In this first of a new monthly column, Melissa Collett discusses how the Enterprise Act 2015 will affect protection insurance claims.
Much commentary on the Enterprise Act 2016 has focused on the new term that will be implied into insurance contracts that requires claims to be paid within a reasonable time.
Breach of this term will give rise to a claim for damages for late payment of an insurance claim.
For those insurers who are already subject to the jurisdiction of the Financial Ombudsman Service, damages for late payment is nothing new.
The ombudsman has made awards for late payment of claims for many years, as part of its remit to award compensation for "distress and inconvenience", as well as for financial loss, caused by late payment under its rules (set out in DISP 3.7.2 R).
But with any new legal development, ombudsman watchers will wonder whether the new law is truly aligned with the ombudsman's existing approach, or whether there are subtle differences.
This articles examines this question and the implications for protection insurers.
"Reasonable time"
The Act specifically provides that "reasonable time" includes reasonable time to investigate and assess a claim. It goes on to state that what is "reasonable" will depend on all the relevant circumstances. Sound familiar?
The requirement that insurers pay claims within a reasonable time by and large reflects existing ombudsman approach towards payment of claims.
However, the law goes further and sets out a number of factors to take into account when considering this issue, including:
• Type of insurance
• Size and complexity of the claim
• Compliance with regulatory rules and guidance
• Factors outside the insurer's control
The insurer does not breach the implied term if it can show reasonable grounds for failure to pay, but the Act makes clear that the conduct of the insurer in handling the claim may be a relevant factor.
By comparison, the ombudsman does not explicitly refer to taking into account the four factors above in its published guidance.
Past experience of ombudsman decisions suggests that conduct in handling the claim is a much more important factor for determining whether the insurer acted reasonably.
Increasingly, the ombudsman expects insurers to be much more proactive in handling claims and clear communication of progress is vital if an insurer wishes to avoid additional awards of compensation.
And lengthy delays in investigation and assessment - even if these were objectively reasonable - are unlikely to be regarded as justified if the insurer ultimately gets the claims decision wrong.
Although, technically, the insurer would not necessarily be in breach of the implied term in this instance, it is a distinction that may not be appreciated by an ombudsman case-handler.
Remedies for breach
Under the Act, in order to bring a claim for damages, the policyholder would need to show that:
• They suffered a loss
• The loss was caused by the breach
• The loss was foreseeable
Plainly, it is foreseeable in certain circumstances that late payment of an insurance claim could give rise to losses for the policyholder.
These may be financial - the policyholder may have had to borrow money at high interest rates, or they may be non-financial - the anxiety, worry and stress of an unpaid claim.
When considering ombudsman published guidance on compensation, it is clear that the ombudsman places much weight on the impact of the delay on the individual consumer - ie, the "trouble and upset" caused by the delay in payment - in determining how much compensation to award.
Although this is highly subjective, insurers should be wary of assuming that ombudsmen will necessarily make higher awards than the courts would make.
The tariff used by the ombudsman, as set out in its published "trouble and upset" guidance above suggests that awards over £5,000 would be "extreme".
An example given is disclosing the consumer's address to a violent ex-partner. This scenario is not one that is particularly analogous to one faced by an insurer due to the late payment of a protection claim.
By comparison, past ombudsman decisions show that compensation for late payment of protection claims is much more moderate by comparison - in the hundreds, rather than the thousands of pounds.
If a similar case were considered by the courts, it seems likely that the court might take a rather different view.
The four factors mentioned in the Act above are, objectively, unlikely to justify any delay in payment of a straightforward protection claim.
And the serious hardship (eg default of mortgage repayments/house repossession) that could be caused by a delayed payment could lead the court to make a sizable award - for both financial and non-financial losses.
In light of this, insurers should be even more vigilant about paying claims promptly, and within a reasonable time, and should not take for granted the relatively low awards of compensation for late payment that it might have been required to pay by the ombudsman over the years. The courts are unlikely to require less.
Key points about the Enterprise Act 2016
Creates legal obligation to pay claims within a reasonable time
•Gives right to claim damages for late payment of claims
•Insurers have reasonable time to investigate and assess a claim
•Cannot contract out of Act for consumer insurance contracts
•Applies to insurance contracts entered into after 4 May 2017
Melissa Collett was Senior Ombudsman at the Financial Ombudsman Service until March 2016. She now acts as a consultant on consumer insurance issues. Her new column, "Off the fence" will be published monthly.
