Insurers' Empty Promise

In exactly six months, on 4 May 2017, the final piece of the Insurance Act 2015 jigsaw falls in to place when the “late payment” implied term will apply to all policies entered into after that date. The relevant sections (inserted at part 4A of the Act) are, ironically, a late change to the 2015 legislation. They were enacted in the Enterprise Act 2016 because the provisions did not fall within the technical ‘non-controversial’ definition that would otherwise have allowed them to be taken forward in the Law Commission’s initial Insurance Bill.

The new implied term on “late payment” addresses the problem that arises from a quite bizarre legal fiction: that an insurer’s contractual promise is to prevent the insured peril from occurring. So, for example, underwriters are regarded as promising to prevent the Royal Clarence Hotel in Exeter from burning down or to prevent the RMS Titanic from sinking.

The insurers’ empty promise arises from the analysis that the insurer is to “hold harmless” the policyholder from loss. Thus the very claim or loss itself is technically regarded as a breach of contract and the proceeds of the claim paid by the insurer are, at law, the damages flowing from the breach of contract. As there can be no recovery of damages on top of damages, the insured is therefore not entitled to recover any sum greater than the correct amount due on the claim (plus interest). No consequential losses are recoverable regardless of how of egregious the insurer’s delay or failure to pay might be.

The new policy term implied by the 2016 Act does not revoke the ‘hold harmless’ principle which remains relevant in that the event of the loss is the trigger date for the six year limitation period for claiming under the policy (for breach of contract). What the 2016 Act does is to allow the policyholder to make a claim for losses consequential on the insurer’s failure to pay the (valid) claim “within a reasonable time”.

So what are the issues that arise from this new implied new term that applies 265 days after the mainstream insurance law (with commencement of the Insurance Act 2015 on 12 August 2016) has changed? Are there any lessons to be learned from the 18 month period that was allowed for implementation of the 2015 Act itself?

BLM will consider a number of issues in the months leading up to commencement of the “late payment” term on 4 May next year:

• first we will look at the issues that arise from claims outsourcing, where late payment could arise from the fault of a party in the insurer’s supply chain
• in December we will consider whether insurers may contract out and the options available if they chose to do so
• in January we will consider complications that could arise from investigating fraud and whether they might give rise to a “late payment” claim
• we will then consider the sums that might be payable in the event of a successful “late payment” claim, and will conclude by
• considering the tactics and strategies that might be considered when dealing with such claims.

I was pleased to first publish this blog on the BLM webpages on 04/11/2016.