Damages for late payment
The Law Commissions propose introducing a statutory duty on insurers to pay valid claims after “a reasonable time”. Under current law in England and Wales (in contrast to the position in Scotland) the insurer is not liable for loss caused by delay or failure to pay a valid claim. The Law Commissions note that this is at odds with the position in other areas of law.
The Law Commissions believe there is general support for reform in this area but accept that any change in the law should not prevent insurers from investigating claims fully. It is proposed that the definition of what is “a reasonable time” should include sufficient time for full investigation and assessment of the loss and that the insurer’s time to investigate should only begin on receipt of a “clean claim” which is defined as being “once the insured has provided all material information”.
The Law Commissions’ thinking has implications for the law of limitation in relation to insurance contracts in England and Wales in particular. The Law Commissions’ proposal is that the law should be changed so that the limitation period starts to run following the expiry of a reasonable time after receipt by the insurer of a “clean claim”.
In business insurance (but not consumer insurance) the parties would be able to agree to limit or exclude the insurer’s liability to pay damages for late payment.
Insurers’ remedies for fraudulent claims
Fraudulent insurance claims are a serious and expensive problem, but the Law Commissions consider that the law in this area is unclear. Although it is well established under common law that a person who fraudulently exaggerates a claim forfeits the whole claim, the law is not clear regarding the effect of a fraud on other claims made under the policy. There is a mismatch between this rule and the duty of utmost good faith, for which the remedy for breach is avoidance of the contract.
The Law Commissions propose to set out the remedies for fraud in statute. There are four main elements:
A policyholder who commits a fraud should forfeit the whole claim to which the fraud relates.
The policyholder should also forfeit any claim which arises after the date of the fraud.
The fraud should not affect any previous valid claim.
The insurer should have the right to claim the costs reasonably and actually incurred in investigating the claim.
Clauses in policies that extend the insurer’s remedies for fraud would be permitted in business insurance contracts (providing they are written in clear and unambiguous language and brought to the attention of the insured) but would be of no effect if included in consumer policies.
The Law Commissions believe that the English law of insurable interest is confusing and that although Scots law is more straightforward it still contains anachronisms and anomalies.
The consultation paper includes separate proposals for indemnity and life insurance. For indemnity insurance the Law Commissions are proposing to provide a clear statutory basis for the requirement of insurable interest, to clarify that the insured must have an insurable interest at the time of loss and to provide that a policy would be void unless there is a real probability that a party will acquire some form of insurable interest at some stage.
There are concerns as to whether this formulation is workable in the context of project insurance where cover is frequently arranged for all prospective project parties when the precise identity of successful tenderers is not known.
Policies and premiums
Sections 52 and 53 of the Marine Insurance Act contain provisions relating to the form of marine insurance policies and insurance brokers’ liability for premium. The Law Commissions propose to repeal the requirement that marine insurance policies should be in a particular form and seek views on proposals to reform the law on the broker’s liability for premium. For further detail see our previous Law-Now.
Responses to the consultation paper
If you would like to respond to the Law Commission on any of the topics outlined above, you can email [email protected] or write to Christina Sparks, Law Commission, Steel House, 11 Tothill Street, London SW1H 9LJ.
The full consultation paper can be found here. Full details of the Law Commissions’ review of insurance contract law are available on the Law Commission’s website.