allow time for that consensus to be reached.

20. Erosion of limits by, and reinsurance coverage for, damages for late payment of claims

21. Clause 20 of the Bill will introduce an implied term that the insurer must pay any sums due in respect of the claim within a reasonable time.

22. Questions arise as to whether sums payable by insurers as a result of this implied term:

22.1. will erode limits of cover available under an insurance contract (and, if so, when the ‘reasonable time’ expires, see above); and/or

22.2. will be covered under any reinsurance contracts between the insurer and its reinsurers.

23. There are two bases on which disputes could be avoided on these issues.

23.1. Firstly, these questions are capable of being dealt with by express language in policy wordings. However an implementation date of 12 August 2016 would give insufficient time for such language to be included in the policies for reinsurance and/or excess layer insurance placements.

23.2. The second alternative would be to insert language in the statute to say that, absent express wording to the contrary, policy limits will (or will not) be eroded by damages for late payment of claims and reinsurance agreements will (or will not) cover them.

24. Impact on the subscription market

25. Risks in the London market are often written by a number of co-insurers taking different percentage shares. Not all insurers participating in a risk will have responsibility for agreeing or settling claims (or, indeed, authority to do so).

26. The legislation could usefully clarify which co-insurers will be liable for damages for late payment of claims. It would, in our view, be unfair for insurers who do not have a say in whether claims are agreed, or the timeframe within which claims are paid, to be held liable for damages for late payment of claims. It would also prejudice the efficient commercial functioning of the subscription market.

27. It should be stressed that this is a separate issue from responsibility for settlement of claims where the claims handling function has been delegated to a third party (where the responsibility for paying the claim in a timely way rightly lies with the risk carrier).

28. Closing remarks

29. We are concerned that clauses 20 and 21 of the Bill, as currently drafted, could introduce unnecessary uncertainty in some areas which would be undesirable for both the insurance market and policyholders alike, particularly if the insurance community is not given enough lead-in time to give it a real opportunity to address these issues via policy wordings.

February 2016

 

Prepared 25th February 2016